Good morning, and welcome to The J. M. Smucker Company's Fiscal 2021 Second Quarter Earnings Conference Call. This conference call is being recorded and all participants are in a listen-only mode. We will open the conference up for questions and answers after the prepared remarks. Please limit yourself to two questions during the Q&A session and then requeue if you have additional questions. I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please, go ahead, sir.

Good morning and thank you for joining us for our fiscal 2021 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 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. These 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. First, I want to acknowledge that the COVID-19 pandemic continues to impact our everyday way of life, making the operating environment dynamic and difficult to predict. I'm incredibly proud of our employees who have worked tirelessly to deliver exceptional, operational and financial results. And I would like to recognize our suppliers and retail partners who have supported us during this unprecedented time. As we are entering the winter months and are experiencing a nationwide surge in COVID-19 cases, we remain committed to prioritizing the safety and well-being of our employees, supporting the communities where we do business and providing a steady quality supply of food for consumers and their pets. In the second quarter, net sales increased 4% versus the prior year and was slightly ahead of our expectations. At-home consumption remains elevated as sales in our coffee, consumer and international retail businesses collectively grew 10%. Sales in the pet food and snack segment were in line with expectations, as continued growth for cat food and dog snacks were offset by anticipated softness for dog food. Finally, the Away From Home business continued its sequential improvement from the fourth quarter last fiscal year, when many of our customers were either closed or shutdown. Adjusted earnings per share was $2.39, an increase of 6%, benefiting from increased sales volume, improved profit margins and reduced interest expense, partially offset by increased SG&A expenses. Due to stronger than anticipated results through the first-half of the fiscal year and updated assumptions for the second-half of the year, we have increased our full-year expectations to include net sales growth of 1% to 2% versus the prior year and adjusted earnings per share in the range of $8.55 to $8.85. This updated guidance does not include the impact of the pending Crisco divestiture. Tucker will provide more details regarding the inputs informing our fiscal 2021 guidance. This fiscal year, we have been focused on four specific priorities: driving consistent net sales growth; increasing our focus on financial discipline with an emphasis on maintaining or improving our strong profit margins and cash flow generation; strengthening our commercial execution and building competitive advantages through harnessing our full suite of capabilities; and living up to our commitment to our company's purpose of feeding connections that help us thrive. The execution of these priorities will help us to continue delivering on our long-term strategy to lead in the best categories, build brands consumers love and be everywhere. At the halfway point of the year, I am encouraged by the progress we have made against these priorities. We will continue to execute against these priorities in the back half of the year while furthering our focus on the brands and categories that have the greatest growth opportunities over the long-term. We continue to benefit from strong demand due to incremental at-home consumption related to the pandemic and achieved a third consecutive quarter of net sales growth above our expectations. Key metrics for consumers purchasing our products improved in the quarter, with household penetration, repeat purchasing rate and dollars spent per buyer, all having increased versus the prior year and sequentially from the first quarter, showing that many of the new consumers gained during the initial phases of the pandemic have remained with our brands. We continue our efforts to retain these consumers and anticipate many will remain loyal consumers of our brands beyond the pandemic. In the second quarter, we are pleased to have increased our dollar market share in core consumer and coffee segments, as well as our cat food business, highlighting the strength of our broad brand portfolio in these categories. In aggregate, we grew share for brands representing roughly half of our sales and we grew retail dollar sales for over 80% of the portfolio. This growth has been enhanced by capabilities we have built for our e-commerce business, which continues to capture a greater portion of consumers' grocery spend. Our total e-commerce business grew 45% compared to the prior year and accounted for 11% of total U.S. retail sales. We anticipate e-commerce growth to remain sticky as consumers are increasingly adopting and maintaining online grocery shopping habits. Our sales performance across the company has been supported by the outstanding work our teams are doing to maintain high levels of production. While we are adequately maintaining production to meet customer demand, we are producing at or near capacity at many of our plants. We have experienced an uptick in customer orders over the last two weeks with the resurgence in COVID cases and we continue to monitor potential supply chain limitations and are taking proactive measures to minimize any potential disruptions that maybe caused by a shortage of materials, reliable transportation, or increased demand. Turning to our segment results. In pet food, our cat food and market-leading dog snacks business delivered another quarter of net sales growth. Sales for cat food, led by the Meow Mix and 9Lives brand, grew 9%, representing the 13th consecutive quarter of cat food growth and our market share improved by over 0.5 point in the quarter. The dog snacks category continues to experience growth related to increased treating occasions with pet parents spending more time at home with their dogs, translating to net sales growth of 3% for our brands, led by Pup-Peroni, Rachael Ray Nutrish and Milk-Bone. Our dog food sales declined with the largest decreases attributed to private label and the Natural Balance brand. Nutrish dry dog food experienced anticipated weakness. However, we are confident that our actions will improve the trajectory of the brand. These efforts include increased marketing investments, enhanced packaging, and improved assortment through SKU optimization and unique innovation launching in the fourth quarter. As a total brand, Nutrish sales were up low-single digits in the quarter, as increases for wet dog food, dog snacks, and cat food and cat snacks offset the declines in dry dog food. Turning to our coffee business, we delivered net sales growth for all brands in our market-leading at-home coffee portfolio as total segment net sales increased 9%. We increased our dollar share by 0.5 point and now have over a 25-point share with three of the top 10 brands in the category. Growth was led by Dunkin' and Cafe Bustelo with both brands achieving 20% retail sales growth. In the K-Cup segment, we continue to grow at over two times the category rate and gained nearly two share points in the quarter. Over 1.5 million net new households consumed at least one of our coffee brands during the quarter. As new coffee habits have formed during the pandemic, we have the opportunity to retain a substantial portion of these new consumers for the long-term. We will support continued momentum with increased marketing investments in the back half of this fiscal year. In our consumer food segment, growth across all categories drove a 12% increase in sales. In snacking, our Smucker's Uncrustables business continued to deliver exceptional growth. Second quarter net sales increased 16% and the brand gained nearly a full retail share point. We remain on track to add capacity at our Longmont facility in early calendar year 2021 and we have accelerated future capacity plans. We are confident we will be able to continue this strong growth moving forward. In peanut butter, the Jif brand returned to market share growth and has now gained six share points since mid-May, due to replenished product assortment being back on shelf. Growth in the quarter occurred across both volume and dollars, inclusive of a list price increase in August to reflect higher peanut costs related to reduced crop yields. With our full assortment back on shelf, upcoming distribution expansion and innovation and promotional and marketing programs returning, we anticipate further peanut butter share growth in the back half of the year. Underpinning the improvement in net sales and market share has been strong commercial execution and a continued commitment to financial discipline. Retailer inventories have improved. And we are resuming some investments in marketing and promotions that were delayed as consumer takeaway outpaced available production in certain categories. We plan to increase marketing investments in the second half of the year, inclusive of Mass media, targeted digital consumer engagement, e-commerce and the click and collect programs. We continue to balance return with reinvestment to support our brands and to benefit from structural changes in consumer behavior. I want to highlight one additional critical area of our continued execution improvement during the quarter. While growth through acquisitions has and will continue to play a role in our strategy, we continually evaluate our portfolio and have been willing to divest businesses that are no longer consistent with our strategic focus. We did this with the divestiture of our U.S. canned milk and U.S. baking businesses, the past few years. Furthering our plans to exit the U.S. baking category, a few weeks ago we announced the signing of a definitive agreement to divest the Crisco oils and shortening business. These divestitures underscore a commitment to further focus our resources on brands and categories with the greatest growth opportunities. As we move ahead, we will continue to evaluate all elements of the portfolio and make changes when necessary to align our portfolio for growth. In summary, I would like to reinforce a few key points. One, our business continues to perform well. And the actions we are taking to deliver our fiscal 2021 priorities are leading to improvement in key metrics including market share, that position us well for the remainder of the year and beyond. Two, we continue to make progress against our consumer-centric growth strategy, including increased marketing investments to position us for sustained growth, even with the future moderation of COVID-19-related demand. And three, I am incredibly proud and thankful to all our employees for their dedication and perseverance through this extraordinary time. I'll now turn the call over to Tucker.

Thank you, Mark. Good morning, everyone. Let me begin by providing an overview of the second quarter results, before giving an update on our financial outlook for fiscal 2021. Net sales increased 4%, driven by favorable volume mix in the U.S. retail, coffee and consumer food segments, driven by elevated at-home consumer demand, partially offset by a decline in the Away From Home business. Adjusted gross profit increased $34 million or 4% from the prior year, mostly driven by the positive contribution from volume mix. The net impact of price and cost was also favorable, primarily due to manufacturing operating leverage from the increased volume and net pricing benefit, partially offset by higher input costs and freight expense. Adjusted operating income grew $18 million or 5%, reflecting the increased gross profit, partially offset by higher SD&A expenses. Within SD&A, general and administrative expense increased $23 million, primarily reflecting higher incentive compensation and the reinstatement of salary increases. Below operating income, interest expense decreased $4 million and the adjusted effective income tax rate was 24%, compared to 24.3% in the prior year. Factoring all this in, second quarter adjusted earnings per share was $2.39, compared to $2.26 in the prior year, an increase of 6%. Let me now turn to segment results, beginning with pet foods. Net sales were comparable to the prior year with cat food growth of 9% and dog snacks growth of 3%, offset by a dog food decline of 8%. Pet food segment profit declined 9% compared to the prior year, driven by lower net pricing and increased marketing expense, reflecting investment for the Nutrish brand. Turning to the coffee segment. Net sales increased 9%, led by the Dunkin' and Café Bustelo brands, which continued their strong trends growing 24% and 19%, respectively. The Folgers brand grew 2%, driven by gains for both roast and ground and K-Cup formats. Total K-Cup sales in the segment were up 15%. Coffee segment profit increased 11%, driven by the favorable volume mix and reduced SD&A expenses, partially offset by an unfavorable net impact of pricing and costs. In consumer foods, net sales increased 12% with growth for all major brands in the segment. Sales for the Smucker's brand grew 11%, led by 16% growth for Uncrustables, frozen sandwiches which marks the sixth consecutive quarter of double-digit growth. The Jif brand grew 12%, reflecting a list price increase, reduced promotional activity and increased volume for peanut butter. The discontinuation of Jif Power Ups was a $6 million headwind in the quarter. Consumer foods segment profit increased 48% due to the favorable net price and cost efficiencies related to the higher throughput in our plants, increased volume mix and lower SD&A expenses. Lastly, in international and away from home, net sales declined 10%. The away from home business contracted 24%, primarily driven by declines in coffee and portion-controlled products due to the continued impact of COVID-related changes in consumer behavior. International growth of 7% was primarily driven by increases in Canada for the baking, coffee and condiments categories. International and away from home segment profit decreased 22%, mostly driven by the lower volume mix in the away from home business. Second quarter free cash flow was $326 million, which represented a $166 million increase from the prior year, reflecting a decrease in net working capital requirements, the growth in earnings and reduced capital expenditures. Capital expenditures for the quarter were $52 million. We finished the quarter with cash and cash equivalent balances at $406 million. We paid down $216 million of debt during the quarter, resulting in a total debt balance of $5.2 billion. Based on a trailing 12-month EBITDA of approximately $1.8 billion, our leverage ratio stands at 2.8 times. The combination of the improvement in earnings and debt repayments over the past three quarters has resulted in our leverage ratio below our 3 times stated target. We continue to prioritize the use of free cash flow toward dividends and debt repayments, while maintaining our investment-grade debt rating and evaluating other strategic uses of cash for future growth and shareholder value creation. The expected divestiture of the oils and shortening business creates additional strategic flexibility for reinvestment and the ability to offset the earnings dilution with the after-tax cash proceeds over time. Let me now provide additional color on our revised outlook for fiscal 2021. The severity and length of the pandemic and related implications continue to create uncertainty in our financial outlook. Changes in consumer purchasing behavior, retailer inventory levels, macroeconomic conditions, and any manufacturing or supply chain disruption could materially impact our actual results. That said, we are sharing our expectations based on our current performance and understanding of the overall environment. Net sales are now anticipated to be up 1% to 2% compared to the prior year, which reflects the sales performance through the first half of the fiscal year and low to mid single-digit sales growth anticipated in the third quarter. Fourth quarter net sales are projected to decline substantially due to the lapping of $185 million benefit in the prior year related to the initial consumer stock up-purchasing during the beginning of the pandemic. We continue to anticipate full year gross profit margin to range from 37.5% to 38%. The projected deceleration in gross margin for the back half of the year, includes incremental trade spend investments, primarily for the pet business, timing of fixed cost expenses related to manufacturing absorption and increased freight and transportation costs. SD&A expenses are projected to increase 1% to 2%, primarily reflecting increased marketing spend and incentive compensation. Total marketing spend is expected to approximate 6.5% of net sales, with additional back half brand reinvestments, partially offset by a reduction in planned non-working marketing spend. Net interest expense is now anticipated to be $180 million. We continue to anticipate an effective tax rate of 24% and a weighted average share count of 114.1 million. Taking all these factors into consideration, we anticipate full year adjusted EPS to be in the range of $8.55 and to $8.85. Due to the incremental reinvestments and the projected reduction in gross profit margin, third quarter adjusted EPS is anticipated to be down mid-single digits year-over-year. Full year free cash flow is anticipated to range from $975 million to $1,025 million, with capital expenditures of $350 million versus the prior guidance of $300 million. As noted in our press release this morning, our full year outlook does not include the impact of the divestiture of the Crisco's oils and shortening business, which we expect to close in the third quarter. The divested net sales for the remainder of the fiscal year is estimated to be $100 million and the earnings per share impact before any use of proceeds is estimated to be $0.20. The earnings per share estimate includes $0.05 of stranded overhead not anticipated to be covered until the beginning of next fiscal year. In closing, let me reiterate Mark's opening comments, we are pleased with the second quarter results, which showed the strength of our brand portfolio and the health of our categories. With continued financial discipline, we are committed to delivering sustainable and consistent long-term value for our shareholders. Thank you for your time. We will now open the call to your questions. Operator, please queue up the first question.

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] As a reminder, we ask that you please limit yourself to one question and one follow-up before rejoining the queue for any additional questions. Our first question today is coming from Ken Goldman of JPMorgan. Please go ahead.

Hi. Good morning. Thanks.

Good morning, Ken.

I wanted to ask, Mark, earlier this year you laid out your four key priorities – excuse me, and one of these was an increased focus on financial discipline. And I think part of that was maybe partnering with your customers on allowing you to take more pricing when appropriate, if I read that right. You did have some pretty good pricing this quarter. This is the first increase in any quarter for the total company in almost three years. And I'm just curious, how much you credit some changes that you've made to your financial discipline for that price increase versus just the ability to sort of take pricing during COVID, which I think is a little bit easier for everybody. If you could just give us a sense on how much you -- that sort of strategic change has helped you. I think it would help us understand how sustainable some of the -- maybe the pricing maneuvers can be?

Thanks, Ken, for the question. First of all, I guess, I would just highlight when we talk about financial discipline, we mean all of it holistically in terms of cash generation, what we do with the cash, our debt paydown, continuing our cost reduction, continuous improvement mindset, all of that being part of that. From a pricing perspective, I think, we've been pretty consistent over time in terms of our ability to take price. We're always very prudent when we do so. We work with our customers. We need to ensure that the pricing is justifiable. And in this case and particularly in peanut butter, it was very clear that we were experiencing cost pressures and could demonstrate that to our trading partners and so forth. So, having price discipline and making sure that we can pass along price increases and, in some cases, decreases in categories like coffee, we will continue to do so. It's fundamental to the success of our business and our ability to deliver our financial results and goals.

Okay. Thank you for that. And then, for my follow-up, you talked about maybe resuming a little bit of marketing that was delayed, but you've also talked about, I think, being still tight on capacity, which makes sense and having an uptick in orders the last couple of weeks. I'm just curious, do you have much flexibility in your marketing spend, if you feel like the return on that investment won't be as good as you anticipated, even if it's speak for all the right reasons, right, but just mainly because demand is already there excluding marketing?

Yes, great question. So first of all, when -- as we have demonstrated over the last few quarters our ability to continue to improve our share numbers, it really is important to connect with our consumers at this particular time, because as we have experienced a significant uptick in households and our brands have been, in some cases, rediscovered by consumers to really engage with those consumers is critical. And given the fact that we are now seeing, obviously, a second or maybe in some cases a third wave, the industry is better prepared for this wave in many cases, even though the supply chain may be somewhat tight to deal with the increased demand. So it affords us the opportunity to make these investments to support our brands and do so in a very targeted way that we ensure we get the return.

Thank you. Our next question is coming from Faiza Alwy of Deutsche Bank. Please go ahead.

Yes, hi. Thank you. Good morning.

Good morning.

So I guess, I'm going to apologize for asking a fiscal 2022 question, but I'm bringing it up only because you mentioned the dilution impact from Crisco and you're talking about some reinvestments. And what I'm really trying to get at is, how do you think about the post-COVID world? And if there's any – anything you can say around, how we should think about as you enter fiscal 2022, is the idea that you'll be able to offset some of this dilution from potential cost savings that you might outline. Just some color around how you're thinking about the post-COVID world would be really helpful?

Faiza, good morning. This is Tucker. Excuse me, with respect to your question, we believe that we have very strong underlying growth in our portfolio across both pet, coffee and snacks and we believe that that momentum will continue into the next fiscal year on the other side of the pandemic. And as it relates to the divestiture of the Crisco brand, we acknowledge that the contribution on a full-year basis is about $270 million at top line and the EPS impact is about $0.45 to $0.55 as well. And we would anticipate over time with a very strong balance sheet, a balanced capital deployment model and the after-tax proceeds from the divestiture to have the opportunity to either reinvest in the business or potentially repurchase shares to replace that dilution. And then, lastly, as we are always committed to a continuous improvement mindset to support our financial margins over time in order to keep them strong to deliver profitability.

Okay. Okay. That's helpful. And then if I could just ask about the increase in CapEx for this year, I think you mentioned – I might have missed this, but could you give us more details around that? And then again, how should we think about sort of next year's CapEx?

Faiza, for this fiscal year, at the beginning of the year, we had a $300 million target. We have increased that to $315 million for the balance of the year. The primary driver of that increase is due to our continued investment in Longmont to support the growth of the Uncrustables brand. And as we go into next fiscal year, we would anticipate seeing elevated levels of CapEx as we continue to build out the next phase of the Longmont facility, which is a new bakery and additional manufacturing lines.

Okay. Thank you.

Thank you. Our next question is coming from David Driscoll of DD Research. Please go ahead.

Great. Thank you. Good morning and congratulations on the strong results, guys.

Thank you.

Mark, I wanted to ask about coffee. You made some interesting comments today and I want to explore them just a bit. I think you said Dunkin' Donuts was up 24%, Bustelo up something like 19%. The question I have is like, who's buying this? Is it new customers to the brands? Or is it a lot more consumption from the existing customers? And this is really leading to the thought process of what happens going forward? Do you have some stickiness to these new sales within coffee? Thank you.

David, thanks for the question. I would start just by reiterating that, in total, our entire coffee portfolio did grow in the quarter, which is fantastic. You're right exact -- you're dead on the numbers on Dunkin' and Bustelo. K-Cups were well over two times -- pacing over two times what that segment is growing. So that's also good. But again this 1.5 million new households speaks to the fact that there aren't some new consumers for sure. Bustelo, obviously, has a very strong South Florida and New York Latino base, but continues to grow with non-Latino millennials. That is a core consumer there. And then Dunkin' has -- the Dunkin' canister we're now selling Dunkin' in the canister. That item has been doing extremely well also. And in the case of Dunkin', it's a little bit of both, it's just increased consumption, because of at-home and some new consumers, but just great very proud of the results on coffee.

Great. Thank you so much, guys.

Thanks, David.

Thank you. Our next question is coming from Bryan Spillane of Bank of America. Please go ahead.

Hey, good morning, everyone.

Good morning.

Maybe just a follow-up on the question around CapEx. And I guess, what it's tied to is, I think Mark earlier in your prepared remarks you talked about the idea or the expectation that some of this incremental demand would be sticky, right? So, you're going to retain some of these sales and maybe some of these customers that weren't here pre-COVID. So, I guess, if that's the case, how do you -- how should we think about the need to invest, right, and partly CapEx the supply chain manufacturing has been tight, capacity has been tight? So, if you've got a bigger customer base, is there a possibility, I guess, that we will need to see an elevated level of CapEx beyond just what you're doing it Uncrustables? And maybe second to that, would it require any other investments, I don't know growth in your sales force, or just anything else that would need to be sized up, if the business has been rebased higher?

Bryan, thanks for the question. First and foremost, we actually feel that from an organization standpoint, we are very capable of absorbing the additional sales growth. From a CapEx perspective, clearly our focus is primarily on Uncrustables and increasing that. We do feel that we have been able to meet demand on the other categories and are monitoring our supply chain on a daily basis, if not 24/7 to make sure that all of the length in the chain continued to work well. That has been a focus. But from a consumer standpoint, if you just step back and think about the growth that we've experienced, our confidence in our ability to retain some of these new consumers has grown. And that is because we have seen continued repeat purchase rates, and now have the ability to target and make sure that we're spending incremental marketing dollars to ensure that we retain some of those. So I think we feel very good about there definitely is some stickiness. It's very difficult to quantify, but we maintain our confidence that we can retain many of those consumers.

All right. Thank you. And then maybe just as a follow-up to Dave Driscoll's question with regard to the coffee consumers. Any sense yet – I mean some of that is clearly coming from Away From Home, right, maybe people drinking Dunkin' and home rather than going to the shops so – and especially, as it's tied to K-Cups. Do you have a sense yet as to how much of that consumption behavior could stick at home, meaning rather than stop on the way to work to buy coffee you just you brew the K-Cup and bring it with you? So I guess my question is, do you think that some of the coffee consumption that you're capturing now sticks because you'll actually take away from the Away From Home consumption?

We clearly acknowledge that there have been habits that have changed and folks have been – have become more comfortable with brewing coffee at home. I think as routines go back to somewhat normal, you're going to see folks go through the drive-thru and obviously we want our partners at Dunkin' to win. But clearly, the comfort with obviously the growth in Keurig brewers at home also helps the trend. So again, difficult to quantify confidence that we will retain some stickiness, but I think, we feel good where we are right now.

Okay. Thanks, Mark. And Happy Thanksgiving, everyone.

Same to you.

Happy Thanksgiving.

Thank you. Our next question is coming from Chris Growe of Stifel. Please go ahead.

Hi. Good morning.

Good morning, Chris.

Good morning. I just had a quick question for you in relation to retail inventories. It sounds like those were rebuilt a bit in the quarter. Was there an increase in your second quarter inventories? I'm just trying to understand if you're at a point where you've been able to build inventory to a proper level both around the baking season in particular? And I guess any potential second wave or whatever as you said any third wave that we're on right now for the virus?

Yes. I think my earlier comment of the industry being better prepared for this wave relates to not just inventory, but all of the links in the supply chain, communicating better, collaborating with our trading partners to make sure that we can deliver. There has been some rebuilding of inventory, but I would also acknowledge that, it's reasonably tight. And so that's why we continue to manage on a -- literally a daily basis to make sure that all those links are working well together, and it has to do with communication and just staying on top of it.

Are you able to produce to your demand today for example? Are you able to build inventories in your production, or are you just at a point, where you're keeping up with demand?

In some areas we're building a little bit, but we're generally keeping up.

Okay. I had just a quick question as a follow-up on the gross margin. You had a very strong first half performance, you did indicate a lower gross margin overall, on a year-to-date basis. I'm just trying to figure, how much of that is the fourth quarter comparison, which is a tough one? And then, how much of it is this incremental or restarting the investment back in the business. Do we see that start in Q3, or is it more about the Q4 comp that affects the gross margin for the -- on a full year basis?

Chris. So, as we stated, we did guide to a 37.5% to 38% gross profit margin for the full fiscal year. The back half is going to be a little bit softer. That's largely driven to the volume comp that you talked about in the fourth quarter, but it also has some incremental pet trade investments included in there. Additionally it has some lost manufacturing absorption. And then it has some incremental freight or transportation expenses as well that are impacting the back half.

Okay. Thank you for that and happy thanksgiving as well.

Thank you Chris.

Thank you.

Thank you. Our next question is coming from Rob Dickerson of Jefferies. Please go ahead.

Hi. Great, thanks a lot. I just want to spend another minute or so just on, the margin side, Tucker, so excuse me. Just -- I guess in terms of the pet trade spend that you're speaking to is that -- do you view that as essentially more temporary in nature, just given some one-offs, or is this a situation such that it works in tandem with the rebranding Nutrish and solidifying shelf right just working on that indoor, on that in-store display piece? And I'm just trying to right size, how that margin or the implied op margin so to speak, vis-à-vis your guidance falls through per segment, because it seems like the freight and the transportation is across the segments. But it sounds like pet might be a little bit lower year-over-year relative to the other segments and then potentially lower even as we go into next year? And that's all I have. Thanks.

Rob, when you think about the investments and trade within the pet business, there's two elements there to consider. One is, as we think about supporting innovation and how we bring innovation to our retailer partners. The second component is, as we continue to advance our placement and positioning within e-commerce as well. And then, on the other costs, I think you've considered those correctly, across either manufacturing absorption and also across the freight and transportation as well.

Okay, great. Thanks a lot.

Thank you. Our next question is coming from Robert Moskow of Credit Suisse. Please go ahead.

Hi. Thanks for the question. This is more for modeling. Your G&A is a lot higher in the quarter. You said, a lot of it has to do with incentive comp. Is that just kind of like a one quarter impact and then it tracks down for the next two, or do you – assuming that you're beating numbers, you're going to have an elevated spend for the next – for the back half as well versus a year ago on G&A? Maybe you can help us on the corporate expense line too if that's the right place to put it. And then I was going to ask about the trade investment in Nutrish. I mean, how significant is it? What's it going to bloom towards? Do you have to increase your space, or is it really just you have to swap out a lot of old SKUs and put in new ones and you're paying a flooding fee for that?

Rob, thank you. I'm going to cover the SD&A question and then hand it to Mark to talk a little bit about the Nutrish tactics. As it relates to the quarter, you are correct. Incentive comp was up year-over-year. That's largely driven by the performance of the company as compared to what we initially anticipated. So there was a true-up in the quarter and then there will be incremental cost in the back half of the fiscal year which is included in our guidance range. And then as it relates to overall SD&A expenses, we are anticipating those to be up kind of 1% to 2% year-over-year. Part of that is the incentive compensation, inclusive of the reinstatement of merit costs as well and then also our desire to reinvest marketing dollars in support of our brands.

Rob, it's Mark. If I can try to answer your question around Nutrish a little more holistically. As you know, particularly, recently we've really been trying to ensure that everyone understands that the success of our pet business really rests on the three pillars: So cat, snacks and dog. And clearly in those first two we had great performance in the quarter. And there's still a little bit of softness in dog. What's great about Nutrish right now is as we focus on the total brand we grew it. So whether that's contributions from wet dog, from some snacks and some cat performance there, in aggregate the brand grew which is great. We knew that we were going to continue to have a little bit of softness in dog. It was more or less as we planned it. And as we've spoken in the past, we've made some very specific and targeted actions on that but we are not done. So we are – we remain very committed to that brand and ensuring that the dog portfolio gets healthy. Several of the actions that we are taking don't really begin to come to fruition until more like the fourth quarter. So yes, there has been some trade to support the brand in the interim. Our marketing was up 30% in the quarter on Nutrish. And then as we get into the back half, you will see some of the things that we talked about optimizing the portfolio in terms of getting the right SKUs, refreshing and making the packaging more consistent and then obviously some new innovation coming in the fourth quarter. So it is a journey. We recognize that it is not – we're not going to flip the switch overnight, but we remain committed to the actions that we are taking and have confidence in the brand in its totality.

I understand, Mark, but I asked about, what's the trade investment in third quarter specifically. So, is it price adjustments, or is it slotting fees to kind of optimize the merchandising in third quarter?

No, Rob, why don't we do this? Why don't we take that off-line?

Okay. All right. Thanks.

Thank you. Our next question is coming from Jason English of Goldman Sachs. Please, go ahead.

Hey, good morning, folks.

Good morning, Jason.

Two quick ones, for you. First, are you still targeting two times -- two turns net debt-to-EBITDA by fiscal 2023? And if so, should we just assume that you'll use the Crisco proceeds to pay down debt?

So, as we think about our desired leverage profile, we continue to focus on being at or below three times leverage, which we are there now. We did pay off an additional $200 million of debt in the second quarter and the term debt specifically. And so, we remain committed to a healthy leverage profile, also to the payment of dividends. But now, we have begun to open up strategic capacity with either our free cash flow generation or with the proceeds from the divestiture of the Crisco business, which then enables us to continue to either enhance our debt position or potentially to buy back shares to replace the lost earnings over time.

Okay. And you just said strategic capacity, but you referenced to sort of buybacks debt. Should I -- it seems like I should not interpret that term strategic capacity to mean M&A.

Yes. I think in the near term, large M&A is probably not what we're focused on. I think we're focused on the execution of our business and the delivery of that, while at the same time having a balanced capital deployment model and returning cash effectively to shareholders to drive value.

Thank you. And one more quick one on Jif, it sounds like a great quarter for Jif and congrats on that. But in looking at the Nielsen data, your price gap to private label sort of right back where it was before you went through that period of investment to try to get it down. Do you think you can hold at this level, or should we expect you to have to once again get back a lot of this price to reclose that price gap?

Jason, its Mark. The short answer is no. I don't think we're going to have to give that back. I think the dynamics that caused us to take the price increase are real and they impact the broader industry. We have, in our case, a very solid supply and relationships with our suppliers on peanuts. I think, it's possible that there we could continue to see some supply disruption in the market. And so, the dynamics, whether it’d be just higher cost peanuts, quality issues with peanuts, those are going to probably persist for some time. And so, I think we've demonstrated it over the last several months that the actions we have taken have worked and we will expect to stick to those.

That’s helpful. Thank you. Talk later. Bye.

Thank you. Our next question is coming from John Baumgartner of Wells Fargo. Please, go ahead.

Good morning. Thanks for the question.

Hi, John.

Mark, I wanted to touch on single-serve coffee. Just given the return to share growth for Folgers and I guess really the sudden sustained drop in market share for private label during COVID, what's your sense as to why private label has been so pressured? Is it just a category where consumers are flocking to brands right now? Are you seeing different category management by retailers? Just how do we think about any more permanent changes in category dynamics that favor brands going forward, as COVID sort of normalizes? Thank you.

John, I think it's a little of all of what you said. I think there is some – we have a very consistent supply. We have a very robust and scaled supply chain. There's no question -- from a consumer standpoint, a brand standpoint, consumers are definitely feeling comfortable with brands that they know and trust. The primary players in the coffee category tend to hedge and use financial instruments to buy coffee. We have seen that private label suppliers don't tend to hedge as much. And I think that might have had an impact on some of the private brands. But we remain committed to our strategy of producing and maintaining a steady quality supply of food and that includes coffee, and working with our trading partners to ensure that we maintain those products on shelves and engage with the consumers wherever we can.

Okay. Thanks Mark.

Thank you. Our next question is coming from Alexia Howard of Bernstein. Please go ahead.

Good morning, everyone.

Good morning, Alexia.

Hi, there. So a couple of questions. First of all, you've mentioned the freight cost inflation quite a few times so far this morning. What percentage of COGS does that represent? And can you talk about what proportion of your freight costs are already – are contracted out versus where you're having to tap into the spot markets? And then I have a follow-up.

Yeah. Alexia, as it relates to the transportation costs, they're probably in the low-single-digits sort of mid -- probably mid-single-digits in terms of freight costs as a percentage of our COGS, as I think what we've shared before. And we are experiencing an increase in those transportation costs year-over-year, primarily driven by the environment that we've talked about.

Okay. Thank you, and just a broader question. Back in March, at the start of the pandemic, you hired a new COO. I think that was the first Chief Operating Officer you've had in the company. I'm just wondering whether there are any priorities that have emerged as opportunities and whether -- and what we might expect from the upcoming Investor Day in terms of what you're going to be sharing with us next month. Thank you and I'll pass it on.

Thanks Alexia. You're right. It's the first COO under my tenure. John, would be the first, not in our company history. But I would highlight that -- rather than maybe answer that specifically, I really look forward to having you all have some interaction with my broader leadership team, including John and others at Investor Day. And part of what we hope to demonstrate to you during our Investor Day is just the strength and expertise of this team and how each of them truly do complement each other. I have to say, I'm proud that I have never worked with the team this fantastic in my career and really hope that we can get you all to interact with John and the rest of the team on December 10th.

Thank you. I’ll pass it on.

Thank you. Our next question is coming from Laurent Grandet of Guggenheim. Please go ahead.

Hey, good morning everyone.

Good morning.

Some follow-up question actually. I'd like to come back to the question about the stickiness of some of your segments here. So, could you please let us know, I mean, the stickiness in your view should be more coming from retaining the new consumers that came into your franchise or retaining the elevated consumption of existing consumers?

It's actually been both, Laurent. It's been -- clearly as at-home consumption has increased, we definitely have seen higher consumption. Clearly, there's been a shift to e-commerce, which does in many cases help repeat purchase. And then, again, having seen repeat purchase both in brick-and-mortar and e-commerce on many of our brands over the last quarter gives us -- that's what gives us the increased confidence of these consumers remaining in our brands.

Thanks. And my second one is about the guidance; you raised the guidance on really just on the topline. And with all the uncertainty about COVID and why did you decide to increase guidance now, I'd like to understand your thought process here as remember when I spoke to you about long ago, I mean, I think it's all about reinstating confidence with investor community, so being in a place where you should be able to beat guidance rather than -- or get to the guidance rather than being challenged like for more in the past few years. So, why did you -- I mean, did you decide to up the guidance now? And I'd like to understand, yes, better your thought process here. Thanks.

Laurent, its Mark. And I may ask Tucker to chime in here. But clearly one of my fundamental responsibilities as CEO is to make sure that we are providing our investors with as much visibility into our current thinking as possible and setting targets that we can meet or exceed and I'm very pleased over the last three quarters that we've been able to do that. I would -- I guess, I would just highlight that these are very uncertain times. We do feel that we have a responsibility to our investors to tell you what we know, when we know it. And so the current revision reflects a change in what we believe we can deliver. We clearly had an over delivery in the second quarter, which caused us to think a little bit differently about the remainder of the year. So, it's really about making sure that we're communicating with our shareholders and giving you the best information that we can based on what we know today.

Mark, that's well said. I don't have anything else to add.

Thanks guys and I’ll step it down then. Congrats on a good quarter.

Thank you, Laurent.

Thank you. At this time, I'd like to turn the floor back over to management to conclude today's call.

Thank you all for joining us. I'd like to just acknowledge and thank our tremendous employees, so many of whom are coming to work every day and ensuring that we have quality supply of food for our countries. We really look forward to seeing and speaking with all of you on December 10th at 8:30 Eastern, which is when our Investor Day will begin and wish all of you a safe and healthy Thanksgiving. Thank you.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time and have a wonderful day.