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

Good afternoon, and welcome back, everybody, to our fireside chat with The J.M. Smucker Company. Joining us today from the company are CEO, Mark Smucker; and CFO, Tucker Marshall. Welcome, gentlemen, and thanks for being here with us today. Mark, I'd like to turn it over to you just to start off for some opening remarks, you and Tucker Marshall, that is, to set the stage a bit, and then we can get into some discussion topics. Thanks again for being here. Over to you, Mark.

Thanks, Andrew. It's nice to see you again, of course, and thanks for the opportunity to participate today. I'd like to start with a few opening comments to provide context around our business performance and strategy and reserve most of our time for answering questions. As a reminder, some of our remarks will include forward-looking statements and non-GAAP financial measures. Full disclosure concerning forward-looking statements and non-GAAP measures are included in our filings available on our corporate website. Two weeks ago, we reported first quarter results that continue to demonstrate strong momentum for the business, with our first quarter results including 1% organic growth for net sales and a 2-year CAGR of 6%. This growth demonstrates that demand for our products remains robust, and we are maintaining the momentum for our brands even as people return to schools and workplaces. This dynamic has continued since the end of the first quarter with results in the month of August, in line with our expectations and showing continued organic growth. On the bottom line, our first quarter adjusted earnings per share declined, reflecting anticipated impact of inflationary costs and the timing of pricing actions, which mostly went into effect at the end of the quarter. As industry-wide inflation has accelerated, we are implementing additional pricing actions to protect profitability while retaining our focus on maintaining demand momentum. At its core, our performance reflects great progress over the past year toward our 4 execution priorities. These are driving commercial excellence, streamlining our cost infrastructure, reshaping our portfolio and unleashing our organization to win. Some of the key accomplishments include implementing a new sales and marketing model to increase focus on our key growth categories and drive enhanced in-store execution through proprietary digital insights. Our new commercial model and continued investment in our brands have supported market share growth for brands representing 2/3 of our sales in the first quarter. We're on track to achieve our $150 million cost savings goal by the end of fiscal 2024. We've streamlined our portfolio with 2 divestitures and have reallocated resources to more strategic, faster growth opportunities. We continue to evaluate further actions to increase our focus on growth opportunities in the pet food, coffee and snacking categories. We increased our organization's focus on delivering with excellence and winning in the marketplace, including revising our incentive compensation measures to include targets for net sales, ensuring our teams are focused on sustainable growth. These accomplishments helped accelerate elements of our capital deployment strategy to support increased shareholder value. Since the beginning of last fiscal year, we repaid $1 billion of debt and returned $1.2 billion of capital to shareholders in the form of dividends and share repurchases. In July, we announced a 10% increase to our quarterly dividend, marking 20 consecutive years of dividend increases and reflecting continued confidence in our business outlook. Finally, we continue to make progress on our key ESG initiatives. We have exceeded all our 2020 environmental goals. And yesterday, we released our 2021 corporate impact report, which includes our next set of environmental goals, including new science-based targets for absolute greenhouse gas emission reductions. Despite near-term supply chain and cost challenges impacting the entire industry, we remain confident in our strategy. The investments in our brands and our operational excellence are driving top line growth and give us confidence in sustaining momentum for the business. We are well positioned to deliver long-term growth and increase shareholder value. I'll now turn it over to Tucker for a few brief comments.

Thank you, Mark, and good afternoon. We're pleased with our strong financial performance over the past 1.5 years, including strong underlying sales and profit growth. Our cash generation has enabled us to pay down debt and return to a more balanced capital deployment model. The actions we've taken are aligned with our financial priorities. I'm confident they're the building blocks to delivering increased shareholder value. These priorities include consistent and transparent communication, improved ability to deliver our annual and long-term financial targets, enhanced focus on financial returns with ongoing business and brand investments, maintaining our cost reduction and profit enhancement efforts and a balanced capital deployment model. Our model is delivered by strong balance sheet and investment grade rating. This enables strategic reinvestment in the business through capital expenditures and acquisitions while returning cash to shareholders through quarterly dividends and share repurchases. We've made solid progress toward our priorities in support of our strategy and continued momentum for our business and brands. We're taking the appropriate actions to manage through this ever-evolving environment. I'm proud to say our company remains positioned to deliver sustainable and consistent long-term growth for our shareholders. Thank you. We look forward to your questions. Andrew, I'll hand it to you.

Great. Maybe a good place to start is to pick up on some of your thoughts recently on market share. It feels as though it's been pretty difficult to truly track a company's underlying brand performance due to all of the anomalous factors the past 1.5 years, such as COVID laps, pricing, inflation, et cetera. So it can be easy to lose sight of key share trends. But as you've pointed out, Smucker is now holding or gaining share in roughly 2/3 of your brands, I think, versus just about 25% a few years ago. I guess, how much of the share gains would you attribute to efforts outside of sort of any COVID-related impacts? And therefore, how sustainable do you see these share gains?

Sure, Andrew. Obviously, we're really proud of the share gains. And outside of COVID, what I would contribute this to the overarching theme is execution, execution excellence. And that applies to supply chain and how we've managed it, our sales execution all the way through the retail shelf as well as our marketing efforts. So if you think about what we've been able to accomplish in this period, a lot of it has to do with making sure our teams have the ability to focus on those things like managing every link in the supply chain, ensuring that from -- that we can get our ingredients, make the product and ship it. And so because we've been so laser focused on that and working with our suppliers and retail partners, it has allowed us to very effectively manage our supply chain and truly continue to deliver products to shelf. And so it's very basic blocking and tackling. That's one. The second one is just our sales execution, which is part and parcel to what I just described in terms of us being able to ensure that we are on shelf and in stock. As a result of some of those efforts, we've actually gained shelf space in a number of our categories, allowing us to gain share there as well. And then our marketing efforts, which we talked about over the last couple of years, having transformed our capabilities there with a more balanced approach to mass reach and targeted consumer engagements as well as just quality creative that really is informed by market research and what the consumer is seeking. So I think it's execution on supply chain, sales and marketing.

Smucker recently raised its fiscal '22 organic sales growth outlook from 2% to 2.5%. And sales trends remain elevated even according to your comment in your prepared remarks about August. I'm curious what recent data or even anecdotal data points that you can call out that further support your belief that some of these new households that have come to Smucker's brands in the past year plus can, in fact, be sticky moving forward, even as reopening occurs.

Sure, Andrew. So the first thing I would point to is some of the ongoing dynamics. And even as this pandemic continues or hopefully ends, one thing is certain, which is consumers' habits have changed. One very notable place is that people will work from home more than they used to. And because they will work from home, whether it's now or post pandemic, they will be at home for breakfast and lunch. And clearly, the opportunity there for us is that many of our food and beverage products obviously are at the breakfast and lunch occasions. Another tailwind is just this notion of the number of coffee brewers that are -- have been acquired and now used in homes. Over 75% of cups consumed are consumed at home of coffee. And so we stand to benefit there. And then just the uptick in pet adoptions has also allowed us to gain new consumers in the pet space as well. So there's a number of tailwinds that we think will persist post pandemic.

Great. Even with recent pricing actions, Smucker as well as many in the peer group have had to sort of take down margin assumption. Can you bridge for us the change in guidance that you discussed on your recent earnings call? And is there any reason to think that we could see, let's say, more prolonged margin pressure than would be the case in a typical commodity swing.

Andrew, at the midpoint of our guidance range, we reduced it by $0.45. And what is comprised within that $0.45 change is approximately $0.40 due to ongoing inflation being partially offset by a partial year of pricing. And we believe that those pricing actions will come into the second and third quarter, inclusive of an estimate for volume elasticities. In addition to that $0.40 headwind, there is an additional $0.35 headwind associated with volume, primarily due to supply chain disruption. An example of that supply chain disruption would be within our wet pet food business with product coming from Asia, primarily having an impact due to transportation. And then that $0.75 headwind to the fiscal year is being offset by $0.30 of additional underlying productivity savings, and that productivity savings is really coming in support of helping deliver the fiscal year. But we do remain committed to our reinvestment in marketing in support of our business and brands, and so we are maintaining that 6% to 6.5% of net sales as our marketing investment for the balance of the fiscal year.

Great. And with respect to pricing, I think you mentioned on your recent call that volume elasticities have thus far been in line with historical levels. Any reason to think that this change is either more or less positively versus history moving forward? And I asked because we've actually had a number of food companies, just over the last 1.5 days, mention how -- again, it's early, but thus far, volume elasticity seem to be trending more favorably than most of them had modeled or forecast and more favorably than what they've at least seen historically. And I guess part of that is because inflation has been so widespread. There's less sort of cross elasticity and demand trends remain robust, as you mentioned. So curious on your thoughts around elasticity in that regard.

Andrew, essentially, there are no perfect elasticity models, but we have always take a prudent approach to how we model those. And I will tell you that they are in line with expectations. We have not seen wild swings outside of our elasticity models. And the other thing that I think is worth noting is, particularly in commodities, although there was a very significant acceleration in cost increases, in most cases, we are not at record high commodity costs. Coffee being an operative example, where at one point, 10 a decade or so ago, we had $3 Arabica, we are nowhere near that. And so we do believe that our customers and our consumers can sustain this level of inflation that we're experiencing at least for the short term.

Great. And maybe you can provide us with an update on Smucker's sort of ongoing productivity measures as well as some of the incremental actions taken more recently and give us a sense of sort of to quantify the timing of when these savings could come through to help mitigate some of these costs.

Andrew, we are committed to the ongoing profit delivery and profitability of our company, and we acknowledge that right now we are experiencing commodity or cost increases due to this inflationary environment, and we believe that we will recover those through our pricing actions and through our underlying productivity gains. And as you have noted, we are committed to delivering $150 million of savings by the end of fiscal '24, which approximates about $50 million per year. Where we see that opportunity really comes in our supply chain and manufacturing network. It also comes from our ability to manage nondiscretionary SG&A costs and also as a component of driving our leaner, more agile organization with organization savings, and it's an opportunity to look within our sales and brokerage networks as well as we think about delivering this over time.

Great. Sticking with commodities, green coffee costs have spiked recently, and that was obviously before even what we've seen around weather patterns and Hurricane Ida and such down in the Gulf. Can you talk a bit about the drivers behind this move in green coffee? Any reason to expect Smucker's ability to protect coffee margins would be different this time around versus what is typical? And then I remember, I think you have a large -- if I'm not mistaken, a production facility in Louisiana. I don't know if there's any impact from recent weather events there that we should be aware of.

Maybe, Andrew, I'd have Mark start with respect to the hurricane and kind of production and operations, and then I can come back and talk a little bit about the commodity cost environment.

Great.

Sure, Andrew. Yes, you are correct. The vast majority of our coffee supply chain is located in Louisiana, in or around New Orleans. We have a very large coffee receiving mill at the port. We have 2 roasting -- large roasting facilities in New Orleans proper and a large -- very large warehouse north of Lake Pontchartrain. And as we do every year during -- or in advance of hurricane season, we do a very robust business continuity planning. We make sure that we have enough inventory in that warehouse. We roast ahead of time and so forth. So this year was no different. And I'm pleased to report that we are back up and running. All of our employees are safe. We were able to check with every one of our employees over about 2 days or so after the storm, many of whom had evacuated, and happy to report that almost all of them are now back in the city, power on. Both plants are running, and we did start shipping out of that north of the lake warehouse about 2 days after the storm had passed. So those plans are very robust, and we're very pleased with the results that we've been able to basically stay in production and continue to ship product.

Andrew, I'd like to reiterate my appreciation to our team in New Orleans for what they've accomplished over the past week or so, and just congratulations to them for the patience and perseverance. But as you've asked, we have seen inflation in the commodity cost of coffee, and that's really driven by a few factors. I think the first is just the acknowledgment of weather patterns that had come through Brazil. As you have noted, there was a frost and a slight freeze that did have an impact to the underlying crop, and so I think they're understanding not only what the current yields are but also how there's a longer-term impact. But outside of the weather patterns, there's also just due to the heightened demand and the fractured supply chain. There is a bit of an incremental cost in the overall differential. And so as we put the total cost of coffee together, we are seeing inflation. As Mark noted, we do believe that it's manageable and that it is an opportunity for us to pass on price in a reasonable way. We would also acknowledge that when you think about just our overall commodity and ingredient deck as a company, we manage this for cost or for profit stability. And so we work very diligently to procure the underlying commodity at the most effective rate. If we have the opportunity to implement a risk management or hedging strategy, we will do that. And then we will look for underlying productivity savings or gains to support any inflation or cost increases. But then where and when appropriate, and particularly in this environment, it's going to be important to price for recovery. And we have done that, and we do remain confident that we will recover our costs through our pricing actions.

Great. Sticking with coffee, we've certainly seen Smucker's single-serve business continue to thrive. I'm curious what trends have looked like in the core mainstream roasting ground space and specifically with the Folgers brand.

So Andrew, as you know, for many years, we started down a journey of ensuring that we play in all segments of our categories. Coffee is a perfect example and that we continue to shift our portfolio and reshape our portfolio for growth. And what that meant in coffee is ensuring that we're in the single-serve space as well as the premium space, both with Dunkin' and Café Bustelo. We were the first national brand in the Keurig system, and so that clearly helped. Our trend in K-Cups have been very strong. Shares are tracking ahead of the category. And it's no secret that both Dunkin' and Café Bustelo have been on tremendous growth. So clearly, that shift is the right thing to do. And just acknowledging that Folgers is an anchor brand. So if you think about our strategy of making sure that we have iconic and emerging brands, again, coffee is a great example because Folgers, we know, is going to be a stable, flat to very modest growth brand that contributes a lot of cash and helps support our entire business. We do have plans, as I think we have mentioned over the next 6 months or so, to continue to contemporize the brand and ensure that we're not alienating our core consumers, but we're also speaking to new trends in the category. So that may include things like packaging and some new breakthrough advertising. So clearly, the Folgers brand is very important in our -- as an anchor in our coffee business, and it has continued to gain share, especially over these last several quarters.

Great. Maybe we shift over to the pet space for a moment. The vast majority of the segment is holding up very nicely. But as you've called out, premium dry dog has been lagging expectations, specifically in the Nutrish brand. Smucker now does, I think, not see a return to growth for that particular brand until fiscal '23. I guess can you remind us here, first, what the key issues are here? And more importantly, why the company still sees the Nutrish brand as one that is well worth investing behind? And I ask this in light of the decision to divest Natural Balance, which was obviously another premium dog food brand at the company.

So Andrew, let me just take a step back and remind the group about what our total pet strategy is, which is really a three-pronged approach. First and foremost, it's about pet snacks, and we have continued to grow our pet snacks business. Similar to my comments I just made on coffee, we have started down a journey of shifting our snacks portfolio to growth, which includes more premium items on Milk-Bone, et cetera. So that is an anchor segment for us because we are the leader in pet snacks. Next, you have cat, and we have a strong #2 position in our dry cat business with Meow Mix continuing to grow, some decent performance on our wet cat business. And then when you turn to the third leg of our pet portfolio, you have dog food. And what I would remind us is that with dry dog food, we have other brands like Kibbles 'n Bits in addition to Nutrish. And Nutrish, just the dry dog, which is where we have had the challenges is isolated really to that dry dog segment and that brand, which is only about 10% of our total pet portfolio. So we have optimized the portfolio. We have simplified the assortment and the offerings that we have. We continue to be committed to the big life launch, which is still very early and the master brand of Nutrish and just acknowledge that some of the challenges we've had on Nutrish have been attributed to some of our marketing efforts, our advertising efforts that have not been as effective as we would have liked. And so we have taken pause on some of that content while we reevaluate and make sure the positioning of the brand is right and the messaging to our end consumers is correct. But you are right, we did acknowledge that returning that piece of Nutrish to growth is going to take some time beyond this fiscal year.

Have you seen the benefits across the broader pet space of the new dedicated pet sales force? And if so, maybe you can provide a couple of specific examples to give us a sense of how that decision is adding value to the pet segment.

I would first point to the fact that the pet category is very unique. The consumers are very unique. The pets consume the product, but humans buy the product. And so it does require a different set of thinking around that. And actually, our customers, our retail customers look at the pet space a little differently. And so separating that particular sales force, first and foremost, provided focus, and it has allowed us to continue to accelerate some of our efforts around getting some of our portfolio cleaned up. You mentioned earlier the divestiture of the Natural Balance brand. And it has just provided a lot more focused insights on both the consumer and our customer. And of course, you know we have some unique customers in the e-commerce space, which are more better served with a dedicated sales force.

Very helpful. As you mentioned, pet snacks is an area of particular strength, and you've seen exceptional growth there. And that subsegment, obviously, is growing very well overall as well. I guess how do you ensure that you can protect your advantage in very profitable business there, particularly the Milk-Bone brand in this space? And can this brand travel in a more premium arena as well going forward?

So Andrew, you have seen that we have already begun to launch a variety of Milk-Bone products, whether it's alternative raw hide or new dipped products that are trending to elevate that brand to a bit more premium space. We also have been able to look at strategic pricing on Milk-Bone because consumers are willing to pay a premium for that brand, and that benefits both our retail customers as well as us. So we do believe that -- obviously, you have Pepperoni, but we do believe that, that portfolio can continue to evolve more into the premium space, and that is specifically what we intend to do.

Great. A particular bright spot has been the Uncrustables brand. Can you talk a bit about how big a driver this can be to overall growth moving forward, and even with the recent capacity expansion, if more capacity is ultimately needed to continue to fuel the growth?

Uncrustables is a brand that we must continue to invest in because it has a tremendous amount of runway ahead of it. We have continued to invest in capacity. We will continue to invest in capacity. We do not see the demand for this brand slowing down. And even in core peanut butter and jelly, we still think there is tremendous runway. We believe that we do have a competitive advantage from a first-mover perspective, our ability to produce these sandwiches at scale. And so even within the core of Uncrustables, there's plenty of room for growth. And beyond that, we will continue to expand over the next several years and look at alternative products. We recently launched some different formats of Uncrustables, which actually are doing very well. So I would tell you, Andrew, that Uncrustables will continue to be a core growth driver of our total business for the foreseeable future.

And Andrew, I would also offer, and we have shared this before, that we have an ambition of being a $0.5 billion total company Uncrustables brand by the end of our fiscal '23. We are on track to meet and exceed that before that time. And so it just continues to demonstrate the great growth. And candidly, we acknowledge that it's been 29 quarters in a row of consecutive growth across that brand. So it is a great bright spot to our overall portfolio.

Yes. Maybe in our remaining 2 or 3 minutes, I love to shift gears a bit to the portfolio. Smucker's over the last few years has divested a few less core businesses that collectively would appear to add around or more than 100 basis points annually to organic sales growth. I guess what is the company's thinking moving forward on the portfolio? Are there other pieces that could still fit into this potential divestiture bucket? And then what would acquisition interest look like and sort of where would deals be focused, whether it would be core areas or maybe looking to move into some new or adjacent spaces?

Sure, Andrew. I would start by saying that our portfolio reshape, which is an ongoing effort, and will always be, includes divestitures, acquisitions, but also a lot of those things that we have just spoken about in the last half hour about how we're thinking about having the most effective and efficient portfolio even within the brands that we currently own. So that's all part of it, SKU rationalization, et cetera. You are correct. Some of those divestitures are important in the sense that we wanted to take some assets out of the portfolio that we believe would be too costly and require too much investment to really get back to growth. As we think about acquisitions, clearly, we're very committed to our existing categories. And coming back to Uncrustables, we think about snacking as portable, no mess, and that is obviously the key characteristics of Uncrustables, meal solutions, ready to eat. So things that might fit into the snacking portfolio, whether they're frozen or not would be something of interest. Thinking about if assets become available to help us round out our coffee portfolio, we would look at those. And then again, coming back to this notion of pet snacks, if the right thing came along, we would think about that. But if we are able to -- if you think about our total strategy of leading in the best categories, we're interested in categories where we can take a meaningful position and own both iconic and emerging brands. So that's generally how we would think about our acquisition strategy.

Great. Great. Well, I think we've come up against our time limit here, and I think it's a good place to leave it. So Mark and Tucker, I want to thank you both very much for being with us today and looking forward to tracking the progress of the fiscal year unfolds.

Thank you, Andrew. A pleasure to be here.

Thank you.

Sure.