The J. M. Smucker Company (SJM) Earnings Call Transcript & Summary

Good afternoon. It's great to join you from our corporate headquarters in Orrville, Ohio, to provide an update on The J.M. Smucker Company. Before we begin, please note that during today's presentation, we will make forward-looking statements based on current views and assumptions. Additionally, the company uses non-GAAP results to evaluate performance internally. Details for both items can be found within today's presentation available on our Investor Relations website. My commentary today will be centered around the current operating environment, actions we're taking to fulfill our corporate responsibility and how we're adapting to rapid change to deliver strong financial results, progress made against our strategic growth imperatives and trends and initiatives within our U.S. retail segments and how we are working to position ourselves over the long term. I will then turn it over to our Chief Financial Officer, Tucker Marshall, for a recap of our fiscal year 2021 first quarter results and guidance and a discussion around his financial priorities as CFO. Throughout our history, we have used a values-driven approach to operate the business by applying our 5 basic beliefs as guideposts for everything we do. This includes an emphasis on people and ethics. We are committed to building a more inclusive and diverse company while supporting efforts to ensure our communities become more equitable and just. Our purpose and, more specifically, the concept of feeding connections that help us thrive serves as the North Star for everything we do. On our earnings call 2 weeks ago, we discussed our commitment to our shared values and some of the inclusion and diversity initiatives that we have accelerated to create a more inclusive work environment while creating positive social change. In addition, last week, we released our 2020 Corporate Impact Report that expands further on several of our social and environmental highlights over the past year, including accelerated inclusion and diversity efforts, which involve launching employee training; recognizing Juneteenth as a company-paid holiday and making donations to organizations that advocate for inclusion and racial justice; progress toward achievement of our 2020 environmental goals for water, waste and greenhouse gas reduction; donation of over 32 million meals to people and pets; and enhanced employee benefits, including offering 12 weeks of paid leave to new parents, inclusive of fathers. We also continue to live in a dynamic environment caused by the worldwide COVID-19 pandemic which has made the near term challenging to predict. With over 120 years of CPG experience, we have continuously adapted our business to execute with the necessary capabilities to compete. Despite the current challenges, I am extremely proud and thankful for our employees and for the active role they have taken to maintain our high-quality and safety manufacturing standards while ensuring we continue to supply food for consumers and their pets. We recently released our first quarter earnings results, which included net sales growth of 11% and adjusted earnings per share growth of 50% versus the prior year. Over the past 2 quarters, we have delivered over $4 billion of net sales and the year-over-year net sales and adjusted EPS growth of 10% and 35%, respectively. These results reflect our strong execution and the hard work and dedication of our passionate employees while continuing progress against our consumer-centric growth strategy. These efforts are the key to unlocking the full growth potential for our brands and increasing value for our shareholders. Our 3 strategic growth imperatives are to lead in the best categories, build brands consumers love and be everywhere. While we have made solid progress on these imperatives, it is a journey which requires continuous improvement to remain competitive and grow our consumer base and market share. Our first strategic growth imperative is to lead in the best categories. The transformation of our company over the last decade reshaped our portfolio to drive future growth, focusing on 3 attractive categories: pet food, coffee and snacking. We have a portfolio of leading and emerging brands in great categories to drive balanced growth. Across our U.S. retail businesses, over 70% of our net sales are derived from categories where we hold either the #1 or #2 branded position. Our broad portfolio includes brands and formats that meet consumers' needs across the value spectrum and various occasions, including traditional at-home offerings, convenient, low-prep and on-the-go options. Guided by our second strategic growth imperative to build brands consumers love, we continue to strengthen our portfolio with increased investments behind our brands and a balanced approach to innovation. These efforts strengthen the trust and emotional bond consumers have with our iconic and beloved brands. Over the last 2 fiscal years, we stepped up support for our brands through increased marketing investments. We intend to maintain marketing investments in the range of 6% to 7% of net sales. Last year, our focus was on driving renewed awareness through refreshed advertising campaigns across 10 of our largest brands with over 20 new TV spots and 100 new pieces of digital content. And we were pleased with the initial consumer response. We are continuing the momentum this fiscal year as we adjust our approach to the fast-changing environment. The recent increase in at-home eating occasions, driven by the pandemic, caused a surge in trial and a significant number of new consumers purchasing our brands as nearly 90% of all eating occasions were at home, a 12 percentage point increase versus the prior year. Our scale and portfolio of trusted brands was uniquely positioned to benefit from this shift as over 3.7 million net new households purchased at least one of our products over the last 2 quarters versus the prior year. Nearly all our categories experienced an increase. Importantly, 82% of consumers made a repeat purchase and dollar spent per buyer increased 9%. It's critical that we tailor our marketing strategies to engage these new users so they continue to choose our brands the next time they shop. We are leveraging data and retail partnerships to attract and retain consumers with incentives and messaging. Another key component of building brands consumers love is expanding the reach of our brands through innovation, including a balance of large platform products and targeted line extensions. Last fiscal year, 5% of our net sales came from products that were launched in the previous 3 years. This reflects a large contribution from projects such as our 1850 Coffee and Milk-Bone engagement platforms, Dunkin' canister packaging innovation and line extensions enabled by new process technology, including Meow Mix tender centers and Kibbles 'n Bits bacon and steak flavor. We are continuing the innovation momentum in this fiscal year with items we previewed at CAGNY in February, including new Uncrustable snack items, squeezable Jif and Dunkin' espresso coffee. Additionally, we have a robust pipeline of pet innovation launching in early calendar 2021. Finally, our strategic growth imperative to be everywhere means having our products available to consumers in both traditional and newer fast-growing channels for consumption at home or while on the go. This includes channels such as e-commerce and convenience stores. Many consumers have tried online shopping as a result of the pandemic, leading to a rapid increase in consumer adoption of e-commerce. Investments we made in our capabilities supported e-commerce business growth over 70% during the past quarter. Prior to the pandemic, our e-commerce sales represented 8% of our total U.S. retail sales. That number increased to 11% in our fourth quarter and to 12% in the first quarter. Our e-commerce sales are weighted towards pet, which derived 17% of net sales online in the first quarter, followed by coffee and consumer at 10% and 7%, respectively. I'll now share some highlights for each of our U.S. retail business segments, which collectively account for nearly 90% of total net sales and an even greater percentage of total segment profit, the remainder being driven by our International & Away From Home businesses. Our largest segment, U.S. Retail Pet Foods, accounted for $2.9 billion or 37% of total company sales last fiscal year. Our portfolio meets consumer needs across value, mainstream, premium and super premium offerings. Dog food makes up nearly 40% of our pet sales, followed by our snacks portfolio and then cat food, which each account for just under 30% of our pet sales. About 5% of pet sales are private-label offerings primarily related to dog food. Let me highlight a few initiatives for the 3 segments of our pet business. We are the leader of the fast-growing $3.8 billion dog snacks category, with over a $24 share led by the iconic Milk-Bone brand. Our portfolio of brands delivered year-over-year net sales growth in 10 out of the last 11 quarters. More recently, snacks growth has accelerated as pet parents are spending more time at home with their pets, leading to an increase in treating occasions. During the last 2 quarters, our dog snack sales have grown over 10%. We will continue to leverage our leadership position in snacks to drive both sales and segment profit growth. Last year's net sales growth included gains across multiple brands. Innovation is an important part of the dog snacks category and accounts for the majority of the category's growth. Our Milk-Bone long-lasting chew platform accounted for a significant portion of our growth last year, and we are excited to expand this platform in the upcoming months. Turning to cat food. We are well positioned with the #2 total dollar share in the category, and our Meow Mix brand is the #1 brand in terms of household penetration and dry volume share. Our cat portfolio has delivered year-over-year net sales growth for 12 consecutive quarters. Through a combination of core growth and expansion of the Rachael Ray Nutrish brand into cat food, we have increased our dry cat dollar share by nearly 4.5 points over the same time frame. With continued innovation and stepped-up marketing investments, we are confident in the continued momentum for both our cat and our dog snacks businesses. In the dog food category, we are the #3 branded manufacturer in retail sales. Approximately 70% of our dog food sales are from our premium brands, with the rest being in the mainstream and value segments. Our mainstream brands, such as Kibbles 'n Bits, had been performing well, growing 3% last fiscal year. However, the performance of our premium offerings has been below our expectations. We continue to take targeted actions to improve execution and performance, particularly for the Nutrish brand. Actions to accelerate Nutrish dog food growth include increased marketing that leverages the equities of Rachael Ray and real food ingredients, improving the consumer value proposition through a combination of improved pricing and augmented bag sizes, optimizing the sub-brands and innovation. These changes began to show up in market early in calendar year 2020 and have led to sequential improvement in household penetration and volume trends. Core items in the portfolio have continued to grow, delivering increased net sales in fiscal year 2020 and the first quarter of fiscal 2021. However, the brand architecture has grown complicated and the sub-brands have been challenged as they do not fully capture the equity of the master brand. 95% of dog food shoppers say the category is cluttered. We plan to simplify the shopper experience by optimizing assortment and improving package design and price points while owning the intersection of taste and nutrition in the category. These changes will begin to appear on shelf early in calendar year '21. Turning now to coffee. We are thrilled to have a strong portfolio of brands within the $14 billion coffee category that meets the diverse and changing needs of today's coffee drinkers. We are the #1 branded manufacturer in the space with a 25% share of the market. Our portfolio includes the #1 brand, Folgers, with a 16% share; the Dunkin' brand, which is #3, with an 8% share; and Café Bustelo. While Café Bustelo is an emerging brand with a 2% share, it is one of the fastest-growing brands in the category with 24% retail sales growth in the last 52 weeks. We have made significant progress over the last several years to better align our coffee portfolio with the higher growth premium and one cup segments. Despite significant deflationary commodity costs and corresponding lower pricing on shelf over the past few years, we have held or increased our volume versus the prior year for 11 consecutive quarters. Our K-Cup offerings continued to increase their share of our portfolio in the category, registering 13% net sales growth and gaining nearly 1 share point over the last 52 weeks. The recent increase in at-home coffee consumption has further boosted our results, including net sales growth of 11% and 23% over the last 2 quarters. Over the past 6 months, many consumers have discovered that the quality, convenience and value of brewing coffee at home has come a long way. We believe new habits formed in the current environment will translate into longer-term structural changes in behavior and continued benefits for our coffee business. Within our consumer foods segment, we have a strong portfolio of leading brands, including the #1 peanut butter, #1 fruit spread, #1 shortening and #1 natural beverage brands. Further, with our consumer-centric strategy focused on snacking and convenient low-prep solutions, we have built one of the fastest-growing frozen brands with Smucker's Uncrustables. The Uncrustables brand continues to be one of our largest and fastest-growing brands, with net sales of $365 million across the total company in fiscal year 2020, a 26% increase versus the prior year. With accelerating consumption growth, we are operating the new Longmont, Colorado facility at full capacity. A new production line will be operational in January, and Phase 2 of the plant expansion is set to begin next calendar year. We remain on track to achieve our goal to grow net sales for the brand to over $500 million in fiscal year 2023. I would like to conclude my formal comments by reinforcing a few key points: one, we are executing on our near-term priorities to ensure employee well-being, have a positive social impact on our communities and society and provide a steady supply of food for consumers and their pets; two, we remain confident in our consumer-centric growth strategy and have significantly improved performance across many of our categories; three, we continue to adapt and be agile in this environment, focusing on maintaining our growing consumer base and growing our categories and market share; and four, while there will always be more work to do, we have positive momentum in the majority of our categories and are on track to deliver our financial commitments. I'll now turn it over to Tucker for our financial discussion.

Thank you, Mark, and good afternoon, everyone. I will begin today by providing a brief recap of our first quarter results and our fiscal year 2021 guidance and then I will share my priorities as CFO. These priorities outline how our financial strategy is designed to support the delivery of consistent and balanced top line and bottom line growth, resulting in increased shareholder value. 2 weeks ago, we reported first quarter earnings results that exceeded our expectations, which included net sales growth of 11% and adjusted earnings per share growth of 50% versus the prior year. The increase in top line and bottom line growth was attributable to a combination of continued increases in at-home consumption primarily benefiting our coffee and consumer foods businesses, rebuilding of inventory levels at retailers following the initial surge in consumer stock-up and pantry-load from the fourth quarter of fiscal 2020, partially offset by a decline for our Away From Home business. Adjusted earnings per share increased primarily from the net sales growth and the benefit to margin from fixed cost leverage, the management of discretionary costs and media efficiencies and a shift in timing of certain initiatives and marketing programs to later in the fiscal year. We updated our full year outlook to reflect the strong first quarter performance and the continued benefit of increased at-home consumption, which we have forecasted to moderate throughout the remainder of the year and incremental SD&A expenses. Our revised full year net sales guidance is flat to up 1%, with projected full year adjusted EPS in the range of $8.20 to $8.60, representing a $0.30 increase to both the high and low end of our previous guidance. We believe both sales and earnings to be carefully considered, providing flexibility to adapt to the dynamic operating environment that still contains elevated level of uncertainty while enabling us to balance reinvestment and return. For the remainder of the fiscal year, we anticipate continued momentum led by coffee with strong growth for the Dunkin' and Café Bustelo brands, continued double-digit growth for Uncrustables as we further increase production capacity and momentum for our dog snacks and cat food portfolios. Notwithstanding our strong start to the year, headwinds to the full year earnings growth still include the lapping of $185 million of sales in the fourth quarter of the prior year related to the COVID-19 stock-up purchasing, continued softness in the Away From Home business and lapping $40 million of sales in the prior year related to the discontinuation of Jif Power Ups and certain private-label dog food business. I have now been in the role of CFO for several months, and I would like to share some perspectives on my priorities. At its core, I am committed to supporting balanced and sustainable growth in both revenue and profit, which we are in a good position to realize due to our market and category leadership positions, a sound strategy defined by our growth imperatives and our strong financial foundation. As we look ahead, delivering on our goal of creating value for our shareholders requires us to deliver on 5 financial priorities that are shared across the leadership team: first, consistent and transparent communication with all constituents; second, improve coordination and execution to deliver annual and long-term targets; third, enhanced focus on returns when evaluating reinvestment in the business; fourth, maintaining continued cost reduction and margin enhancement efforts; and fifth, capital deployment that appropriately balances reinvestment in the business and returning cash to shareholders in the form of dividends and share repurchases while maintaining a strong balance sheet and an investment-grade rating. Finally, now more than ever, I recognize the importance of being a purpose-driven organization, embedded in a long-standing heritage of focusing on people and culture. These are principles that we have long fostered that I am also committed to supporting across the organization. Let me provide a few details around the actions we are taking to support these financial priorities, particularly as it relates to our focus on returns, costs and capital deployment. We have renewed our focus on holistically evaluating opportunities to prioritize investments toward those that will generate the highest returns. In support of this, we are putting in place greater financial oversight for our strategic investments, strengthening our reporting and analytical tools and continuously evaluating our portfolio to put the company in a position to deliver strong financial results and improved return on invested capital. Further, we will maintain cost discipline by optimizing our cost structure to preserve or improve strong profit margins and cash flow generation. We are achieving this through a total company commitment to productivity and a renewed focus on minimizing discretionary expenses that do not directly support sales or profit growth. As a part of our margin management program, we have a team working to evaluate and prioritize a robust pipeline of strategic projects with significant opportunities for cost management across the company. We look forward to sharing more details about this initiative at our upcoming Investor Day. Finally, when cost changes are beyond our control, it is critical that we are transparent and collaborate with our retail partners on consumer pricing when and where appropriate. Maintaining disciplined cost control and margin management, along with the enhanced focus on improving returns, will serve as the fuel to support our capital deployment approach. Our aspiration remains to allocate approximately 50% of our operating cash for future growth through capital expenditures and strategic projects, including acquisitions and returning approximately 50% of cash to shareholders through dividends, share repurchases and the reduction of debt. Over the past few years, paying down debt has been one of our top priorities, with the goal of achieving 3x leverage by the end of fiscal year 2021. With a current total debt balance of $5.4 billion and a trailing 12-month EBITDA of $1.8 billion, our leverage ratio stands at 2.9x. Driven by the combination of significant profit improvement and continued debt repayments over the past 2 quarters, our leverage ratio is now below our stated target. We view this level of debt as an important enabler of improving our financial strategy, allowing us to maintain an investment-grade debt rating and access to capital at preferred rates and the flexibility to resume share repurchases, continued dividend increases or making strategic investments. While not included in our current fiscal 2021 guidance, we continue to evaluate opportunities to repurchase shares as a lever to increase shareholder value when the near-term, more attractive value-creating investments in the business are not available. In July, we announced a 2% increase to our quarterly dividend, which marks the 19th consecutive year that we have grown our dividend. While the increase is below our 10-year average rate of 8%, we felt it prudent to maintain flexibility while navigating through an uncertain period. We will continue to evaluate the economic landscape as we move forward. Long-term, we expect the Board to maintain the current dividend policy, which is to return approximately 40% to 45% of our adjusted earnings per share to shareholders through dividend increases commensurate with earnings growth. With that, I would like to conclude our formal comments by emphasizing a few key points. We are off to a strong start this fiscal year by executing at a high level and capitalizing on the increased demand. Our commitment to financial discipline is a key enabler of our long-term strategy, and we are confident that we are firmly on the path of delivering consistent, sustainable growth and increasing shareholder value. We look forward to sharing more details about our business and financial strategy at our upcoming virtual Investor Day. We had planned to host this event in October, and recently, we have decided to reschedule to the week of December 7 after we release our fiscal 2021 second quarter results and full year guidance. Given the ongoing uncertainty due to the pandemic and broader economic and political conditions, along with company initiatives currently underway, waiting until December will allow for a more meaningful conversation about our expectations for the current fiscal year and our long-term strategic outlook. Thank you for your time today.