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

All right. All right. We're back. We're back. And I think it is still good morning. Sure enough, it's 11:41. So we got a little more time left to go before we can actually crest the noon hour. And I think we have a proper lunch break coming up next so stay with us. We can get that in short order, but before we get there, speaking of lunch, let's talk to the king of the lunchbox. We're talking, of course, to the Smucker team up next. I just came up with that on the fly. That's good, right? Makers of Uncrustables, Jif Peanut Butter, nothing says lunch like a peanut butter and jelly sandwich. But I'm fortunate enough to have a broad-based group of the management team with us today. We've got, of course, the man, the myth, the legend, Mark Smucker himself. Joining him on stage as well is the still relatively newly minted CFO, Tucker Marshall. And I have the pleasure today of meeting for the first time, Amy Held, who is their Head of Strategy, and I believe also overseeing the international business efforts as well. So without further ado, please join me and welcome them on stage. Let's sit down, let's have a conversation. Make yourselves at home.

We will. Thank you for having us, Jason.

Of course. Of course. So all of you in the audience, you know the drill by now. We have a big audience on the web. They can't ask any questions, but anyone here can raise their hand, ask a question, and I prefer audience engagement rather than me. But I've got enough to carry this going for quite some time. So let's start with you, Tucker, because initially, you were the only one coming, and then we had the pleasure of having more people added. So when I initially drafted my question list, it was with you in mind. So let's jump off with a question for you. You've been in the role still not that long, although you've been with the company for a long time, and I think your experience dates back to private equity and M&A before you joined and set off on the world of corporate finance with Smucker. You replaced Mark Belgya, who many of us have known for years. He's a legend in his own right. What have you done differently? What do you bring to the table that is complementary or distinct and different? And what changes have you led so far in the organization since you took the helm?

Jason, first, thank you for having us today. We certainly appreciate the time that you spend with our company, not only articulating our thoughts and perspectives and how we're thinking about growth over time, but also ensuring that our investors really have an understanding of who we are. As it relates to the role that I share in the organization and leading us forward, a couple of things that we have been focused on is ensuring visibility and transparency to how we're thinking about the strategic growth and delivering our annual performance. We've worked very hard on ensuring that we are setting credible financial targets, delivering against our long-term growth algorithm while bringing a continuous improvement mindset of advancing cost initiatives and programs but also acknowledging the importance of investing in the right and best use of our capital while delivering a balanced capital deployment model. And so some things that I have been focused on, one is ensuring a very strong partnership with our new Chief Operating Officer, John Brase. That enables both execution on the operational front but also collaboration with Geoff Tanner, who has advanced our sales execution as well. And further ensuring that Mark and I and Amy remain aligned on how we're advancing our portfolio and optimizing it through acquisition over time and through divestitures when they make sense.

Let's pick up on that last point then because it's a great transition to something else that I want to jump into. And maybe it's an opportunity to get you Amy involved, but it's also a question, I think, that applies to all of you. And that is the strategic efforts to transform your portfolio. You've been very active the last couple of years. Certainly, spanning back multiple years, you've diversified into a new vertical. That's pet care. You've exited some categories within the baking side of your portfolio. And then you made some headlines at CAGNY. Maybe they weren't worthy of headlines, but they were interpreted by many of us to be headlines of talking about ready for some more transformational type acquisitions. So I want to run down all 3 streams of those. First, on the shedding of businesses, do you feel that you're at a good point? Like have you divested the things that you want to get out of or are there still areas that you're exploring to say, maybe there's a better owner for this business or that business?

So Jason, as you know, portfolio management is an ongoing process, and we have to do it all the time. So as we think about our portfolio, our first priority is to make sure that we are in growing categories and that we can continue to grow within the categories that we play. So as we think about assets that we have shed using those as an example, they had not been delivering the growth that we had expected and we felt that deploying our capital where we're going to get the best return was clearly the best strategy. So at the end of the day, it's a fairly simple notion, but obviously, executing against it takes expertise and effort. And I am very proud to have Amy and Tucker here today because they have really helped to lead some of those efforts.

That makes sense. And I imagine, yes, they can be complex as they can suck up a lot of organizational time in trying to get out of these businesses and unwind them and unlock some of the, remove some of the dis-synergies, probably just as much time as acquiring the business can sometimes. On the acquisition front, before we come back and revisit the transformation line and what that could mean, if anything, I think it's fair to say, and you've got a lot of impairment charges that provide evidence of this, that the whole, the pet food acquisitions collectively haven't gone as well as you had hoped. What's caused some of the underperformance? And what have you learned from that, that's going to educate your future acquisitions?

Well, I guess what I would highlight is that we have gotten our pet portfolio, we've gotten, first of all, very clear on the strategy with snacks first, pet, second. And we are having success there. And so we have really focused efforts and resources against those areas. We've been very clear with all of our investors about stabilizing dog, but it is not going to take the front and center role. Clearly snacks and cat first, and we're very pleased with the performance. If you think about the growth we've been experiencing on Milk-Bone of late, the move towards premiumization of that brand has been going well and has been delivering. And then with Meow Mix, our performance there has been very strong to the point where we're now the #1 dry cat brand. And so continuing to push there while stabilizing the dog food business has really been our priority. So we are pleased with the progress we've made, particularly against that strategy.

And in terms of future acquisitions, I think you guys, there was quick, at least on Aaron's behalf to say, no, no, no, slow your roll after CAGNY. We weren't trying to signal like we're going to do something meaningfully different. This has always been part of our stated strategy. But still, a lot of us walked away from CAGNY saying, oh my gosh, they're signaling that they're about to do a big deal. For clarity, to put this at rest on the public stage that you were not trying to signal like it was a change or something was different now, correct?

That is correct. And words are important. And to your point, Jason, we've gotten this question a lot. And I think what we were trying to clarify is, we've always talked about transformational, enabling or bolt-on acquisitions. All 3 potentially can play a role. As we've grown and we have done some transformational acquisitions, transformational ones are more difficult to come by. But what we were trying to signal is if there was any subtle shift in our acquisition strategy, it was around trying to clarify that our strategy is around filling out our existing portfolio where necessary. So if you think about pet snacks or if you think about rounding out our coffee portfolio, those are fairly easy to understand. In some cases, it may be a little bit more obvious. If we are going to enter a new category, what you won't see us do is enter a new category with a smaller brand. If we don't see a path to acquiring a leadership position, we're less likely to go into a new category. We feel that gaining some degree of scale, some strong leadership in a category is required if we're going to go into a new category.

Yes. That makes sense.

I guess I would ask Amy if she has anything to add to that.

No. Jason, I would just tie together your last question in this one. We have a strong, dominant position in dog snacks with Milk-Bone. We have a strong, dominant position in cat with our Meow Mix brand. We don't have that same leadership position in dog food today. And so you can just see how it's bearing out in our portfolio today and how we're taking that and we're leveraging that to maybe think differently in the future.

Yes. Yes.

Jason, at CAGNY, we felt it was important for our investors and prospective investors to understand how we were thinking about acquisitions as a part of the overall strategy. And particularly as we have strengthened the balance sheet over the last few years, as we have continued to manage through a balanced capital deployment model and more importantly is, as we have advanced our portfolio optimization through divestitures, we have been asked questions around where would your next dollar of capital be invested on an acquisition front and the intent at CAGNY was really to outline what Mark just shared.

That's helpful. That's great clarification. Let's come back to pet then for a minute. I was recently at a conference and then we've mined some data since. And it does look, there's certainly the narrative at the pet food conference and the data as well supports the notion that dry dog food as a category may have tipped into a secular decline. And a lot of people are talking about this notion of mix-ins or toppers either with wet food, frozen food, refrigerated food now being blended with dry and therefore, displacing dry. And so that as a category is shrinking, which I don't think is really well appreciated or understood. So first, is that consistent with your own analysis and research on it? And secondly, and I know snacks is #1 and cat is #2. But does that create opportunity if you were to find a differentiated way to participate on the sort of mix-in and topper within the dry side, not the dry side, the dog side of the portfolio?

Well, so a couple of things. First of all, what we're seeing in the data is there is not a decline in dry dog. You would see units being roughly flat, and you would see because of pricing and inflation, dollars are up, I think, low double digits.

Yes. And I'm sorry, I was only referring to volume. Yes, you're right. There's a lot of inflation in.

Right. There's a lot of inflation, but we're seeing units being relatively flat. I think you're right about some of the trends in terms of toppers and so forth. We continue to play in wet dog. We've had some gravy train items that are doing reasonably well in that space. So we are playing there. And we will continue to look at that. As you know, wet pet food particularly has been somewhat constrained through some supply challenges, and that's been affecting the whole industry. But I think as we get beyond that, we will continue to look at wet as an opportunity to participate in all segments of that category.

Yes. I think that co-manufacturer manufactures for so many people. I didn't appreciate their scale. Did that impact your supply as well on the wet side?

Our wet constraints have been more in the wet cat because some of those products are actually coming from Southeast Asia. And so there's been some constraints there. We do manufacture some of our wet dog, and so that has provided us the ability to stay largely in stock.

Yes. Yes. I imagine that does help. So that was one of my questions was, what's your capacity situation been like on wet dog and has it actually given you a competitive advantage? I think that Simmons is the manufacturer who's taken so much capacity out of the system right now. Is there a transitory tailwind that you've had that could fade the other way when that capacity goes back online?

We think we've been relatively steady in the wet dog space and again, continuing to focus on making sure we can improve our supply chain on wet cat.

And the other thing that came out of this conference is everyone's talking about expanding capacity. Every single manufacturer I ran into, whether we're talking wet and so many people on dry as well. Meanwhile, we're hitting a ceiling where the pet population isn't really growing, at least in the near term as we're coming off of the COVID. And I'm sure it will mean revert back to a modest degree of growth. How do you assess the risk of oversupply in the industry and price competition building?

Are you speaking specifically to pet? Are you speaking just more broadly just in the industry?

Just wet and dry, people are talking about, every manufacturer is talking about expansion at one, if not both of those verticals.

On the whole, our capacity situation in pet is we're okay, outside of the wet cat. I mean, that is primarily the constraint. So we feel that we have sufficient capacity across our entire pet portfolio to continue to supply. You have seen us expand capacity in our other categories. So let's separate pet as well. Obviously, Uncrustables, we've made progress in expanding capacity on peanut butter. We've had great success staying in stock on peanut butter and managing through supply disruptions. And so across our, particularly our human food business, we have seen continued investment in capacity.

Just looking out here in the audience to see if there's any questions. Reminder, feel free to wave your hand in the air, and we're happy to call on you. I don't see any hands waving in the air. So let's just keep this moving. You've expanded capacity on Uncrustables. You mentioned like, wow, what a home run that's been. I mean, my goodness, it's a peanut butter and jelly sandwich that's premade. I never would have thought you could have this much momentum year in and year out. And it's almost unfair.

It continues to exceed our expectation.

Totally. It's like, wow, how lazy are we in the U.S. We can't make our own peanut butter and jelly. But nonetheless, the momentum is phenomenal. And actually, we're guilty as a household too. I'm buying these things because they're so easy for us to grab and like pop in the lunch pail or something on the way out the door. I think it's 6% of your sales year-to-date, 31% of your growth, just speaking to momentum. Remind me of that capacity expansion plan, you've got 2 waves, I believe, in the works right now, one completing in 2023, one in 2025. How much incremental capacity are you bringing online there?

You want me to start?

Why don't I start and you can round out. But Jason, we have 3 facilities. Scottsville, Kentucky is a completed facility. It is our flagship initial facility to produce our sandwiches. We have a Longmont, Colorado facility which has 2 phases. The first phase is complete. And we will bring on the second phase this fiscal year sometime in the summer to early fall time frame. We'll get the full run rate benefit in the back half of our fiscal year. When you think of phases as it relates to Uncrustables production, it's primarily 1 bakery and 3 production lines. So you have essentially 2 phases within Scottsville. You'll have 2 phases within Longmont, Colorado. And then as you know, we are expanding beyond that second facility into McCalla, Alabama. And we will bring on the initial phases of McCalla in that '25 time frame. And all of this is in support of achieving our $1 billion top line ambition over the next 5 years. We believe that we can meet that top line ambition due to a series of reasons. One, we continue to be in a supply-constrained environment against demand. The second is, we have low household penetration that we believe that we can double over time. And furthermore, we continue to spend little to no marketing against the business today. And so as we continue to advance that, that will help. And then lastly is, we're primarily in the U.S. retail channel, and there's other areas to explore in the away-from-home channels as you think about international channels through Canada. And so we do believe the core handheld peanut butter and jelly format, there is a lot of runway against that $1 billion ambition. And then beyond that, we do continue to explore innovation in very limited ways just to see how far the brand can extend as we continue to invest behind it.

Now you said demand is outstripping supply. It sounds like it may be some of these other distribution verticals, whether we're talking foodservice or different channels or the international. Can you expand upon that? Like where do you see, like if you turn this facility on, this isn't something you have to spend on, like the demand is there, ready and waiting for it. Where is that and how big is it?

Do you want to start?

It's everywhere. I mean, so the consumer demand is significant. And so we continue to be on allocation. And so obviously, getting that capacity in Longmont will help alleviate some of the supply constraints that we have had and will help us to continue to grow double digit. So it is definitely not a demand issue. So even in the core U.S. retail market, Tucker referenced the ability to double household penetration even to get to a place where you see household penetration of similar handheld items, we think that we can get there. And then he also referenced away from home. We definitely haven't filled out the channel in away from home, whether that's schools or other locations. And then Amy will definitely tell you that Canada has been itching to get their hands on Uncrustables for a decade?

Quite a while.

Right. So there's runway.

Okay. So I hear you that demand is not an issue, but looks like it's slowing quite a bit. In Nielsen, we've gone from like 50% growth late last year to 20% to now, I didn't see this morning's data release because I've been stuck on stage here all day. But the last time I saw 2 weeks ago, dollar sales have slowed to plus 3% with volume down 13%.

Keep in mind, we lapped the start-up of Longmont. So that's why you're seeing those numbers. So again, I would just go back to, it's not a demand issue, but we did lap the pipeline fill as we started up Longmont, and we would expect our growth to continue.

But that's, usually, we see that show up in the net sales line of reported results when you lap it because to your point, it's typically a pipeline fill. It's less obvious in the retail channel. But you're saying no, no, when you filled it, perhaps maybe you turned on merchandising or something once again with the capacity, which is why you saw a demand spike.

Yes. And Jason, I would also say that in this period that you're referencing, we've also been a little bit supply constrained as we've worked through a very modicum of supply chain disruption. And we've also made some conscious decisions to ensure that the business continues to perform in FY '23. And as a result of that, you saw a little bit softer volume in the recent consumption data. That's just a near-term sort of anomaly or blip. It will continue its trajectory being a large contributor of quarterly growth and annual growth as well.

Okay. And it's going to be compounded in reported results by lapping the pipeline fill from the prior year?

Correct. And along with just some supply chain challenges that we experienced in our most recent period to your point, but those have been resolved and will continue to perform as we move forward into the first quarter and beyond.

Yes. On that topic of supply chain challenges, we've had a lot of different companies on stage today. Frankly, your supply chain challenges haven't been as substantial as many other companies out there. Where have you seen some of the negative impacts? Uncrustables is one, but that's almost more of a demand problem than a supply-side problem, which is a high-quality problem to have. Are there other supply chain challenges that have been impeding your ability to grow or weigh in heavily on your cost structure, aside from the inflation environment?

The beginning of your comment and just your acknowledgment that we've done a decent job managing through. We thank you for that because we do believe that's true. We have been working extremely hard to make sure that we can manage our supply disruption. There's no question it's there. And on a given week or month, it could shift to different things. We've seen some packaging constraints at times. We've worked through those for the most part. We've seen some labor challenges earlier this calendar year. Transparently, we've worked through those and gotten back to a more normal staffing rate. And so it does vary. It's varied by, at any given moment, there might be different constraints. But I think it is a tribute to the cohesiveness of the team, the link that they have had to both our suppliers upstream and then downstream to our retail customers has allowed us to effectively manage through those constraints.

And Jason, as we spoke earlier around the wet pet food, that is a top line impact to our pet portfolio. So as the reliability of that supply chain comes back, we will be able to provide more wet pet food, particularly in the cat side, as Mark noted.

That makes sense. And while we're laying praise, I also need to compliment your ability of getting price in the system fairly quickly without a tremendous amount of elasticity. It looks like you're in there with lots of different levers around RGM. Can you expound upon that? Like where do you stand on the pricing efforts of what you've been able to put in the market? How are you feathering your trade in or out during this? And anything you've done on the pack size that would be notable or anything else in terms of how you're effectively getting more net price into the system to offset the cost?

You're correct, Jason, that we have had good success passing along pricing. And I would say, overall, our customers, our retail customers also need it, right? And it's important for them to be able to pass along as well. So we have, again, through our relationships with our customers, obviously, the open dialogue, making sure that where we can't obviously cut cost, justified pricing has allowed us to be successful there. Trade is always a lever. The vast majority of trade tends to be EDLP by a long shot. And so high-low trade is not as prominent in the mix, but it's clearly still part of the equation. But overall, our pricing, our ability to pass along pricing has been very effective.

Now the trade side, the vast majority of EDLP, it's a little stunning. You're one of the few companies today that disclose this in their 10-K, and I appreciate the disclosure. Although I'm going to turn it on you for a minute. So Tucker probably doesn't appreciate disclosure.

He's going to answer the question.

But to see trade spending at 39% of net sales is just really big. We're accustomed to an industry operating somewhere around 20% of gross sales, I think, is what food looks like overall. And you're probably looking at very high teens for CPG overall. That's, of course, gross, which then pushes you into the low 20s. Why is it so much higher for you? And it seems wildly inefficient and maybe this is my own ignorance and please educate me if so. But trade seems like it has such a big risk of kind of being a slush fund of money that isn't always the most efficiently allocated. And there's lots of risk of leakage once you have that large pool of money out there.

So on the trade spend front, as Mark noted, the predominance of our trade spend is for every day low price, EDLP. And a big component of that does fall within our coffee portfolio first and secondly, into the pet portfolio. And within coffee, we have used trade as a way of supporting or reflecting against price. And my assumption is, is you'd look through the data through our most recent filing of last fiscal year. Since then, as a result of us moving forward with pricing against cost inflation, we've been working through to make sure that we're addressing trade, not only as a component of EDLP, but also as a component of how we're using it against pricing actions. Now that we've taken pricing in this inflationary environment, it does continue to be an area that we continue to manage and monitor. But it has changed since our last filing.

Fair to say it's gone lower because you've used that as a lever on pricing.

I don't know the exact number, but I would...

Yes. I'm not trying to push you on it.

Yes. But I would acknowledge that it has changed.

Okay. And the other thing we've seen on the pricing side is so far a broad-based lack of elasticity. I think I saw the other guys hovering in the back of the room as I was asking the P&G folks this because I think it was P&G who I had on last.

It's Kimberly-Clark.

It was Kimberly. I asked P&G the same question, though. It's all blurred together here, Mark. It's a long day. So forgive me for that. But there's early evidence in some categories that we're seeing some heightened price sensitivity. We're seeing private label creep back a little bit here or there. We're hearing a bit more from some retailers out there but I don't want to sensationalize it. It's all in the context of like elasticity is still phenomenally low, just maybe not quite as low as it was before. What are you seeing and what are your planning assumptions predicated upon as we look forward?

I'll start and maybe Tucker will add a couple of things. So definitely, you're right, benefiting from very low elasticities. We have not seen a meaningful shift or trade down in our categories at this point. So we are not seeing that shift to private label. I would also highlight coffee. There's obviously a lot of attention on us with coffee because we're really the only CPG company that has a separate reportable segment for coffee. So provides visibility for you all into the category to some degree. But what I've been highlighting is and just reminding us is that we are not at record coffee prices, far from it. And the record coffee prices that we saw in 2012, 2013, where arabica spot prices were well above $3, $3.10, $3.15 per pound. We've been bouncing around that sort of $2.10, $2.35, $2.40. So we are well below from a spot price perspective where we would see record coffee prices. So just using coffee as one example, we've been able to manage through. And I think we've been doing a nice job. So as we go forward, we're going to make sure that we're very prudent in how we model elasticity. We want to make sure that we're taking a realistic approach to what might come. And so we'll plan accordingly.

And the other thing that's probably changed, not probably, that's definitively changed since those periods you mentioned you had, I mean, these K-Cups in your portfolio looks very different, right? I mean, single cup is substantially larger. And there, you've got your coffee as a percentage of COGS is a lot lower. And also the premium mix is substantially higher than mainstream. Does that give you more flexibility, A, require less pricing because of the cost structure of that? And B, do you think it insulates you more from trade down risks?

Yes, on the latter, I think it definitely helps. And you're right, coffee is a much smaller component of single-serve but packaging prices and all of the other direct components that go into K-Cups have also risen. So that has obviously driven prices. But we have done a really nice job executing against our strategy and shifting to where the growth is. Another version, if you will, of our portfolio reshape is making sure that we're pushing against those segments of coffee where the growth is going to be. And Folgers happens to be the fastest-growing K-Cup brand right now. So the strategy is working. Dunkin' is going great. Bustelo is doing well. And then we're growing share in every single one of our K-Cup businesses. So, so far, so good.

I mean, I'll be honest, it surprised me, the continued success you had. I initially looked and said, well, they have tailwinds because they renegotiated the Keurig contract, and that's given them more flexibility to lean in and close the distribution gaps, particularly online. We're at a point now where those tailwinds, I would think, would be long behind you and this is not growth being driven anymore just based on a contract renegotiation, just basic block and tackle and executing. Is that fair?

No. The contract, there's been multiple negotiations over the years and both parties have benefited as we've leaned in. The last, I think it's been a few years now since we really have been talking about that, but making sure that from a cost basis we're on a level playing field. I believe and there's evidence to support this, and obviously, our teams would support it. Our investment in these brands has helped to drive growth. Our partnership with Keurig, the fact that they've done a fantastic job of increasing brewer penetration. There's a lot more brewers out there. There's more consumption at home as a result of people working from home. That has continued to some degree. People are not going to go back to the office as much as they were. So there is a continued tailwind there. And then, again, just this notion of us supporting our brands, having a very significant share of voice, whether it's sort of the reinvigoration of Folgers, supporting Dunkin' and even advertising on Bustelo has supported the brand.

A last question for me, and I think we'll refresh on the time. We talked about pricing and we talked about the need to raise prices to offset cost. Any evidence that we could be reaching a peak on cost? Like we're hearing some comments of some fatigue on the freight complex. You mentioned the resin components of K-Cups. Well, spot resin prices are still well off the highs induced by the Texas freeze last year. I know it's a mixed bag, some things still moving up, some things moving down or sideways. But collectively, in a basket, any chance we're close to the peak?

Jason, that is truly the $64 million question because I think when we came into the initial part of this calendar year, we saw a lot of labor disruption associated with the Omicron variant. And I think we've begun to see some stabilization across labor, which has benefited the supply chains. I think you've also gotten to a bit more availability and reliability across the supply chains. But since then, a few things have happened that I think we need to continue to manage and monitor. And these are not in any particular order. But one is, the war in Ukraine has put more pressure primarily on the commodity markets and what that impact is going to be. I also think it puts pressure on supply chains as well, just the overall availability and reliability. I think we need to continue to see how China opens up in terms of the lockdown in the ports to get sort of goods flowing and moving. And then lastly is just how quickly we can quell the inflation that we're against here in the United States and how the Fed continues to drive that forward. So I do think we're reaching a peak, but I don't know if we've gotten to the tippy top of that peak, so to speak. And that question will be ultimately how quickly it comes down. Our desire would be more of a gradual decline down versus a crash, but we've got to slow some demand down so the supply chain stabilize.

Yes. Yes. All right, on that note, we could have timed it better. The clock ticks zero.

Good timing.

Yes. We're done for that. Thank you guys so much for your time. I really appreciate it. Mark, great seeing you again. Tucker, a pleasure. And Amy, great meeting you. Thank you so much for taking the time.

Thank you.

There's a box of dry Uncrustables sandwiches outside, help yourself.