Good morning. Good morning. And welcome to The J. M. Smucker Company’s Fiscal 2023 First Quarter Earnings Question-and-Answer Session. This conference is being recorded and all participants are in a listen-only mode. Please limit yourself to two questions and re-queue if you have additional questions. I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Kevin. Good morning. And thank you for joining our fiscal 2023 first quarter earnings question-and-answer session. I hope everyone has had a chance to review our results as detailed in this morning’s press release and management’s prepared remarks, which are available on our corporate website at jmsmucker.com. We will also post an audio replay of this call at the conclusion of this morning’s Q&A session. During today’s call, we may make forward-looking statements that reflect our 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. Additionally, we use non-GAAP results to evaluate performance internally. I encourage you to read the full disclosure concerning forward-looking statements and details on our non-GAAP measures in this morning’s press release. Participating on this call are Mark Smucker, Chair of the Board, President and Chief Executive Officer; and Tucker Marshall, Chief Financial Officer. We will now open up the call for questions. Operator, please queue up the first question.

Thank you. Our first question today comes from Andrew Lazar from Barclays. Your line is now live.

Great. Good morning. Thank you for the question.

Good morning, Andrew.

You mentioned favorability in the commodity side for the full year versus expectations when you provided guidance last quarter and the fact that you were able to raise the low end of your full year gross margin guidance as a result suggest that some of the benefit is expected to flow through maybe in contrast to what is kind of a prevailing concern among investors in the overall food space, that margin recovery will essentially be eroded under pressure from customers and others. So I was hoping you could talk a little bit about your view on your margin progression as costs roll over and if you still expect about a 15% benefit from price for the full year? Thanks so much.

Andrew, good morning. We are continuing to experience cost inflation that is having a mid- to high-teens impact on our cost of products sold. That is not a change from what we said in our initial outlook for this fiscal year. There are two areas that we continue to assess; one is the Jif impact is coming in better than anticipated, so that has supported our margin uplift from the bottom end of the range; and two, as we continue to manage costs within our overall infrastructure to the extent that we are able to in this environment. As you have noted, we still anticipate 15 points of pricing for the full fiscal year. There is not a material change to that from our original guidance. And again, what we are carrying in from fiscal 2022 is about mid-single digits and actions that we have taken for the full benefit of fiscal 2023 is high-single digits as well on the pricing front.

Got it. Thank you. And then just, I guess, as a quick follow-up. I noticed in the prepared remarks, you mentioned, when it’s in the Pet Food space, there’s sort of the concept of value a number of times. And I guess, I just wanted to get a sense from you on sort of what you are seeing on that front and maybe in past times of sort of macroeconomic stress on the consumer, what you have seen with respect to any trade down in Pet? I guess, I was under the impression that, the growth obviously in the higher end was still pretty strong and consumers tend not to shift their Pet Food that often. So any comments there would be helpful. Thank you.

Yeah. Sure, Andrew. It’s Mark. When you think about just taking a real quick step back on our total portfolio, we participate, of course, in all segments of our categories and that includes the entire value spectrum, if you will and Pet is no different. And so if you think about Milk-Bone and how Milk-Bone has outpaced the pet snacks segment, particularly in this last quarter and it actually gained share, that is driven both by some of the premiumization, the innovation that we have launched, but also just by base Milk-Bone, which is, quite frankly, a very affordable snack option for pets. And likewise, with Meow Mix having also taken the number one spot in cat also meets the value equation for many consumers. So, I think, strategically, we want to continue to play across that spectrum in our categories and make sure that we are providing consumers with options.

Thank you. Your next question is coming from Ken Goldman from JP Morgan. Your line is now live.

Hi. This is Nora Young for Ken. Good morning.

Good morning.

Good morning.

Good morning. I wanted to ask about coffee. Could you explain why you are lowering your growth expectations for the year? In your prepared remarks, you mentioned that volumes are expected to improve. What insights are you seeing that give you confidence in this improvement? Additionally, how much of this is influenced by competitor actions compared to factors within your control, such as increased marketing and promotional spending? Thank you.

Nora, it’s Mark. I will start and Tucker may add. But, first of all, we are very pleased with our Coffee performance. Again, it goes back to the comments I just made around Andrew’s question. And we lead, so we did lead in taking price and that helped drive our dollar growth and our dollar shares continue to be very strong across the coffee category. And although, we did anticipate some elasticity in the quarter, those were largely as expected as we are now seeing our competitors follow in pricing, and so as we move forward, we would continue to monitor very closely consumer behavior, but we are encouraged by the fact that over 70% of cups consumed are still consumed at home. So we still feel very good about our total coffee business and we will continue to invest in it. We also noted the reinvestment in Folgers with a new advertising campaign to reinvigorate that brand as well. So all signs are continuing to support the business and drive balanced growth.

Thank you. Our next question is coming from Peter Galbo from Bank of America. Your line is now live.

Hey, guys. Good morning. Thank you for taking the question.

Good morning.

Mark, maybe just to follow up on Andrew’s question around Pet Food. I know you gave some comments on both treats and cat food. It seems like dog actually had a pretty solid quarter, I think, up 18%. So if you can just comment there? I know you haven’t put in the full brand refresh on Nutrish at this point, but just what you saw in dog specifically in the quarter in terms of trade down and what you are expecting kind of over the balance of the year there? Thanks.

Sure, Peter. Thanks a lot. In dog food, we've seen a very strong quarter overall, which includes Nutrish and Kibbles ‘N Bits. This success is due to our efforts to stabilize our dog food portfolio, with our main focus being on snacks and cat food. Stabilizing dog food has also been a priority, which involves optimizing our offerings to present a narrower but clearer selection for consumers. Many of these improvements are now visible in the market. Additionally, the dog food industry has faced significant supply disruptions, which isn't unique to us. Our results have benefited from these disruptions as we've managed to meet demand effectively.

Got it. That’s helpful. Thanks, Mark. Tucker, I have a couple of questions this morning and wanted to clarify the situation with Jif. There was a significant insurance recovery in the quarter, which I believe was already included in the previous guidance of $0.90 you provided, correct? Also, regarding the adjustment from $0.90 to $0.80, it appears that things have improved more quickly than expected. I think there was a $0.65 impact in the first quarter, so there might still be some effect into the second quarter. Can you provide any additional insights regarding the second quarter in relation to Jif and the overall quarter? Thanks.

Yeah. Absolutely. So, as you know, we came into the fiscal year with a $0.90 impact associated with the Jif peanut butter recall. That estimate is now $0.80. We did have the opportunity to come back faster both from a manufacturing standpoint and then beginning to refill the shelves at the respective retailers and so we were able to see benefit, which enabled us to reduce from $0.90 to $0.80. To your point, we did contemplate in the estimate the anticipated insurance recovery. Folks may be reading the income statement classification of where that recovery resides, but it was always contemplated in the estimate. To your point, we had a $0.65 impact in Q1. Therefore, we have about $0.15 left to go in Q2 and a little bit into Q3, but again, nothing material beyond the first quarter.

Thank you. Next question is coming from Chris Growe from Stifel. Your line is now live.

Good morning.

Good morning.

Hi. I just want to follow on quickly on that Jif discussion, and just to be clear, on the first quarter, do you have insurance recovery that is incorporated into that $0.65 figure? And is there more insurance recovery to come throughout the year, I just wanted to make sure we get a sense of how that’s going to play out in the coming quarters?

Chris, the $0.65 impact in the quarter did have the anticipated insurance recovery. There’s still a $0.15 exposure in Q2 and Q3.

Okay. And no further insurance recovery as best as you know, is that fair to say?

Correct. We have factored in what we believe is the appropriate factor for the insurance recovery and our total $0.80 estimates…

Okay.

Again, the predominance that came through in Q1 and I just acknowledged to you that the impact was against the $0.65.

Thank you for your explanation. I have one more question regarding Uncrustables. You expect growth to increase throughout the quarter and improve as the year progresses, and it has already picked up significantly. Have you mostly resolved the supply chain challenges, so that now it's just a matter of continuing to grow the brand? Additionally, with the Longmont capacity coming online later this year, do you anticipate that will further accelerate the growth we are currently observing?

Chris, it’s Mark. Yes. We are still very bullish on Uncrustables and everything related to it in terms of production remains on track. We are finishing the Longmont expansion, that’s the Denver facility and we are well underway in construction of the McCalla, which is Alabama facility. And so all of that, remember, McCalla is not going to come online for a couple of years, but all of the efficiency improvements that we have seen in Kentucky, as well as Longmont are going to support us meeting demand. So, although, we are not quite meeting demand, in other words, supply is not quite caught up with demand, all of the work on production is intended to do so over time and we do expect that we have, again, significant runway and the ability to get that brand to $1 billion over time.

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

Hey. A couple of questions. I want to make sure I understand the assumptions for profit growth for the rest of the year. From what I can tell, you are assuming kind of flattish operating profit, maybe even down a little bit for the next few quarters and I just want to make sure I am doing the math right. Is that true, but especially given first quarter, it looks like your profit would have been well ahead of last year ex the Jif recall and then a quick follow-up.

Rob, good morning. We brought the guidance range at the midpoint up $0.35, about $0.10 of that is coming from volume mix, about $0.15 of that is coming from cost of products sold, but then embedded in that first $0.25 is the $0.10 benefit from the Jif estimate going from $0.90 to $0.80 and then you have got about $0.10 of SG&A that comprises your $0.35. In terms of the flows, as you think about for the rest of the year, maybe we can follow up with that offline and help you with your flows. But that is how we are seeing the earnings construction from going from 8.05% at midpoint to currently 8.40%. And then I would just lastly acknowledge that, as we continue to see the Pet momentum continue through the balance of the year, as we continue to see consumer momentum inclusive of Jif recovery and the International Away from Home momentum and then that’s being partially offset by coffee topline momentum. So just to give you a sense of how we are thinking about both bottom line and top line.

In the Retail Consumer Foods segment, your profit decreased by about $65 million compared to last year, with $90 million attributed to the Jif recall. Is this division’s profit performing better than last year, excluding the recall, and should we expect a corresponding profit growth in this division for the remainder of the year?

Yeah. The profit growth should pick up on a sequential basis in the second, third and fourth quarters, as it gets beyond the first quarter impact associated with the Jif peanut butter recall.

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

Hey. Good morning, folks.

Good morning.

Two quick questions. Hey, there. So since you last reported you guys filed your K, and in there, it revealed that your advertising spend was down around 21% last year. Given that you are over delivering so far, why not take some of the over delivery and reinvest back into advertising?

Yeah. Why don’t I start just with our assumption around marketing spend for the fiscal year. So we did experience some SG&A favorability in the first quarter associated with marketing. However, we remain committed to spending the dollars that we planned at the beginning of the year and are still maintaining our guidance of 5.5% of net sales spend against our brands. We believe it’s important for the ongoing reinvestment and growth of those brands and overall health and profitability of the company.

Hey, Jason. It’s Mark. I would just reinforce that we are committed to spending the dollars and some of the dollars that, they are going to flow through later in the year. And just keep in mind that because pricing is up and inflation has driven up top line to some degree, that would slightly mute the dollars as a percent of net sales. But rest assured that our commitment to continue to invest in our brands is solid and the efficiencies, in other words, the bang for our buck that we are getting by getting more efficient on some of our marketing spend is also helping deliver good results against brand investment.

I want to revisit the question about coffee and why you anticipate an improvement in volume. I didn’t come away with a clear understanding of that. So let me ask a more straightforward question: Do you expect competitors to adjust their prices, therefore narrowing the gaps? If that's the case, are you already seeing that happen, or are you planning to introduce some promotions to alleviate those pricing gaps? If that is the plan, what is the timeline for that?

It's more about the fact that we are seeing competitors follow us. We manage price through various means, such as trade and other strategies. We have our regular promotions planned for the holiday period, which will continue to support the brand, but we do anticipate that competitors will keep following our lead.

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

Hi. Good morning.

Good morning.

So I just had a question on pricing and whether you have implemented all of your planned pricing actions for the year in the market or is there going to be further pricing that comes through, and if so, in which categories will there be incremental pricing?

Pam, we have implemented most of our pricing, but since we are still facing inflation, it's not accurate to say that we are finished. As you know, when we adjust prices, we have consistently raised and lowered them based on our costs, with increases being more prominent over the past year. However, we believe we have addressed the majority of the pricing changes, and we will monitor the situation closely to determine if additional price adjustments will be necessary in the upcoming quarters.

And Pam, I would just acknowledge that our guidance reflects the pricing actions that we took in the spring timeframe in support of recovering the cost inflation in order to deliver our fiscal year.

Okay. Thanks. That’s helpful. And then my second question is just an update on your M&A strategy, given your comments earlier this year about your interest in potential acquisitions, where does this stand, have you been evaluating any potential acquisitions and can you remind us what the criteria is, and if that’s changed at all?

Sure. The criteria hasn’t changed and I am happy to refresh our collective memory on that. The short answer to your question is always have lines in the water, constantly evaluating opportunities that come across our desks. But, again, we want to invest in businesses and do it in a prudent way that will generate a good return. So, clearly, that is one of our key priorities. And as we have articulated over the last several quarters, we are interested in acquisitions that would add to our existing portfolio in our existing categories that would potentially round out our portfolio in coffee, potentially our portfolio in pet snacks would be of interest. We could be interested in more significant or meaningful acquisitions as well. To the extent that we are looking at newer categories or categories that we don’t participate in, we have tried to be clear that we would not enter a new category unless we have the ability to acquire a meaningful or leadership position in those categories. So it’s quite simply meaningful leadership positions or rounding out our existing portfolio.

Thank you. Our next question is coming from Cody Ross from UBS. Your line is now live.

Hi, there. Thank you for taking our questions.

Good morning.

I just want to touch a little bit on pet. Pet has seen nice acceleration here, organic sales in the mid-teens. Did you have any benefit from inventory replenishment in the quarter stemming from your supply chain headwinds and can you discuss what you are seeing from a market share perspective? Thanks.

The answer to the first question is no.

Okay.

And the second part of your question, I am sorry, Cody, was around market share? We have seen good share growth. Clearly, Milk-Bone and Meow Mix are, again, our areas of focus, very pleased with the results there, about a full share point on Milk-Bone and continued share growth on Meow Mix. So really pleased, again, with the way our investments are playing out in those two segments. And then we spoke earlier just about dog food and our efforts there to stabilize that business.

Thank you for that. That’s helpful. And then I just want to go back to one of Tucker’s comments earlier about your revised EPS guide. You mentioned that SG&A is adding about $0.10 to your higher EPS outlook. Can you just provide more details about what’s different today in your SG&A outlook versus prior? Thank you.

So, Cody, what’s consistent is our reinvestment in the business of maintaining 5.5% of marketing spend as a percentage of net sales. So there’s no change there. Rather, what we are seeing in SG&A is just some favorability on the discretionary side that came through in the first quarter and how we want to continue that trend or trajectory through the balance of the year.

Thank you. Our next question is coming from Alexia Howard from Bernstein. Your line is now live.

Good morning, everyone.

Good morning.

Good morning.

Can you provide insights on retailer inventory levels? We've heard mixed views from various companies regarding whether retailers are holding safety stock that needs to be reduced or if low service levels require them to increase inventory. How do you assess this across your portfolio, and do you foresee a need for adjustments in retailer inventory levels in the upcoming quarters?

Alexia, we really have not seen anything out of the ordinary on inventory levels on our businesses. So for us it’s pretty much business as usual.

Great. Thank you very much. And then in the prepared remarks, I think, you made a comment that, obviously, the consumer environment is evolving. Could you just hit the high notes of what the key consumer shifts that you are working your way through are right now and I will pass it on. Thank you.

There's been considerable discussion in the media regarding consumer sentiment and a more cautious approach among shoppers. We have noticed some of this trend. However, our categories tend to demonstrate greater resilience compared to the broader categories in stores, which has benefited us. Additionally, there have been conversations about private label products and the idea of consumers trading down. In response, I would highlight two points: first, we are committed to offering a diverse range of brands across all price points. While we have seen some growth in private label market share, this is typical during such times and has not returned to pre-pandemic levels. Despite some shifts in the categories, I want to emphasize that our categories remain strong, and we will keep investing in our brands.

Thank you. Our next question is coming from Scott Mushkin from R5 Capital. Your line is now live.

Thanks, guys. Thanks for taking my question. I actually wanted to clarify some of the comments around the pet food area. So I think it was mentioned before that there were some out of stock issues, I guess, that’s with competitors. Is that what I am taking, because I think, you guys said, you are fine on the inventory perspective and people haven’t been replenishing, did I get that correct?

What I mentioned earlier, Scott, was that the pet industry has faced significant supply chain challenges, primarily because pet products are formulated foods that require many ingredients, which complicates the supply chain. This has had a wide-ranging impact on the industry. However, we are very pleased with our ability to navigate these challenges, which has allowed us to maintain our presence on the shelves and ensure supply continuity.

That's a good clarification. I appreciate it. I wanted to ask the company about the long-term outlook. I've spoken with some distributors about what might happen if inflation eases. Looking ahead to next year and the following year, how do you anticipate that affecting your businesses? If a reduction were to occur, what would the impact be? Thank you.

Well, first of all, it’s hard to say. A little relief would be great. My answer to that question, Scott, would simply be that we have always been prudent and disciplined about when we increase costs, and we would similarly be very prudent and disciplined if we had to lower prices over time. But at this point, because it’s still volatile and there are many unknowns in the marketplace, we can’t really provide any more details than that.

Scott, I would also add that, we remain committed to the profitability and margin profile of our brands and business. And so as we continue to navigate this inflationary environment, as we continue to move forward, we will continue to reinvest in those brands on behalf of our business and we will continue to think through what ongoing continuous improvement or productivity programs will also mean to the long-term health and strategy of the company.

Thank you. Our next question is coming from Rebecca Scheuneman from Morningstar. Your line is now live.

Great. Good morning and thanks for the question. So my first question has to do with coffee margins. I think that they were down about 350 basis points in the quarter. That was quite a bit more than I expected, obviously, I know that there’s some volume issues there. You had also mentioned that you are investing in Folgers marketing. So I am just kind of wondering, like, as we look at the year and even if volumes start to perform better there, should we still expect those margins to be lower year-on-year given the increases in marketing?

So the coffee story is one of cost inflation that has needed to be recovered on a dollar-for-dollar basis and this first quarter is our largest cost component or cost basket, so that is really what is driving the year-over-year margin pressure. But as we move sequentially through the balance of the fiscal year, we would anticipate that our coffee margins improve. But getting them back to the historical 30% plus level will still take us some time as we navigate this inflationary environment.

Okay. Great. Thank you. And then my second question is about dog food. You had mentioned either in the press release or the prepared comments that you think dog food is well-positioned for evolving consumer habits. I believe what you are referring to there is kind of given inflation, you could see some consumers trading down from the premium and super premium to more of the mid-tier. First of all, is that what you are referring to, and if so, are you seeing that yet or is that something that you just anticipate you could be seeing? Thank you.

Rebecca, there’s a little bit of that. There’s a little bit of trading down. We, again, going back to some of my earlier comments about making sure we are providing value to the consumer, the benefit to our dog food business this quarter is, again, around the fact that we have done a lot of work to stabilize the business. Make sure that we are managing through the supply constraints and we have benefited in that regard, because we have done a good job of managing through some of the supply issues. And then, thirdly, there is a bit of the trading into our brands.

Okay. Great. Thank you.

Thank you. We have reached the end of our question-and-answer session. I will now turn the call back to management to conclude.

Well, I want to thank everyone for your time joining us this morning, and as always, our results were made possible by our outstanding team, our employees, and I really want to just thank them for their discipline and hard work and dedication to our company and our brands. And we hope to see many of you in Boston at the Barclays Global Consumer Staples Conference in a couple of weeks and there will be a live webcast of our presentation on September 6th at 2:15 and you can access that from our Investor Relations website. Have a great day.

Everyone, this concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.