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

Welcome to our conversation with The J.M. Smucker Co. With us today are Chairman, President and CEO, Mark Smucker; and CFO, Tucker Marshall. Mark has a few prepared comments, and then we'll shift to a fireside chat format. Welcome, gentlemen, and Mark, over to you.

Andrew, thank you for having me and Tucker. I always appreciate being here, and it's good timing right after earnings. Let me get myself organized here. Obviously, great to be back at this year's conference, and we appreciate as always the opportunity to participate today and talk to our shareholders. Tucker and I, as Andrew just pointed out, we'll have some brief comments and then we will reserve the remainder of the time for your questions. Please note that certain information provided 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. My commentary today will be centered around, first, the resilience of our business, as demonstrated by our strong first quarter results; second, how we are evolving our business to meet the needs of the consumer; and third, that the company is well positioned to deliver long-term sustainable growth and increase shareholder value. Last week, we released our first quarter financial results, which reflected a strong start to our fiscal year in a dynamic consumer environment, demonstrating the resilience of our business and our transformed portfolio. Consumer demand for our iconic brands, combined with our focus on execution, increased marketing investments and disciplined cost management drove double-digit sales and earnings growth in the quarter. Total company comparable net sales increased 1%, and when excluding contract manufacturing sales related to the divested pet food brands, net sales increased 3% versus the prior year, reflecting 3 percentage points of volume/mix growth. Adjusted earnings per share exceeded our expectations by a double-digit percentage as we drove efficiencies through our transformation office focused on disciplined cost management and began to realize synergies earlier than anticipated from the Hostess Brands acquisition. Though we delivered a strong first quarter, we decided to take a more cautious view and amend our guidance for the full year. We continue to focus on managing the elements that we can control and are taking actions that position the company for long-term success, including evolving our business to meet the needs of the consumer. Let me share how we are doing just that. Throughout our history, the consumer has remained at the center of everything we do and today guides our vision to engage, delight and inspire consumers by building brands they love and lead in growing categories. We continue to meet the evolving needs of the consumer by creating products that anticipate their needs through a relentless focus on data and insights, a mindset of continuous improvement and a culture of innovation. We are focused on consumer-led disruptive innovation across the business. In coffee, we brought the Café Bustelo brand, one of the fastest-growing brands in the at-home coffee category into the refrigerated aisle with new multi-serve, ready-to-drink offerings. This new product combines an espresso-style roast consumers love with the cold and refreshing taste of an iced coffee. Take a look. [Presentation]

The Café Bustelo brand has a unique culture and heritage. It is the #1 espresso coffee and the #1 Latin coffee. With this innovation, we wanted to ensure we were intentionally driving cultural resonance. The bottled silhouette is inspired by that of a greca or moka pot, a nod to the traditional stovetop method of brewing ground espresso. This innovation is a retailer exclusive and is already a top 5 product at that customer in the refrigerated multi-serve liquid category. We are focused on driving accessibility of Café Bustelo coffee to consumers across the U.S. through both geographic and format expansion. In frozen handheld and spreads, we use data-driven insights to discover an incremental opportunity to expand the Jif brand to meet the growing usages of spreads for snacking with Jif peanut butter and chocolate flavored spread. This new product leverages the plant-based halo, brand familiarity and nostalgia from peanut butter paired with the delicious flavor of chocolate. This merger made quite the headlines. See for yourself. [Presentation]

We can make fun of ourselves, right? Through data and insights, we found that over 70% of peanut butter buyers were not purchasing a chocolate flavored spread today and saw an incremental opportunity to leverage the Jif brand into a new format. The launch has exceeded our expectations. The product is the #1 new item in the entire nut-based spreads category and is on pace to be the largest launch for the category in over 5 years. We are also building on the success of Uncrustables sandwiches, which we anticipate to grow approximately $100 million this fiscal year, driven by our national advertising campaign, distribution gains and new merchandising investments to drive trial and awareness. Operations for our third Uncrustables sandwiches facility in McCalla, Alabama, are anticipated to begin in October. This expanded capacity will enable continued growth for the Uncrustables brand to approximately $1 billion in annual net sales by the end of fiscal year 2026. After being in a supply-constrained environment for years, we're now able to expand with innovation. We are excited to launch a new peanut butter and raspberry-flavored Uncrustables sandwich. Both are available in stores -- excuse me, we are planning to launch a new peanut butter and raspberry-flavored Uncrustables sandwich and a peanut butter-only Uncrustables sandwich. Both will be available in stores in the coming months, raspberry sooner and peanut butter only to follow. We will have some Uncrustables sandwiches available at the end of this presentation, including the new raspberry flavor. So please feel free to grab some before you leave. In pet, we continue to drive the humanization trend in the category by launching the first dog treat featuring a human brand, combining the #1 dog treat brand and the #1 peanut butter brand with new Milk-Bone Peanut Buttery Bites made with Jif peanut butter. This launch is already exceeding expectations and will be available nationally in January. Take a look at the new combination Milk-Bone Peanut Buttery Bites commercial. [Presentation]

Today's consumer views their pets as family members and enjoy sharing similar treating experiences with flavors and forms the whole family enjoys. With this exciting innovation, we continue to nurture this relationship and bond while driving growth through premiumization. In Sweet Baked Snacks, we continue the Hostess Brands' strong track record of innovation by launching Meltamors. The first product launched by the Hostess brand that could be microwaved, Meltamors transforms when warmed and offer a restaurant-inspired lava cake in a convenient and snackable product design. Recently, Meltamors was selected as a winner in this year's PEOPLE Food Awards as one of the Best New Snacks in Grocery. Across the company, innovation launched this year is anticipated to contribute over 1 point of growth to net sales to fiscal 2025, one of our most successful years of innovation in recent history. We continue to evolve our business to meet the needs of the consumer, while building strong leading brands they love with approximately 95% of our U.S. retail channel sales coming from categories where we have the #1 or #2 branded position. We create brands that are more than products. They feed connectivity and are an essential part of everyday life for families everywhere, with our products found in over 90% of U.S. homes. As we look ahead, I am excited for the future and the vision we have for the company and look forward to sharing more detail around our long-term strategy at our Investor Day on December 10. Our success continues to be powered by our focused strategy, unique culture, outstanding leadership team and dedicated employees who I, as always, would like to thank for their tremendous contributions. I will now turn it over to Tucker.

Thank you, Mark, and good afternoon, everyone. It's great to join you for this year's conference. I'm extremely proud of the progress we've made in recent years to transform our portfolio while navigating a dynamic operating environment. Guided by our strategic priorities of delivering growth for the core business, integrate and growing the Sweet Baked Snacks segment and achieving our transformation, cost management and cash generation aspirations, I believe that we are well positioned to deliver consistent and long-term growth for our shareholders. Our long-term financial objectives include low single-digit net sales growth, mid-single-digit operating income growth, high single-digit adjusted earnings per share growth and total shareholder return of approximately 10% or greater when considering our dividend policy. Long term, we anticipate low single-digit top line growth as a result of our strengthened portfolio. Sales growth is the foundation of our shareholder return model and is guided by our key growth platforms and the strategic choices we have made and where and how to play. Let me give some color on how each of our key platforms ensures our top line growth. We expect continued growth for our coffee portfolio, driven by the Café Bustelo and Dunkin' Brands and our K-Cup portfolio along with expansion into liquid coffee; the Uncrustables brand, which is expected to grow approximately $1 billion in annual net sales by the end of fiscal year 2026; our pet food business, which we anticipate 3% to 4% growth for, led by our leading brands, Milk-Bone and Meow Mix; the Sweet Baked Snacks segment, which is anticipated to grow approximately 4%; and lastly, we expect continued growth in our Away From Home business driven by these key platforms. Our transformation, cost discipline and cash generation objectives are now part of our stated strategic priorities, demonstrating the further emphasis that we are placing on each of these activities. With these priorities in mind, we anticipate adjusted operating income growth will outpace our sales growth, increasing at a mid-single-digit percentage over time. Operating income growth and margin improvement will be supported by 5 key focus areas: improved volume/mix from our reshaped portfolio, driven by divesting low-margin businesses, acquiring margin-accretive Hostess business and prioritizing resources toward our largest growth opportunities; benefits from our cost and productivity efforts, which will support both gross and operating margin improvement; the realization of approximately $100 million in synergies from the Hostess Brands acquisition, with the full annualized amount to be achieved by the end of fiscal year 2026; relief from stranded overhead related to the pet divestiture next fiscal year; and finally, we anticipate a moderation of commodity and input inflation over time. These focus areas will enable us to deliver gross margin improvement while supporting mid-single-digit operating income growth. Below operating income, we expect our capital deployment model to drive a high single-digit percentage growth for adjusted earnings per share as we pay down debt and repurchase shares over the long term. Our company has consistently demonstrated the ability to generate strong cash flow that allows us to take a balanced approach to capital deployment while maintaining an investment-grade debt rating. Our objective remains to generate at least $1 billion in free cash flow annually, which will be used to support the growth of our business, pay down debt and create shareholder value through dividends and share repurchases. Our long-term strategic target for capital expenditures continues to be approximately 3.5% of net sales. However, investments continue to be elevated this fiscal year compared to our target, primarily due to the new Uncrustables sandwich plant. In the near term, we plan to continue prioritizing debt reduction by paying down approximately $500 million of debt this fiscal year and in each of the next 2 years. With this anticipated deleveraging, achievement of cost synergies and overall business growth, we anticipate a leverage ratio of approximately 3x net debt to EBITDA by the end of fiscal year 2027. This level of debt provides the financial flexibility for a balanced approach to capital deployment, while maintaining an investment-grade debt rating and the flexibility to undertake strategic growth opportunities. Another key component of our capital deployment strategy is our dividend. We are proud to be a member of the Dividend Aristocrats, an index that includes companies that have increased their dividend each year over several decades. Our dividend has increased approximately 6% over the past 10 years on a compounded annual growth rate basis and in fiscal year 2025, we increased the dividend for the 23rd consecutive year. We expect our Board to maintain the company's current dividend policy, which is to return approximately 40% to 45% of our annual adjusted earnings per share to shareholders, reflecting dividend growth consistent with future earnings growth. In closing, we remain confident in our strategy and the ability to deliver continued growth across our portfolio, and we are well positioned to deliver consistent and long-term sustainable growth for our shareholders. Thank you. Andrew, I'll hand it to you.

Perfect. Thank you very much, Mark and Tucker. We've got about 15 minutes for some Q&A. And thank you for the Uncrustables, always a fan favorite. Maybe to start off, putting Hostess aside for the moment, even with last week's revision to organic sales growth outlook for the year, the company is still looking for comparable sales growth, excluding the impact of lower contract manufacturing sales for the year of about 2.5% versus 3% previously. And this is predicated on 50 basis points of volume mix and 200 basis points of pricing. And this is still ahead of what most peers in the space are looking for. I was hoping you could talk a bit about what gives you the confidence that this is achievable, particularly with the more challenging consumer environment you talked about on the call last week?

Sure. Yes. Let me start, Andrew. First of all, obviously, we're really encouraged by our track record of 13-ish quarters of continued growth in this last -- first quarter is no different. So we had a good quarter. Even in the face of a consumer environment where we are seeing a more cautious consumer, our portfolio has continued to perform and buoyed by the fact that we spent the last 4-plus years really transforming it and reshaping it, making sure that we could take out those things, which were going to drag down our aggregate growth. And so getting to a place now where we have a really strong portfolio, iconic brands, growing categories, and there's lots of bright spots. If you look at -- I talked about Bustelo. Clearly, Uncrustables is -- has continued to drive a lot of growth, obviously, unencumbered now that we are in full supply. Milk-Bone and Meow Mix have continued to perform. And there's just a lot of bright spots. And as you saw, obviously, we spent a lot of time today on innovation. We do fundamentally believe that not only the expanded distribution opportunities we have on products like Uncrustables, among other things, that we have the wherewithal, the right brand strategy and continue to focus on investing in these businesses for growth. So we're -- we think the future is bright.

Uncrustables, as you mentioned, has continued to be a really impressive growth engine. Now that the McCalla, Alabama plant is up and running, Smucker can really, for the first time, manage to demand rather than supply. I think you're supporting the brand with an incremental like $20 million of marketing spend on national TV and merchandising, a digital campaign as well as incremental promotion, merchandising spend. And it should drive awareness, trial, ultimately, household penetration. I guess how are these efforts gone so far? Do you believe these efforts have created the desired level of demand? And have you seen any improvement in awareness or household penetration?

It always surprises me that there are consumers out there who have -- not too many haven't heard of it, Uncrustable, but there still are many who haven't tried one. And so there is still runway to expand household penetration and awareness. And clearly, with this new campaign, which you see these 2 animated characters, the Bread Brothers, they take on a lot of different forms. They appear in a lot of different places, both on digital and social channels. And so we really are starting to see the traction there. Now that we have the capacity, obviously, we have -- we're going to be able to bring back or launch new flavors that maybe we had in the past or are truly new and so we're working on that. And then we're also really just encouraged by the fact that there still is a lot of distribution opportunities. Even in our traditional retail channels, we have continued to expand freezer space. In the Away From Home channel, we've got a lot of opportunity even in multiple school districts, among other places where Uncrustables can live and thrive, universities, for example. And then in Canada, which is a recent launch, that is the most successful product launch in our Canadian business' history. So just a ton of runway and continuing to [indiscernible] the demand creation is going to be really important for us.

On coffee, Smucker has a long track record of managing cost volatility to maintain solid profit levels and margins. I can understand the concern over whether raising prices further in mainstream coffee, which is certainly justified by inflation, could lead to softer consumption trends, particularly as the company has already seen some increased competitive activity in mainstream roast and ground. How has the consumer reacted to the recent price increases? What are you seeing from a competitive standpoint in the coffee category that sort of make you confident in the upcoming second round of justified pricing?

Yes. The first thing I would say is, we've seen this movie before, right? It's a coffee as a pass-through category. We've always been very diligent in taking our prices up or down based on the commodity. What you're seeing today is, we're not at record commodity price level. So our ability to very judiciously take price, we think, is the right strategy. Remember, we have multiple levers that we can use, whether that's trade, list price, we have the ability to flex our formulas to deliver cost savings and not pass on as much price while still delivering the exact same consumer experience. So just -- and I guess the other thing just from a pricing perspective is, we typically lead on price, which we've done in this case as usual. And we are now starting to see the competitors follow, which should provide a bit more stabilization in the category. And we'll see -- we should see some normalization in terms of shares and so forth. And then lastly, I would just point out, again, the innovation that we've had adapting our portfolio. We previously shifted it from traditional-only roast and ground to single-serve and K-Cup. Now we're in the process of transitioning our portfolio to more liquid. We've had Dunkin' concentrate executions and now more recently, the Bustelo liquid coffee, which is going very well also.

Fiscal first quarter Pet segment operating margins came in at just below 29%, well above the fiscal '24 margin of closer to 22%. Is it fair to think that the fiscal first quarter margin is the new baseline for the Pet segment? Or are there any one-offs that may have made margins in the quarter higher than we'd otherwise expect for the balance of the year?

Andrew, Pet had a great first quarter to our fiscal year, and one of the bright spots was the gross margin being approximately 29%. Really, what we're seeing is the benefits of transforming that portfolio over time, largely starting with the pet food divestiture, which has enabled us to prioritize our resources to pet snacking and to cat food. We're also seeing the benefits of an improved supply chain environment, particularly within our cat food portfolio. And we're seeing the benefits of cost and productivity savings flow through as it relates to our transformation office. As we think about the margin over time, two additional benefits will be as we begin to evolve from the co-manufacturing sales as we relieve that from the divestiture to Post Holdings; and then lastly, as we began to mitigate or remediate against the stranded overhead. So the long-term outlook is probably in the mid-20s to maybe slightly better than the mid-20s as we think about that portfolio.

Great. Maybe shifting over to Hostess. It's been almost a year now since the company took ownership of Hostess. And before we get into maybe recent top line trends, what have you learned about this business that maybe wasn't as apparent to an outside observer?

So it's an iconic brand, Hostess. And we, for several years, have really admired what the resurgence of the brand and the team, the Hostess team has been able to accomplish with that. I think there haven't been a lot of surprises for us. I think when we have brought the brand into our portfolio, we're very pleased with the performance of the business. We're very pleased with the integration. The integration is very much on track. The cultures of the 2 companies, there's a lot of similarities. And quite frankly, when you look at snacking trends, snacking continues to outpace total food. And even in indulgent snacking, the trends are such that you would presume that, that would continue as well. And so we've been very pleased with what we've seen, with what we've inherited. We do acknowledge that there has been a little bit of consumer slowdown, mostly in the discretionary categories. It has affected our business primarily in Hostess and in dog snacks, which is still growing, but albeit at a slightly smaller rate. These are items that, of course, consumers are being a little bit more selective about. Hostess specifically, we've seen a bit of slowdown in the convenience channel across the board. So that's really all of convenience, not just indulgent snacks. And we -- even within that channel, our shares have actually been performing very well. So I would say, overall, we view that the dynamic that we're experiencing right now is somewhat temporary. We do have plans as we get further on in the balance of the year to start to support Hostess through marketing, through new brand positionings, obviously innovation, and we do continue to believe there improved opportunities for distribution and Hostess. So still feeling really optimistic about the brand.

I think staying with Hostess for a minute. Your revised fiscal '25 guidance for the business is for flattish sales. And given first half expectations, this would require a pivot to perhaps low to mid-single-digit growth for the Hostess brand in the back half. Can you talk a little bit about some of the specific plans that sort of give you the visibility to this outcome in light of current results?

Yes. I talked -- I just spoke to, first of all, it's distribution, it's marketing and it's innovation. So if you think about those three things, that's where we're going to maintain the focus. And I think even at the store, store-level execution is really key. One of the things that Hostess has done an outstanding job of is making display easy for retailers, both in multiple channels. So if we can really focus on the fundamentals, brand building and then distribution and innovation, that really should help our business.

You touched on this earlier, but maybe the last one in Hostess is, current top line trends, sort of well below even the most conservative view of the brand's long-term growth potential. I mean how much do you attribute this to current consumer environment? And how much, if any, at all, is related to the brand itself or sort of execution? And overall, as you touched on before, how have market shares held up even in the context of sort of a weaker near-term category outlook?

Yes. I think it's pretty much what I said previously is that we do think that the consumer cautiousness is the primary driver right now. I would highlight, and I know we get asked this question a lot, there's a lot of questions about GLP-1 drugs. We study that very closely. We pull data monthly to look at a variety of metrics in terms of households. And even in the last couple of weeks, the most recent data would suggest that we have not seen any meaningful impact in terms of consumer behavior that is driven by that trend. It is truly a moment in time, we're in an election year, right? We're at a moment in time when the consumer just doesn't have as much discretionary income. But we are -- we could, again, remain very confident in the brand and our plans to continue to execute against it.

Right. A key growth initiative for Smucker has been the expansion into the newer fast-growth coffee formats, most notably liquid and cold. How are these efforts progressing? And is your view of this consumer trend changed at all one way or the other?

I think where I would start is that over 70% of cups consumed of coffee are still consumed at home. And so again, as we've demonstrated over time our ability to shift and evolve our coffee portfolio to meet the needs of the consumer, we're doing just that. And when you look at the different liquid executions, what's very interesting to us is that in these multi-serve formats, these large bottles, they may be concentrates, they may be single strength, if you will, consumer behavior is really to make customized drinks at home. Often those are hot, but more often they're -- we're seeing that shift to cold. And so even our own kids, yours and mine, are consuming coffee in these ways. And so we think we have the right brands. Obviously, Dunkin', we started with Dunkin' on concentrate. And now we're in the refrigerated single-strength format with Bustelo and so far, very pleased with the results there.

Great. Great. Throughout fiscal '24, Smucker called out consumer trade down and some of that in Pet. I guess what are you seeing in terms of trade down within Pet specifically more recently, if anything?

The -- so there's been obviously some competition. We have seen a little bit of trade down in dog snacks. But where our portfolio is very well positioned is that we play across that value spectrum, right? So we have -- if you look at the Milk-Bone brand, Milk-Bone as a treating occasion addresses multiple occasions, consumer needs, depending on whether that you want to occupy your pet or reward them, dental, all of those things. So we have a broad spectrum of meeting the need states as well as value to premium. So you saw the new innovation with Peanut Buttery Bites, that is more of a premium offering and you have base biscuits. So we have seen growth in aggregate on dog snacks primarily because we continue to offer the consumer [indiscernible].

Good. All right. I think that's all we have time for in here. Please join us next door in the breakout. And thank you, Mark and Tucker, for being here.

Thank you, Andrew.

Thank you. Thank you.