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

Good morning. We appreciate the opportunity to give an update on the J.M. Smucker company at this year's CAGNY Conference. Before we begin, please note that certain information we provide today is forward-looking based on current views and assumptions. Also, we use non-GAAP results for the purpose of evaluating performance internally. Details for both items can be found in the slides for today's presentation available on our Investor Relations website. Joining me today is our Chief Financial Officer, Tucker Marshall, who will give an overview of our financial strategy, priorities and outlook. And joining us for the Q&A session with CAGNY members is John Brase, our Chief Operating Officer. My comments today will focus on 3 themes: first, I'll give a brief company overview and talk about our values-driven approach. Then I'll cover our priorities for the next 12 to 18 months, which are designed to make us sharper in focus, stronger in our execution capabilities and together in how our organization is bringing our purpose to life. And finally, I'll highlight key initiatives that will drive sustainable growth within our key categories. While originally known for our namesake, jams and jellies, we have transformed into a leading consumer goods company with over $7 billion in annual sales and a focus on 3 growing and attractive categories: pet food, coffee and snacking. We have a portfolio that combines iconic leading brands with emerging on-trend brands to drive balanced growth. Throughout our history, we have used a values-driven approach to operate the business. Earlier this week, we introduced a new Thriving Together agenda, focused on addressing issues that impact the quality of life for people and pets, including contributing to a healthier planet. Detailed information and ESG-related disclosures in SASB and TCFD formats can be found on our corporate website. I am proud of how our company has thrived over the past year. Specifically, our employees who have navigated social, political and pandemic-related impacts to their daily lives. They have produced record results amid many personal sacrifices, while securing a safe and reliable food supply for people and their pets. Looking ahead, we are taking decisive actions to sustain long-term growth and increase shareholder value in the fast-evolving CPG environment. As we shared at our Investor Day in December, our near-term priority is not changing the elements of our strategy, but rather improving how we execute. Over the next 12 to 18 months, we are focused on 4 pillars of execution that we believe will strengthen our core capabilities and unlock the full potential of our strategy. Our first pillar is driving commercial excellence. A commitment to consumer centricity remains at the center of our commercial model, including our growth imperatives to lead in the best categories, build brands consumers love and be everywhere. Over the previous 2 years, the transformation of our commercial model has primarily been focused on how we engage with consumers. These changes are most notable in our marketing strategy. We consolidated to a new agency in order to update our advertising, increase our consumer reach and reduce our nonworking marketing costs. The result was 12 breakthrough campaigns for our major brands, improved reach for over 5 million incremental households and a 15% increase in our marketing ROI. Further, we increased our investment and remain committed to maintaining marketing spend of 6.5% to 7% of net sales. Most importantly, we have significantly improved our market share performance, where today, 53% of our portfolio is growing market share versus 26% just over a year ago. We are also transforming our commercial delivery to improve how we partner with retailers. These changes include creating 2 distinct sales organizations, 1 focused on pet and another on our human food and beverage businesses. We've also improved in-store execution through proprietary digital insights and the further evolution of our e-commerce model. Second, we are streamlining our cost infrastructure, centered on a pervasive mindset of continuous improvement, designing to value and operational efficiency, enabling us to preserve or expand our margins. Work is underway to restructure our corporate support functions, optimize our supply chain and maximize network production efficiencies. Full implementation of these initiatives will deliver $50 million of incremental cost savings in each of the next 3 fiscal years. Third, our strategy of leading in the best categories calls us to reshape our portfolio to fully realize the potential in our key focus areas. We are divesting brands and businesses that are no longer consistent with our long-term strategic focus, optimizing our SKU assortment to maximize productivity and reduce complexity and differentiating our research allocations to brands that will drive growth. We will also continue to seek new opportunities for growth in our focus areas of pet food, coffee and snacking. Recently, we completed our exit of the U.S. baking category with the sale of the oils and shortening business, following prior divestitures of the U.S. baking mix and condensed milk businesses. In the pet business, we divested the specialty channel exclusive Natural Balance brand. Moving ahead, we are continuing to evaluate opportunities across the company to further align our portfolio with our key growth platforms. We look forward to updating you as we make further progress. The first 3 pillars of our improved execution will be powered by a fourth, unleashing our organization to win. The strength of the Smucker culture has always been a unique differentiator in achieving growth over the past 2 decades and is a critical component of our successful path forward. At the same time, we are evolving our ways of working together to be more agile, lean and focused on delivering with excellence and winning in the marketplace. To do this, we are driving greater alignment and ownership of decisions and accountability for results across the organization. Our new structure will be leaner and flatter, with incentives aligned to the common goal of driving both sales and profit growth. These 4 pillars are critical to ensuring we maintain our momentum and achieve our financial goals for this fiscal year and beyond. Now turning to key initiatives within our segments. Our largest segment is U.S. Retail Pet Foods, which, on a pro forma basis, accounted for $2.6 billion of net sales last fiscal year. Pet food and snacks continues to be one of the most attractive consumer product categories. It is the largest center of store category and is projected to grow 4% annually over the next 5 years. Our portfolio of brands is unique in serving consumer needs across value, mainstream and premium offerings. Our growth in pet will be achieved through a 3-pronged approach. First, in snacking, where we are the market leader with a 24% dollar share, we will accelerate growth, which will provide fuel across the pet portfolio. Second, we will continue the strong momentum in our cat business, where we hold the #2 dollar share. And finally, in dog food, where we hold the #3 dollar share, we will continue our focus on premium dog by returning Nutrish to category growth rates. These focus areas are being supported by increased marketing investments. Our snacks portfolio has delivered year-over-year net sales growth in 13 of the last 14 quarters. To further increase the pace of growth, we are accelerating innovation and taking steps to capitalize on the premiumization trend. Innovation for our Milk-Bone brand includes more premium products, and we are expanding premium treat offerings for the Nutrish brand. Within dog food, trends for Nutrish dry dog have stabilized over the last 4 months, reflecting continued e-commerce growth, while our Nutrish wet dog food has experienced significant growth and share gains across all channels. Retailer shelf resets maximizing our most productive offerings began this month, including the launch of Nutrish Big Life and broader improvements to the brand architecture and packaging are coming this summer. Initiatives to drive growth for dog food also include adjusting offerings to match shifting consumer preferences such as more grain in varieties and expanding our wet dog food portfolio that is growing over 20% in all channel retail sales the past 2 quarters, which is faster than the category. In cat food, we have significant momentum with year-over-year net sales growth for 14 consecutive quarters, led by Meow Mix, which has the highest household penetration and volume share in the category. We are confident about continuing this momentum with a pipeline of unique innovation, leveraging digital tools, evolved marketing and promotional programs and improved assortment on shelf. Now I'd like to highlight our $2.1 billion coffee segment. Coffee is a great category, as 62% of Americans drink coffee with 4 out of 5 cups consumed at home. Growth in the category has accelerated over the last 11 months, driven by the work anywhere environment. And we have added more new net households than any other branded manufacturer. We are the #1 branded manufacturer with 3 of the top 10 brands in the category, including the iconic Folgers brand and the fast-growing Dunkin' and Café Bustelo brands. We have increased our marketing investments, while tailoring our communication strategies to gain and retain new households. Since last March, over 3 million new households purchased the Folgers brand. We have bold plans to significantly evolve this iconic brand to connect with new consumers. These initiatives, including refreshed and increased marketing, breakthrough innovation and updated packaging, will be in market over the next 2 fiscal years. Further, we anticipate continued growth and share gains in our fast growth areas of K-Cups as well as the Dunkin' and Café Bustelo brands, which have significantly outpaced category growth rates over the past year and now collectively account for over half of the coffee segment's net sales. In fiscal year 2022, we will also be launching several line extensions to supplement our core offerings across each of our brands. They include Folgers blond light roast coffee, several Dunkin' seasonal and flavored offerings and an additional ready-to-drink option for Café Bustelo. In our consumer foods business, we have taken significant actions over the past few years to reshape our portfolio and increased focus on fast-growing, no mess, convenient and balanced nutrition options. A focal point of our growth strategy is our Smucker's Uncrustables brand, which has delivered consistent and significant growth over the past 19 years, increasing at an average annual rate of 20%. As a result of this growth, we are on track to exceed our $500 million net sales target by fiscal year 2023. We are unlocking significant growth for the brand through a combination of additional production capacity, distribution expansion in all channels of trade and strategic pricing. Overall, we expect consistent double-digit top and bottom line growth over the next several years, making Uncrustables, one of the key growth drivers for the company. For our spreads business, we have strong #1 share positions in both the peanut butter and fruit spread categories. We will continue to focus on the needs of consumers changing lifestyles by leveraging our category expertise and enhanced commercial capabilities and appealing to new consumers by building on the strength of our core offerings through innovation. Last year at CAGNY, we announced new Jif products that capture the essence of our convenient no mess strategy with Jif no added sugar and Jif squeeze. A second wave of distribution is underway with the addition of Jif Natural in a squeezable pouch. We plan to accelerate growth for these options through digital, social and on-air support, including the national ad campaign we introduced at our Investor Day. Our Jif brand serves as a great example of how we can deliver growth for mature brands and categories despite input cost inflation. Through collaboration with our retail partners and new marketing campaigns, last fall, we executed a price increase due to rising peanut costs, which competitors followed. Since then, the Jif brand has gained 4.5 points of dollar share, enabling us to capture a 50% share of the total peanut butter category. Looking forward, we are confident that other commodity inflation risks are also manageable by working with our retail partners and reducing costs across the company. While the pandemic continues to impact our Away From Home business, we are making progress on initiatives that will help restore top and bottom line growth as this channel recovers. Our 3 priority segments, Coffee, Uncrustables and Portion Control Spreads have all increased market share over the past year. The Away From Home business will also benefit from our SKU optimization efforts as 30% of items will be discontinued May 1. These items account for just over 3% of the business's net sales, and we anticipate that customers will transition to other offerings within our portfolio. A consolidated distribution footprint will further reduce complexity and costs, fueling an anticipated full recovery and future growth in this channel. The actions we are taking across the organization give us confidence that we can drive continued growth and deliver our financial targets, which Tucker will speak to in a moment. In closing, I would like to reinforce a few key points. First, we continue to make significant progress on unlocking the full growth potential of our brands, delivering strong results and improvement in market share trends. Next, our executional priorities are enabling us to become a more focused, efficient and agile organization. And finally, we are strengthening capabilities, which position us to emerge from the pandemic as a stronger company that will deliver consistent and sustainable growth. With that, I'll turn it over to Tucker.

Thank you, Mark, and good morning, everyone. It's great to join you for this year's CAGNY Conference. I'll begin with brief comments about our current fiscal year, then I'll transition to our longer view of our top line and bottom line growth ambitions. Finally, I'll provide some preliminary considerations as we develop our financial plan for fiscal year 2022. Next Thursday, we'll report our third quarter financial results. While we're not providing any details today, our results are ahead of our previous expectations, reflecting the continued strength of at-home consumption and the progress against our consumer-centric strategy. We also anticipate providing full year guidance that meets or exceeds the current estimates for net sales, adjusted earnings per share and free cash flow. We look forward to sharing more details on our earnings call next week. We are pleased with our strong financial performance that we are delivering this fiscal year, including strong cash generation that has enabled us to pay down debt and to return to a more balanced capital deployment model. Over time, I am confident the actions that we have taken and will continue to take are the building blocks to delivering increased shareholder value. The momentum, growth and improved execution will be supported by our financial priorities. These include: improved ability to deliver annual and long-term financial targets; enhanced focus on financial returns, while continuing to invest in the business; maintaining our cost reduction and margin enhancement efforts; and a capital deployment model that balances reinvesting in the business and returning cash to shareholders, while maintaining a strong balance sheet and an investment-grade debt rating. At our recent Investor Day, we presented the actions that we are taking to deliver our strategy and to achieve our long-term financial goals. These include low single-digit net sales growth of around a 2% CAGR, mid single-digit operating income growth of around a 5% CAGR, high single-digit adjusted earnings per share growth of approximately 8% on average over the next 5 years. And total shareholder return of approximately 10% or greater when considering our dividend policy. We view low single-digit top line growth as achievable as a result of the projected growth rates in our respective categories, the positive momentum of our brands, their improved market share trends and growth initiatives within each of our business segments. Specifically, we are confident in achieving growth through our reshaped portfolio, which includes an increased focus on our key growth platforms and most productive products. The Uncrustables brand is anticipated to add 1 percentage point to the total company's growth rate. Continued growth for the Dunkin' and Café Bustelo brands, along with our K-Cup portfolio while taking actions to reinvigorate the iconic Folgers brand. Accelerated growth for our pet snacks brands, driven by execution and innovation, along with continued momentum of the cat food business led by the Meow Mix brand and demonstrating dog food stability and growth. Lastly, we anticipate a return to growth in our Away From Home business. Our financial priority to achieve cost reductions and margin enhancement will be delivered through a total company commitment to productivity and a focus on minimizing expenses that do not support either sales or profit growth. We anticipate operating income will outpace sales growth and increase at a mid- single-digit percentage. The operating income growth and margin expansion will be achieved through gross profit improvement, driven by favorable sales volume and mix, net revenue optimization, value engineering and ongoing efficiency improvements. And we will continue to further realign our portfolio to focus on our key growth platforms and most productive items. Our margin management programs are unlocking significant cost savings across the company. Our actions include: minimizing discretionary spend, reducing nonworking marketing spend, managing sales and brokerage expenses, optimizing our manufacturing and supply chain environments, and restructuring our corporate support organization by realigning roles and responsibilities to increase speed and agility. Our total cost reduction and margin enhancement efforts are anticipated to deliver an incremental $50 million of bottom line benefit in each of the next 3 fiscal years. Below operating income, we expect our capital deployment model to deliver a high single-digit percentage growth for adjusted earnings per share. As we have prioritized debt reduction over the past several years, we anticipate maintaining a debt leverage ratio around 2.5x. This level of debt provides the financial flexibility for a more balanced approach to capital deployment, while maintaining an investment-grade debt rating. With our improved leverage profile and strong cash generation, we anticipate allocating approximately 50% of cash from operations for future growth through capital expenditures and strategic investments, including the ability to pursue acquisitions. We anticipate returning approximately 50% of cash to shareholders through dividends, share repurchases and the reduction of debt. We anticipate generating approximately $1 billion in annual free cash flow over our strategic horizon. While capital expenditures will be elevated in the next 2 years, primarily related to the Uncrustables capacity expansion, our long-term capital spend target is approximately 3.5% of net sales. We anticipate a continuation of our current dividend policy which is to return approximately 40% to 45% of adjusted earnings per share. We have increased the dividend for 19 consecutive years with an average increase of 8% over the last 10 years. Continuation of this policy is anticipated to contribute 2% to 3% to total shareholder return. With the recent completion of the 2 divestitures, using the after-tax cash proceeds, we initiated share repurchase programs in the months of December and January to help offset a portion of the divested earnings. We repurchased 4.5 million shares, reducing our outstanding share count by approximately 4% on a full year basis. With our strong cash generation and balanced capital deployment, we will continue to evaluate future share repurchases. We are confident that we will execute our strategy and deliver our short-term and long-term sales and earnings growth objectives, creating an opportunity for multiple expansion, resulting in enhanced total shareholder return over time. Looking ahead to next fiscal year, the environment remains highly uncertain. While we are in the early stages of our planning process, I'll now provide some commentary about the elements that we are considering as we develop our financial plan for next fiscal year. Our focus is on maintaining the increase in at-home consumption of our brands while achieving some level of recovery for our Away From Home business. We also remain committed to executing a step change in the performance of our dog food portfolio. On the top line, we anticipate elevated at-home consumption related to the pandemic continuing into next fiscal year, given our expectations regarding the timing of vaccine deployment, the establishment of herd immunity and a gradual shift in consumer sense of a return to normal. We do anticipate longer-term stickiness in at-home consumption and habits, particularly for breakfast, lunch and snacking occasions, primarily benefiting our coffee and consumer businesses. We also recognize the potential impact of pent-up demand for Away From Home consumption. For the fiscal year, we see top line tailwinds from the Uncrustables, Dunkin' and Café Bustelo brands, pet snacks and cat food, along with an improvement in our dog food portfolio. We also expect benefits from strategic pricing decisions and a gradual recovery for our Away From Home business. Top line headwinds include the divested sales from the Crisco and Natural Balance businesses, lapping of some COVID-related volume and retailer inventory replenishment, along with a return of promotional activity that was suspended in early fiscal 2021. On the bottom line, several elements that are being considered for next year are as follows: volume mix and pricing benefits from ongoing growth and business momentum, offset by lapping of some COVID-related volume and retailer inventory replenishment; divested profits from the Crisco and Natural Balance businesses; commodity ingredient, packaging and transportation cost considerations, we would seek to offset any inflation through efficiency improvements and pricing actions where and when justified; normalization of certain SD&A expenses, inclusive of total marketing dollars anticipated to be comparable to this fiscal year; earnings benefit from our total cost reduction and margin management programs; and reduced interest expense, along with the benefit of shares repurchased during this fiscal year. Taking all these elements into consideration, we anticipate our performance on a 2-year stacked basis to demonstrate underlying growth in both organic net sales and adjusted earnings per share. Further, we expect to demonstrate improved performance coming out of the pandemic than was the case prior to the pandemic. In closing, I would like to emphasize a few key points. We continue to deliver exceptional results during these unprecedented times. We are making significant progress carrying out our executional priorities, which positions us to deliver our short-term and long-term financial targets. Finally, our commitment to financial discipline and our balanced approach to capital deployment are key enablers of our long-term strategy. While there is always more work to be done, we are confident that we are firmly on the path to delivering consistent sustainable growth and increasing shareholder value. Thank you for your time today.