Good morning, and welcome to The J. M. Smucker Company's Fiscal 2018 Second 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'll open the conference up for your questions after the prepared remarks. Please limit yourself to two questions during the Q&A session and re-queue if you have additional questions. I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on our Fiscal 2018 Second Quarter Earnings Conference Call. Mark Smucker, President and CEO; and Mark Belgya, Vice Chair and CFO, will provide our prepared comments. Also participating in the Q&A are Steve Oakland, Vice Chair and President, U.S. Food and Beverage; Barry Dunaway, President, Pet Food and Pet Snacks; and Dave Lemmon, President, Canada and International and U.S. Away From Home. During today's call we will make forward-looking statements that reflect the company's current expectations about future plans and performance. The 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 to our website supplementary slide decks summarizing the quarterly results and our updated fiscal 2018 outlook 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. If you have additional questions after today's call, please contact me. I will now turn the call over the Mark Smucker.

Thank you, Aaron. Good morning, everyone, and thank you for joining us. Our ongoing efforts to position our business for growth began to pay off this quarter. We achieved modest sales growth driven by key brands in every business and delivered earnings per share ahead of expectations. We will continue to deliver long-term top and bottom line growth by executing our strategy of supporting a balanced portfolio of leading and emerging brands, guided by a deep focus on consumer and customer insights. Central to our strategy is capitalizing on the strength of our leading brands, Folgers, Smucker's, Jif, Dunkin' Donuts and Milk-Bone including expanding their reach through the introduction of new platforms in high-growth segments, such as premium coffee and snacking. At the same time, we are investing in emerging growth brands such as Café Bustelo, Smucker's Uncrustables, Nature's Recipe and Sahale Snacks. We are balancing our portfolio by placing emphasis and resources on these faster growth opportunities. This includes incremental marketing investments fueled by continued cost discipline, efforts to become more agile, and a relentless focus on how best to engage and delight today's consumers. As I mentioned, progress on these fronts is reflected in our second quarter results, as we had strong performance for a number of our key brands. This included double-digit sales increases for Nature's Recipe, Dunkin' Donuts and Jif and high single-digit growth for the Uncrustables, Café Bustelo and R.W. Knudsen brands, demonstrating the ability of our brands to win in the rapidly changing retail environment. Sequential volume trends for Folgers roast and ground coffee improved, with Folgers volume down 6% in the second quarter compared to a decline of 13% in the first quarter. This was a result of actions we have taken to manage relative and absolute pricing gaps to competition. With price…

Thank you, Mark, and good morning, everyone. Let me start by providing additional color on our second quarter results and then conclude with our updated outlook for the full year. GAAP earnings per share were $1.71 in the quarter compared to $1.52 in the prior year, an increase of 13% primarily due to reduction in special project costs in the current year. Excluding these costs and reflecting other non-GAAP adjustments summarized in this morning's press release, adjusted earnings per share were $2.02 compared to $2.05 in the prior year, a decrease of 1%. During our first quarter call in August, we guided toward a high single-digit percent decline in second-quarter adjusted earnings per share. The over delivery of earnings was attributed to increased net sales and a shift in certain marketing activities until later in the fiscal year. Net sales increased $10 million or 1% compared to the prior year, and improved sequentially from last quarter where we were down 4% versus the first quarter of fiscal 2017. Net price realization was higher adding 1% to the net sales driven by peanut butter and fruit spreads while foreign exchange also contributed slightly to sales growth. Volume mix had a negative 1 percentage point impact on net sales as declines in our oils and baking categories were partially offset by gains within mainstream dog food. Moving down the P&L, adjusted gross profit decreased $11 million or 1% reflecting the impact of lower volume mix. Commodity costs, notably green coffee, were higher in the quarter but were offset by the overall higher net pricing. Adjusted gross margin of 38.8% in the second quarter represented a decline of 80 basis points compared to the prior year, reflecting the anticipated increase in green coffee costs. However, gross margin improved sequentially from the first quarter…

Thank you. The question-and-answer session will begin at this time. Our first question comes from the line of Andrew Lazar of Barclays. Your line is now open.

Thank you. Good morning, everybody.

Good morning, Andrew.

Good morning, Andrew.

Hi. Just one for me. I think it seems that each food category has a kind of one consumer problem or benefit that if it can be solved it sort of opens up a new avenue of growth. And I realize some categories are just on the wrong side of sort of where consumers want to go. But I guess when it comes to roast and ground coffee, I know – I think you have more significant innovation planned for the end of the year and really into fiscal 2019 but I guess have you fully identified maybe what that key benefit is that roast and ground consumers are kind of looking for or the problem that you can sort of solve for them? And if so, I'm just curious what that is.

Andrew, hi. Steve Oakland, I'll give that a shot. I think to suggest that there's one problem to solve in roast and ground coffee might be a little too easy. I think we've got so rich of consumer segmentation data today that we understand that there's a large business where Folgers flourishes, frankly, in the value channel, right? So if you think about the discount channels that are growing and who's building stores today. So we want to provide that consumer with a rich coffee experience that's very affordable but is branded. If you look at traditional groceries today, it's a convenience play. It's K-Cups, right? And if you look at who's merchandising K-Cups, it's the traditional grocery retailer across the country. And then there's the whole premium experience and how do we make that authentic, how do we make it experiential, how do we bring more. And I would argue Café Bustelo does that, right? So if you think about the needs we're solving in Bustelo, the needs we're solving in other ones. So I think, obviously, there are things we need to solve in every category. The breadth and reach and size of the coffee category – the fun part about it is there's a whole bunch of needs. It's fragmented. It's not as simple as it was 10 years ago that you could sell Folgers roast and ground. So the journey we're on and we've talked a lot about that, about improving our mainstream business, about positioning ourselves to participate significantly more in the premium business, both with Dunkin' and Bustelo, and then winning in K-Cups. And we made progress on all three of those in the quarter. We're excited as the innovation comes out later in the year to show you how we're solving in each one of those segments. But I just think our view on it is it's a complicated segment, there's a lot of opportunity but they're uniquely different by customer and by consumer.

Okay. Thank you for that.

Thank you. Our next question comes from the line of David Driscoll of Citigroup. Your line is now open.

Great. Thank you and good morning, everyone.

Good morning, David.

Good morning, David.

Two questions for me. The first one is bigger picture on the cost-savings programs, the various programs, and just your sense today of the delivery of those savings to the EBIT line versus the need to reinvest in the market. As you said in your script, the number one point is getting that sales growth. So I'd just like you guys to talk a little bit about – you've already achieved the $200 million from the pet food acquisition. I believe there is $250 million remaining in your program. So can you go over a little bit about the timing? And then really specifically, whether or not much more of this needs to be reinvested back into the business to achieve your primary goal?

Hey, David. This is Mark Belgya. Thanks for the question. Let me start here. So you hit on all the points correctly. We did achieve the rest of the $200 million and that leaves $250 million. And I think in our scripted comments we've said that we're going to have another $100 million coming through this fiscal, which is probably skewed a little bit more towards the Keurig contract than the other components that we've spoken to. In terms of how we're going to spend it, it really kind of goes across the board. We were very explicit when we talked about, if you recall, we went from the $200 million, the original pet synergies to $250 million. At incremental $50 million, we were specific to say all $50 million of that was going to be reinvested into the business. And then as we look at the incremental $200 million, I would just say it's a blend. One of the things that we have spoken about is that to support the innovation platforms that are coming to market over the next several quarters, it's absolutely imperative that we support them both with the retailer and to the consumer. So we will be spending some of that behind each of the respective platforms that you'll see coming to market. At the same time, we also said the profitability on our K-Cup will improve. So there you will see a flow-through the bottom line. While we will certainly benefit from the price on Folgers K-Cup and see a volume pick-up there, you will see margin improvement in the overall K-Cup category. And then I think just as we see the rest of it, it will be a blend of flowing through to help us achieve our strategic growth objective there as it relates to earnings. What we're not in a position to do, and I just candidly don't see us doing this, is just saying black-and-white of the $200 million; the X amount will go to reinvestment and Y will go to the bottom line. I think we will prudently think about how we spend that in the coming couple of years. And then lastly, the timeframe is such that that entire $450 million will be realized by the end of fiscal 2020.

Really appreciate that answer. One follow-up on the Coffee side. Just curious how fast you can get moving on the benefit of the freedom to operate within the new K-Cup contract? It seems like a very significant event for you guys, but, again, the speed of how fast you can take advantage of this new opportunity within the contract I think is interesting. I would love to hear your thoughts and comments. Thank you.

Sure. Hi, David. I think if you dug deep in the numbers or if you walk to a club store, you'd see we've sort of got a running start on that, okay? So even though the economics didn't make sense, we worked with KGM to start to build pack sizes to put ourself in places where we knew we would benefit once the contract went into force. So I think it'll be sequential. You'll see impact in the third quarter and you'll see even more in the fourth quarter and I would expect it to be sequential into next year. I would remind you that we do about 20%, 21% of our business in K-Cups. The category is 41% K-Cups. So the opportunity for us to grow significantly, we think, is real. We made a running start and part of that is reflected in the numbers. And we don't like negative numbers, but we felt investing in getting ahead of this K-Cup opportunity was important. And so we'll start to take advantage of that a little bit this quarter and more in the fourth quarter.

David, it's Mark Smucker. I think you heard both Mark and Steve's answers. I think it is good to point out that some of the flow-through at the bottom line that Mark referenced is both a combination of improved economics and increased sales.

Thanks so much, guys.

Thank you. Our next question comes from the line of Ken Goldman of JPMorgan. Your line is now open.

Hi. One quick one from me, and then a more broad one if I can. I just wanted to get a sense. Your pet sales came in I think a little bit better than most people were looking for. Was there any shipments ahead of consumption there that we should be aware of? I know you talked about mainstream dogs, but I'm just trying to get a sense for overall.

Hi, Ken. This is Barry Dunaway. No, there were no anomalies as far as shipments this quarter. In fact, we had one retailer who shut shipments down just based on their year-end. And so we actually had fewer shipments because of that one retailer. So, no. To answer your question specifically, no anomalies.

Okay. Thank you for that, Barry. And then this is a broader one. There's obviously a bunch of areas of concern for investors in the food space, and indulge me for a second as I list a couple of them. But you have customer consolidation, the growth of private label, customers potentially not accepting higher prices as easily. I know you guys have talked a little bit about maybe some of the foot dragging that goes along with that – better terms, better fill rates the customers were asking for. As you think about which of these concerns is the most legitimate and which is the most overstated, I'm just curious for your sense – because could you cover so much in the food industry in terms of your categories, how do we think about what's real and what's maybe imaginary so to speak?

All right. Ken, it's its Mark Smucker.

I'm putting you on the spot here. I'm sorry about that.

There are – so there is – we've talked about the foot dragging. There has been some pricing pressures. What we keep coming back to is our success in that area. It's really our ability to maintain strong customer relationships. We've always had very strong customer relationships, being a category captain certainly helps. So as we've said in a number of our recent investor meetings, in our case, it is more, I would say, delayed execution of pricing but still successful execution of pricing. I think the private label comment and I think we would tell you and again we said this in investor meetings is that we have not seen from a private label perspective anything particularly different in this recent private label push versus ones in the past. And so obviously that's something that we will watch very carefully. We continue to point to the fact that – that U.S. consumers are particularly brand loyal and that bodes well for our brands. And so I guess if I could comment on those two, and then I guess I would reserve any commentary on customer consolidation. I don't know if anybody has anything to add around the table but...

Yeah. Ken, this is Steve. We saw the consolidation, the national – when Kroger went national and when a number of these things happened. I think it is a tough retail environment. I think there's a lot of question on the role of e-commerce. There's click and collect. A couple of our retailers are just super successful with click and collect. So I think there's a lot of question on how to serve the consumer today as we transition to a consumer that's much more digitally connected. I would tell you some of the meetings we're having. The level of dialogue is very rich. Those places where you're a category captain, where you're important to the retailer, and most of our big brands that we are in that situation – the dialogue is very rich. I think there's going to be a lot of test and learn in the interim, but I would say I think we're encouraged by the recent results by some of our biggest customers and how strong their business is. I think you can look at our results and you could say well that's a mirror of those results. So I would say I think that dialogue is working. So I think it's hard for us to comment on any one of those things. I think they all exist differently depending on the category and the impact on that category depending on your position in the category. If you're a number two or three brand, I think it's a tough place to be right now.

Ken, it's Mark again. Just a couple of things. We continue to preach big brands are not dead and there is a continued role for those, both in e-commerce and in traditional brick-and-mortar. What we are very pleased with in this quarter is in virtually every one of our businesses, the brands that we intended to grow did grow. And so I think from our perspective that speaks to the fact that our strategy is working.

Thank you very much.

Thanks, Ken.

Thank you. Our next question comes from the line of Pablo Zuanic of SIG. Your line is now open.

Hi. Good morning. This is actually Aatish Shah for Pablo.

Good morning.

Good morning.

Good morning. Just two quick questions; first related to Coffee and then the second on Pet Food. On the Coffee front, as K-Cup has becomes a larger part of the coffee market and of your own Coffee segment, does that mean the Coffee segment becomes less of a pass-through category? And as such, should we expect more margin volatility in the future? Also, is roast and ground becoming less of a pass-through category? We ask this because you're guiding for a record 4Q coffee margins. Given the lower coffee costs, we would imagine that it will get passed on. Any color on this and the coffee margin bridge for 2Q and the second half would be helpful.

Sure. I do think, as we talked about earlier, K-Cups are 40% of the business today. I think the good news on your question there when it comes to green coffee volatility – green coffee, quite frankly, is a small part of the cost of a K-Cup. So if you think about what's going on in K-Cup, it's really packaging distribution technology co-pack agreement. So green coffee has a much smaller role in the margin structure. So I think, by nature, you're going to have less volatility in it, right? Unless we get the coffee at extreme, extreme prices. So I actually think that'll be good for us all, long-term. I think you'll see more stable margins, because green coffee, frankly, isn't as big of a deal on it. With regards to the pass-through categories, I think Ken touched on this in the last question. I think pass-through is a little bit more difficult right now. I think we have to look at our green coffee purchasing organization on our strategy. We have great results when we are priced at certain price points. And so we need to make sure we hit those price points as often as we can. I'm not suggesting we can't push price through, but I'm just suggesting we understand better how the Folgers brand performs, where it performs, in what channels, and we just have to have that pricing right. And that pricing right means not just absolute price point but gap with our major competitor. The other thing I would say that's going on is the growth of premium. And premium, historically, has had less price volatility in it because all the players don't pass price at the same time. A part of that is driven by the length of the supply chain of premium coffees, et cetera. So I would argue the fragmentation of the category, in general, I guess to bring us all together, will make it less volatile versus more volatile, long-term; K-Cups being the biggest impact on that.

That's great. And if I could just squeeze one in on Pet Food?

Sure.

Is there an imperative to increase exposure to the faster-growing Natural Pet Food segment? And if so, would this be through maybe taking Natural Balance to FDM and/or acquiring other natural pet food brands?

Hi, Aatish. This is Barry. Let me add some color to that. We had stated previously that we are committed to keeping Natural Balance in the pet specialty channel. We believe that we continue to be consumer-led as we think about that brand, and we think those consumers are looking for that brand specifically within the pet specialty channel. Based on the performance of Nature's Recipe, which you saw the numbers, we think that is the right brand for grocery en masse, and I think the performance is playing out as we expected. So, no. Natural Balance will continue to be focused in pet specialty. M&A acquisitions of other brands will be part of our growth strategy, and clearly we'll look for brands in pet specialty, just like we would across grocery en masse.

That's great. If I could, just one more quick one – going back to Coffee, is there a negative mix issue since Dunkin' is growing faster than Folgers, especially in the K-Cup category? And if there's any kind of color in terms of the margin difference between the two?

In general, no. The premium coffee margins are at or above our segment margins. And now that we've solved the K-Cup issue, I think we're in much better shape there. So, previously, I would have said yes on K-Cups only, but not now.

Great. Thank you very much.

Thank you. Our next question comes from the line of John Baumgartner of Wells Fargo. Your line is now open.

Good morning. Thanks for the question.

Hey, John.

A question for Mark, maybe Belgya. As part of your savings initiatives, you've really been focused on trade spend and getting the efficiencies there. And we've seen a pretty significant improvement in your subsidized volumes over the past few quarters, and it's really across the board. It's been dog foods, spreads, peanut butter, coffee, right on down the line. And the magnitude really it seems you need to cross the industry, so can you speak a little bit to the execution there? I mean what's going to be changed in your approach to trade promotion? What inning are you in in terms of the improvement there? Any comments would be appreciated.

Okay. John. I'll start and then maybe look to Steve. So as we talked – whatever six months, a year ago, when we first came out with our cost savings programs and then we had, I think, six items or six categories, certainly, trade was one of those revenue growth management. And so we have just been actively – we use the term – it's just blocking and tackling, but we've been actively trying to address this. We've got a dedicated team following the pet acquisition that is spending more time on that, we're adding the analytics capabilities and again there's – just making sure that each dollar spent is we're getting the maximum efficiency out of each of that. And then I think just the fact that we've elevated the importance both through the savings program and just to the respective individuals that are responsible for managing the efficiencies. I think it's a combination. I don't know, Steve, if I'd say anything dramatically or specifically we would say we're doing differently, although we're continuing to look at ways...

Yeah. I think it's a much more effective group. We have a new system application that we're in the middle of installing to help them, to give them even more data. I would say it also goes back to we're having some very rich customer dialogue. It no longer is that the customer is just trying to collect trade funds the customer wants us to grow the business as well. So the dialogue with the customer, if you have the right information and you're the category captain, the dialogue can be very rich. And I would argue that's happening across Pet; it's happening across our Food businesses and our Coffee business.

Great. And are there – just in terms of thinking forward, are there any certain categories where you feel like you can still maybe do a better job overall or just some sort of basis of innings where you are in terms of the progress there going forward?

We haven't had the question on our Food business yet today, but we might get one. And if you look at some of the – and there'll be some sequential lumpiness in our Food businesses because we spend trade on Crisco. We spend trade on baking. That team has decided and brought us a model which suggests it's much better to spend that trade during the periods when the consumer is really in the category, okay? And so you saw our oils business and our baking business down substantially in the summer. You'll see those trends improve dramatically here in the fall bake period. So I think what we're learning is there's an opportunity for us to be much more targeted to align our promotional spending with one that consumers really in the aisle or really online, really looking forward to recipes so they react to both our trade and our shopper marketing – those other things we do. So as we work on those, you might see some sequential changes in business, and I would argue the food businesses is one of those right now. We took some of the spending that we would have normally spent in the summer and spent it on our other growth brands – on peanut butter and fruit spreads, on Uncrustables. And we are turning on the promotional spend on those baking categories now. So I think as we get better, as we learn how to target this to both the retailers' needs and the consumers' needs, it will just become more effective, right?

John...

And less is great; effective is better.

Yeah.

So I mean we're happy to spend trade dollars if we get a return. When you don't get a return, that's the wrong time to spend it.

Yes. John, this is Mark Smucker. I think Steve painted the picture extremely well. I would only add that I would – to answer your question specifically, I don't view that our capabilities are really any different by category. We have a centralized team that really manages the deployment of trade funds, but our individual sales folks are responsible for managing them at the customer level. But specifically, your question about innings – we're doing a much better job right now of managing category by category, so the capabilities are consistent across. But as Steve mentioned, we are in the midst of upgrading our systems and that is basically a year-and-a half to two-year process. So as we go forward, we will continue to gain benefit and it will probably be, I think, in fiscal 2020 that we get sort of the full benefit and even enhanced capabilities to manage that trade more effectively.

Great. Thanks very much very. Very helpful.

You're welcome.

Thank you. Our next question comes from the line of Akshay Jagdale of Jefferies. Your line is now open.

Hi. Good morning.

Good morning, Akshay.

Good morning.

Okay. I'm going to try to catch those. There's a number of questions embedded in there actually, so I'll try to get them for you. First of all, I would say, yes, there is a replacement cycle and I don't know that we're really the right people to comment on that. I will comment on the fact that they brought the first real, what I would consider, innovation to that and that is a price point. We see that new brewer promoted under $50, right? At our largest retailer, we see it online at that number. So the fact that they're adding new price point is just, by definition, will bring a new consumer base into this, right? So for the first time in a number of years, I think, we have confidence that we will have a household penetration gain and we have confidence they're doing two things. They're investing in marketing and they're investing in equipment, right? And so both of those things we view as very positive for the segment and I would hope will drive household penetration. I think certainly it's fair to assume that this lower price point machine will bring new consumers into the marketplace. And quite frankly they're doing this as retailers where we are very successful, where we have great share, so that also intrigues us. Your comments on the category are correct. We think there's an opportunity to as much as double our K-Cup business over time. That has to happen by very, very different mechanics depending on the brand. The Bustelo business, right? We have to continue to expand reach. That business is small but growing very, very quickly. Dunkin' has a great opportunity as we get into flavors, as we get into pack sizes as we – we have the shackles taken off of us for channels and distribution. So Dunkin' is growing – Dunkin' is our – next to dog food, Dunkin' K-Cups is our best online item and a tremendous item at the largest online retailers. And then Folgers is really about competing in that lower price point, that mainstream price point. And we're now positioned with a cost structure that allows us to bring Folgers back to those price points that we needed to be. So I think the work will be different across brands. And then I think the innovation that we'll show you at CAGNY will have another look at a K-Cup opportunity. So, for us, to make that ambition of doubling our K-Cup business, we will need to add SKUs, we will need to add brands, and we'll need to add distribution and I think hopefully you'll start to see us do that.

That's very helpful. And one for Mark. So in terms – Mark Smucker, that – in terms of the longer-term initiatives, M&A has really been the major sort of value unlock for investors in Smucker's over time, right? So recently, you've seen a big correction in valuations in the public market. Rates are starting to move up. Can you just give us your view of what's happening in sort of your world? Are you seeing more reasonable valuations? What does the pipeline look like and is the probability of larger deal greater now than it has been? Or like just give us a high-level view of what's happening on the M&A side if anything has changed?

So, Akshay, thanks for the question. I think from a macro perspective, obviously, we're all very aware of the adjustment that occurred in our entire industry and our peer group, largely driven by news around what's happening in the e-commerce space. I think you can point to, particularly in the last few days, some decent performance by two of our largest customers that are historically brick-and-mortar retailers. And so, from our view, we think the correction, if you will, may have been – our opinion would be there was an overcorrection and that is, we believe, substantiated both by some of the results of some of our larger customers as well as our performance this quarter and our outlook. From an M&A perspective, we can't talk about specifics. We do still believe that M&A is very important and is one of the four key pillars of our strategic roadmap. And it goes without saying that we continue to keep our lines in the water and look at a number of opportunities. But, as always, we are prudent and diligent and we want to make the right acquisitions at the right price, so that we can generate a return for our investors. And so, at the end of the day, we still have a responsibility to our shareholders to deliver returns. And then, as it relates to large or small lines in the water for both of those opportunities but, again, it's one of those things where we just can't control timing. Thanks for the question.

Yeah. And just one last one, again for you, Mark. If you leave M&A aside, you've got the three other initiatives. What do you feel the best about in terms of which of those initiatives are most likely to have the most meaningful impact on your P&L and shareholder value over the next – whatever, five years? Like long-term, what do you feel best about of those three initiatives in terms of where you'll see the biggest unlock for investors? Thank you. I'll pass it on.

Akshay, this is Mark Belgya. I want to comment on something related to that and then I'll turn it to Mark to the degree he wants to comment on the platforms that we haven't exposed to the rest of you. So, that's a little difficult but – and I've made this point to some investors over the past few months. If you want to look at the near-term absolute best opportunities, I would say, it's our Uncrustables and it's our Café Bustelo. If you think about what we've said publicly over the last two, three, four months, the construction of Longmont provides us the opportunity to double the capacity of our current sales which are $250 million. Our Bustelo business is about $125 million which we feel also can be doubled in over the next several years. So, just those two pieces alone are $350 million to $400 million worth of top line growth, so that's the near end. Mark, I don't know if you want to comment specifically on the platforms because, again, we haven't really – we've talked about them but we haven't scaled them in. So I'm not sure that you have a preference over which one of the three is the best opportunity for them.

No. I agree with Mark. I think both of the opportunities that he mentioned are not only we have the ability to double but we have the ability to double them profitably. And they both continue to generate at least or right around corporate average profitability. So, those are both very important. And then, just we will continue to be disciplined on our cost management program. So, those are very important for our ability to support our growth.

Perfect. I'll pass it on. Thank you.

Thank you.

Thank you. Our next question comes from Farha Aslam of Stephens. Your line is now open.

Good morning. This is Greg Nep on for Farha.

Morning, Greg

Morning, Greg.

I wanted to drill into the pet food business a little bit. You mentioned that there was some marketing expenses that got pushed out into the second half of the year. Can you help us understand what the – kind of quantify the impact of that? And then, revenues they were strong despite that marketing push out. Will that marketing kind of, as it heads into the second half, sort of help accelerate that top line? Hello. Can you hear me?

Yes. I'm sorry. Greg, this is Barry. So, you wanted to – some color on the marketing shift?

Yes. That's what – yeah. As a – kind of the marketing shifts out in the pet food into the second half of the year, I just wanted to understand the impact on margins that had in the second quarter?

It wasn't – it really wasn't significant to be honest. It was not a material impact on our segment profit. And just as we plan the year and now that we're actually executing our marketing plans, it's really just modest shifting in specific executions of marketing activities. So, not a material impact on Q2 or – and we wouldn't expect it in the balance of the year.

Got it. And then, if I can sort of drill into cash flow a little bit. I'd noticed that the sort of the expectations for full year cash flow is maintained despite the slightly lower EPS guide. Are there any offsetting factors in working capital that we should be thinking about in the second half of the year?

Yeah. Right now, I think that what we – obviously, we've kept our CapEx. We're just – we think that there's some opportunities just generally as we move into the last couple of months of the year, both from the inventory and just the payables, receivables that will try to cover that shortfall that's coming from the earnings, but we still feel confident that we can get this $775 million.

Got it. Thank you very much.

Thank you. Our next question comes from the line of Robert Moskow of Credit Suisse. Your line is now open. Robert Moskow - Credit Suisse Securities (USA) LLC: Hi. Thanks for the question.

Hey, Rob. Robert Moskow - Credit Suisse Securities (USA) LLC: Very specifically, I had seen coffee futures starting to rise because of bad weather conditions in Vietnam and then, perhaps, even some concerns about South America. Are you seeing that as well in your forward outlook heading into fiscal 2019, and should we start to worry about that? And then, also your comments about freight, can I assume that that's not a cost that you can pass on to your customers, because they're experiencing higher freight as well? Thanks.

Sure. Hi, Rob. I would suggest that our opinion is there's going to be a lot of Arabica coffee in the world next year. I think near-term volatility on these things based on one week's weather forecast or two weeks' weather forecast is it'll drive you crazy if you chase it on a day-to-day basis. As you can imagine, we look at it day to day, so we know that for sure, but you can't let that happen. The macro environment of an on-cycle crop and where we are in the process would suggest that we think coffee futures will be fine. Remember, in the first quarter of last year, coffee was like $1.55, right? And so, you've got – we're talking about moving from $1.25 to $1.30 type of thing now, so significantly better coffee costs as we roll forward. We think it's going to be a good quality and size crop, which we think is good for all of us. With regard to freight, I think yes. I think passing freight on right now will be difficult for all of us. The challenge in front of us is to work with our customer to get absolutely as much pickup and to make our freight system the most effective it can be, and I know our team is doing that. But I think we all understand what's going on in the macro freight world, what's happened because of the storms this year, the new driver of logbook issues, all of those things are going to drive tightness in the freight market for the near term.

Thank you. Our next question comes from the line of Jason English of Goldman Sachs. Your line is now open. Jason English - Goldman Sachs & Co. LLC: Hey. Good morning, guys.

Hi, Jason.

Good morning, Jason. Jason English - Goldman Sachs & Co. LLC: Thank you for squeezing me in here. Much appreciated and congratulations on a relatively solid quarter.

Thank you. Jason English - Goldman Sachs & Co. LLC: A couple of questions. First, this – the hurricane, was there any benefit in results this past quarter?

Jason, this is Mark Smucker. We saw some elevated shipments at the beginning of the quarter. But given the fact that it was early on in the quarter, we do – and that was in advance of the one that hit Texas. Given the timing of it, we do think we saw some reversal of that later in the quarter, so we actually think the – sort of the impact was all contained within the quarter. So, we don't expect any blowback in the next quarter. Jason English - Goldman Sachs & Co. LLC: Got it. That's helpful. And on your pet performance, can you give us your assessment of how your portfolio is performing in accounts where Blue Buffalo has distribution?

Sure, Jason. This is Barry. The comments, actually, that Mark made in his prepared remarks reflected that performance. So, where we have a presence in the same retailers where that competitive brand also has a presence, we are seeing our velocity is at 2x what that brand's performance has been at least since they've been in the market. So, our velocities are growing, they're two times based on points of distribution, and we see velocities increasing. So, again, we have a unique value proposition for the consumer. We have national distribution. We – that was a lift in place with that brand when we took it from pet specialty. We're going to be bringing out some refreshed packaging. We also are going to be adding some new items where we're going to be replacing some of the lower performing items. So, overall performance outstanding year-to-date especially including those retailers where we both have a presence and momentum growing. Jason English - Goldman Sachs & Co. LLC: Yeah, that's great news. Sorry I missed that in prepared remarks.

No, it's fine. Jason English - Goldman Sachs & Co. LLC: Last question, then I'll pass it on. I heard comments on terms of sort of the cadence of cost relief fourth quarter, heavy; cadence of cost saves, kind of tilting fourth quarter; and cadence of marketing spend, a bit three quarter heavy. It sounds like you're talking or sort of suggesting muted earnings growth in the third quarter? Is there any way you can sort of contextualize that for us?

Hey, Jason, this is Mark. What I would say is just that – from our, I guess, just more from our top line growth perspective is that we see growth in the back half, we tweaked up our top line guidance, and we've seen the volume growth come from particularly in coffee as we see they – both on KGM pass-through at K-Cup and then the price support on roast and ground. So, I'm not sure, really, there's not too much more to add to that. Jason English - Goldman Sachs & Co. LLC: Got it. Thanks a lot, guys. Appreciate it.

Thank you. Our next question comes from the line of Matthew Grainger with Morgan Stanley. Your line is now open. Matthew C. Grainger - Morgan Stanley & Co. LLC: Hi, everyone. Thanks for the question as well. I appreciate it.

Good morning. Matthew C. Grainger - Morgan Stanley & Co. LLC: Just two follow ups on coffee or one follow up and one quick clarification. You mentioned in the guidance comments that getting toward the higher end of the range was going to be dependent on continued roast and ground improvement, and then the outcome in K-Cups as you move into the back half. We have seen scanner data, consumption data improve for roast and ground versus Q1, but it's still been a little bit choppy. Low single-digits some months, down high single-digits in other. So, just curious how consistent the improvement has been? And if you could just give us a little bit of color on the current competitive pricing dynamic in the category?

Well, I think what you've seen in the data just reflects the four-week nature of the data, and the four-week nature of the competitive set. So, it will be lumpy on that. I think if you look at 12-week data, it's a little bit better way to look at it. I think we are priced where we need to be. I think we have support from our retail partners on core roast and ground that we're excited about and that would be against both our Folgers business and our Dunkin' business. So, we think that – we think you may still see monthly choppiness, I mean, that's going to happen in this business always, right? But we think as you roll it up on quarter-to-quarter, we think we're in good shape. I think it's too early to talk about next year. We'll settle the coffee costs that we're talking about be passed on or not. I think that's something we'll see as we get into the fourth quarter. But I feel good about it, right? And in the K-Cup business, as we spoke earlier, we understand what price points need to be on K-Cups. So, that promotional volume, I think, is pretty easy to project for us. So, those things are set, the big events on roast and ground are set, and I think as we get through, at least, through third quarter and into fourth quarter, we have pretty good visibility.

Matthew, this is Mark Smucker. I would just characterize – I think Steve said it well. I think I would just characterize the headlines are on K-Cup, we're executing it and we feel very confident that that – the new agreement and our actions are going to deliver particularly in the back half and beyond. And then, the headline on roast and ground is the activities we have in place with our key retail partners are very strong, and that's what gives us sort of the confidence going forward through the next six months. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. Thanks, both, for that. And then, just to clarify, the comment around, I think, reaching all-time high levels of profitability in the coffee segment in Q4. Is that meant to be just in terms of absolute EBIT dollars or percentage margin as well?

It's dollars and it's a fourth-quarter comment, just to be clear. It's the record for a fourth quarter not a record for any quarter but it's dollars. Which may, actually, probably translate into margin percent as well.

Yeah, yes. It's – and it's just where all of this is going to fall, right? And so we reiterate, we manage this on a full year basis, right? The plans we give our team are for the year. We speak to you all quarterly, obviously, but we run the business, hopefully, on a much longer-term basis than that. So, we will have times when we have great quarters fall through and it looks like the fourth will be one of those.

Yeah, Matt. This is Mark Belgya. Just to add a little bit to Steve's points and maybe just to call out why we're being a – that specific of that and, candidly, that's a little out of character for us to call something like that out. There's been a lot of questions as we've met with investors over the course of the fall and they've come out of the first quarter. We basically talked about what was going to drive the back half in coffee and then there was this conversation, well, how does it shakeup between Q3 and Q4 and I think just in an effort to try and get a little clarity to the investor as to dollarize it without being black and white, that was just another data point that we wanted to provide. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. And the full year expectation would still be, I think, you said on the first quarter call, that full year margins would be roughly in that 31% to 32% range?

Yeah. I think we said that it would be in the low 30s which is sort of the historical, so. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. Great. Thank you again.

You're welcome.

Thank you our next question comes from the line of Chuck Cerankosky of Northcoast Research. Your line is now open.

Good morning, everyone.

Hey, Chuck.

Good morning.

Good morning.

If possible, could you give us an update on where the Wesson oil acquisition is and if your confidence about closing it has changed at all?

Hi, Chuck. Steve. No, our confidence hasn't changed. Unfortunately, these things are cumbersome and so we are in the process of all of the documents going to them. We feel comfortable that shortly after that we'll announce a close but, unfortunately, just the nature of that process, where that agency is right now, it's taking a little longer than we'd hoped. But it's not – it does not affect our confidence. It's more a mechanical thing than a – than anything else.

>: That's great news. Thank you.

Thank you. And I'll turn the conference back to management to conclude.

Well, we want to thank everyone for your time today and taking the time to listen. Again, we always – as always, want to thank our employees because they are the ones that make it all happen. And we will talk to you all soon. Thank you.

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