Q3 2017 Real-Time Call Brief

Highlights

Non-GAAP results exclude certain that affect comparability.

One such item for the third quarter was a $76 million or $0.44 per share non-cash impairment charge related to certain trademarks of the Pet food business, representing approximately 1% of the company's total non goodwill intangible assets.

During the quarter, company-wide Smucker's and Uncrustables volume grew 8% on top of a plus 38% volume comp in the prior year.

During the quarter, we realized incremental synergies of $26 million, By accelerating our synergy capture, we now expect to achieve $120 million in incremental synergies this year, an increase of $20 million from our previous guidance.

Excluding the impact of the divestiture, net sales declined 2.5% from the prior year, approximately half of the decline was due to the net impact of commodity driven pricing actions across a number of category.

Adjusted earnings per share grew 5% compared to 2016 excluding the gain.

The Dunkin' Donuts and Cafe Bustelo brand each delivered double-digit percent volume mix growth in the third quarter.

In addition, Dunkin' Donuts K-cups have crossed the $250 million threshold in annual retail sales sooner than originally anticipated.

During the third quarter, we began to recognize higher green coffee cost.

In respond, we increased list prices by 6% across most of our portfolio in early January.

Within Consumer Foods, segment profit grew 26% excluding the prior year impact of the milk business.

Late in the second quarter, we increased list prices on our fruit spread products by 9% to reflect higher commodity cost, resulting in an initial volume impact that was consistent with our expectations.

In addition, sales of Jif snack bars continue to grow at robust double-digit rate confirming our innovation efforts are on point with consumers.

In Pet Food, our Kibbles are changing pricing strategies to improve the competitive positioning of Kibbles 'n Bits in the mainstream dog food category drove 12% volume growth for the brand in the quarter along with modest increase in net sales and profit.

For our Natural Balance premium Pet Food brand sales decreased as the impact of slower traffic in the pet specialty channel was partially offset by high double-digit increases in online sales compared to the prior year.

Sales for our Pet Snacks brand declined as they left promotional event in a high single-digit comp in the prior year.

Other assumptions utilized including growth rate did not change materially from the second quarter analysis.

The results of this updated analysis continue to indicate no impairment goodwill.

However, it did indicate a fair value that was less than book value for certain and definite live intangible assets, resulting in a non-cash charge $76 million or $0.44 per share in the third quarter.

Net sales decreased by $95 million or 5% in the third quarter, including the 2 percentage point impact from the prior year divestiture of Canned Milk business.

GAAP earnings per share were $1.16 this quarter, a decline from $1.55 in the prior year driven by the impairment charge.

Adjusted EPS was $2 a share.

This reflects the 5% increase over the prior year's adjusted EPS of $1.91, which excludes $0.14 on a milk divestiture.

Included this quarter's adjusted EPS, it is approximately $7 million or $0.04 per share cost associated with the product recall and the write-off of assets related to a discounted product line.

Adjusted gross profit decreased $38 million or 5% with gross margin flat at 38.5%.

The lower gross profit was mostly attributable to copy volume mix and lacking prior year's gross of $13 million related to the milk business.

SD&A decreased $44 million in the third quarter or 12% compared to 2016.

Our full year marketing spend; this lower SG&A led to adjusted operating income of $383 million, up 3% over the prior year once you exclude the $25 million gain and $11 million of operating profit related to divested milk business included in last year's third quarter results.

We now expect the full year effective tax rate to be approximately 32.5% compared to our previous guidance of 33%.

Beginning with Coffee, third quarter net sales decreased 7% driven by lower volume mix of 11% for Folgers brand, partially offset by gains for Dunkin' Donuts and Cafe Bustelo of 11% and 10% respectively.

Net price realization was 1% lower compared to the prior year as the impact of the 6% list price decreased in May of 2016, was mostly offset by reduced trade spend in the current and the initial impact of last month's 6% list price increase.

The lower volume and an unfavorable price to cost relationships in the quarter cause coffee segment profits to declined 12% compared to the prior year.

We now anticipate full year coffee segment profit to be down mid single-digit compared to our previous guidance being flat to the prior year.

In Consumer Food net sales declined 2% compared to 2016, excluding the canned milk divestiture.

Sales for the Smucker brands were down 4%, reflecting the volume impact of our recent price increase in food spreads.

While Crisco declined 3% on lower volume.

Consumer Food segment profit declined 8% in the quarter.

This was attributable to lapping $9 million of prior year operating earnings related to the divested milk business and the $25 million gain on the sale.

Excluding these items, segment profit was up 26%, reflecting reduced manufacturing cost, higher price realization and lower marketing expense.

On a full year basis, we continue to anticipate Consumer Food segment profits to be up mid single-digits excluding the impact of milk divestiture.

Net sales for our Pet Food segment decreased 4%, reflecting price investments across number of brands in our portfolio which were supported by lower commodity cost.

Pet Food segment profit was up 2% compared to the year as the lower sales were offset by reduced input cost and marketing expense as well as incremental synergy realization compared to the year.

Excluding the impact of product recall, segment profit was up 6%.

Net sales for International and Food Service were up 6% compared to the year with strong top-line performance across each of the underlying business areas.

Segment profit decreased 7%, reflecting $2 million of one-time asset disposal cost in the current year and lapping of $1 million of prior year profit related to the divested milk business.

Turing to cash flow, cash provided by operations was nearly $420 million for the quarter.

This compares to $542 million in the prior year, which include benefits related to our working capital initiative.

Factoring in capital expenditures of $53 million, free cash flow with $367 million in the third quarter, and this brings a year-to-date total nearly $660 million.

We expect full year free cash flow at range between $950 million and $1 billion.

This range continues to reflect the CapEx estimate of $240 million.

We now anticipate net sales for the fourth quarter will comparable to the prior year a reduction from our previous expectations of mid single-digit increase for the quarter, reflects the lower forecast for coffer and to a lesser extent consumer foods.

This will result in full year net sales being down approximately 3% compared to 2016, excluding 2 percentage point impact of the divested business.

We now projected adjusted earnings per share to be in the nearer range of $7.60 to $7.70.