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

Good morning, everybody. Welcome to the 2025 iteration of the BofA Consumer Conference. We are in Miami for the third year in a row. My name is Peter Galbo. I am the packaged food analyst for BofA. I want to welcome everybody to the conference this year. We are delighted to have the folks from The J.M. Smucker Co. back with us this year. Last year, Mark, I think you were receiving an honor in Congress or you were bestowing an honor in Congress?

Our retiring government relations leader was getting a was getting an honor from Congress.

We're glad you're back.

It's pretty cool. Thank you.

Glad to have you back in Miami, but that's a cool -- that's definitely a very cool honor there. So with us today, we have Mark Smucker, Chairman and CEO; as well as Tucker Marshall, CFO, both back with us this year. So guys, thank you again for being here. We really appreciate it.

Our pleasure. Thanks for having us.

Mark, maybe just to kick off. You just reported your third quarter. You raised guidance on earnings. You're kind of back to where you thought you'd be from an EPS standpoint at the start of the year, around $10 a share. And Tucker, you gave some kind of helpful puts and takes on fiscal '26 back at CAGNY, some additional thoughts a few weeks ago. So I would just love to get kind of both of your perspectives coming out of the quarter just as a starting point of the discussion.

Yes, sure, Peter. Obviously, we've been in the public here several times over the last several weeks with earnings and CAGNY and what have you. But actually very pleased with our results. I mean, if you look at -- we've delivered both organic net sales growth in total with some net also supported by some pricing growth. We've had strong earnings that have been supported by just disciplined cost management. We've continued to support our brands through our marketing efforts. And so we're very pleased with the performance. It's mostly driven by our growth brands, Uncrustables, Café Bustelo, Milk-Bone, Meow Mix and the like. So overall, when you look at our legacy portfolio, it really is supporting growth in the company. On Hostess, obviously, we've been pretty clear that we haven't been satisfied with our performance on Hostess. Some of that has been some challenges in the category in total, some with our own execution. But we feel very good about the plans we have in place and the five pillars that we've outlined to get that brand back to growth and at least starting with stabilizing it. So overall, portfolio is in really good shape. We've worked really hard to get this portfolio where it is today and now supporting it and growing it is obviously the #1 goal.

Yes. Peter, we outlined at CAGNY our perspectives for next fiscal year. And really, that was in the spirit of being very visible and transparent about the elements that we were considering, particularly on the bottom line, because we have a lot of belief in the fact that we can deliver an above-algorithm year as you consider base business momentum and you work through the benefits of cost, and productivity and realize synergies and mitigate stranded overhead and pay down debt. But we're also acknowledging that we continue to live and operate in a highly inflationary environment with green coffee costs. And we are going to have to continue to navigate this environment through additional pricing actions, while also navigating the price elasticity of demand factors. That will be a headwind to volume growth year-over-year. And so that was really just in the spirit of outlining how we were thinking about next year.

Great. And we're going to get to coffee in a bit. I'm sure we'll have a lively discussion there. But Mark, two kind of higher-level topics, I just wanted to touch on with you. First one is tariffs, right? Obviously, it's been in the news quite a bit. Just a broad update in terms of how you're thinking about tariff news, any sort of reciprocal tariffs? You have a not insignificant size business in Canada, just and how those discussions and how you've been thinking about it?

Yes. So I think with any action that would impact us from a government perspective or regulators or the current administration, we monitor it all the time. It's changing daily. I think we have some exposure, honestly. But at the end of the day, I think we feel confident in our ability to manage through whatever comes our way, I would say that who knows what's going to happen? I think there's a bit of hope that some of the tariffs might be temporary in terms of trying to get countries to come to the table. So I think we want to manage it prudently. And as tariffs do come, not necessarily jump to conclusions right away, but make sure that we're monitoring how the discussions are going between various parties and make sure that we're taking the right actions to support our portfolio. We might have to take pricing. But until we see, I guess, tariffs that are truly sticky, I think it's going to be -- I think we just need to tread carefully before we start to take actions. We want to make sure that we understand what's really coming and what really impacts us before we react.

So a little bit too early to call it.

It's a little too early to call.

And maybe, Mark, just the second, kind of turning more broadly to the rest of the consumer. I mean, we're getting -- it feels like, a lot of mixed signals across companies, in general some resiliency, some weakness. Just maybe your thoughts on where we are from the overall consumer standpoint in the U.S. and maybe specifically just on the low-income consumer as well.

Yes. We do view that the consumer continues to be relatively cautious. I think they're being careful in terms of how and when they spend their money. They're being choiceful about the brands they buy. I think -- we feel really good about our portfolio, because we play across the value spectrum. I mean, if you look at pet and coffee, Hostess, all of these categories have products or brands that actually reach a value consumer as well as more premium consumers. Even coffee, I know we're probably going to talk about it in a minute, but coffee is still affordable when you brew it at home versus buying it out at a coffee shop. So we do think that our portfolio is really well positioned. But we have continued to see consistency in that cautiousness of the consumer. I wouldn't say the consumer is struggling necessarily but is just being more prudent about how they're spending their dollars.

On the low income, is there -- are you noticing any kind of discernible difference overall?

I think it's a little early to tell. I think with gas prices having come down a little bit, it will potentially support a bit of shift with some discretionary impact coming potentially back into snacking -- cautious in terms of predicting that, that's going to happen, but I would say we're cautiously optimistic.

Got it. So that's maybe a good segue into coffee. It's probably been the most topical area of the business, maybe outside of Hostess. Tucker, we've spent a lot of time talking about flexibility for further pricing with where green coffee costs have moved. Maybe a sense of kind of the building blocks of where we are in coffee, how we should be thinking about it conceptually next 12 to 18 months. And Mark, if there's any update in terms of the crop that you've seen coming out of Brazil, that would be helpful to discuss as well.

Yes. Peter, we continue to navigate an inflationary environment with green coffee. We took two significant price increases in this fiscal year. And as we think about next fiscal year, we will have to take additional pricing actions to recover green coffee costs. And our strategy has always been that we will recover the cost for the dollar cost inflation. First, because of the nature of the pass-through category, and we've consistently done that over the years both in an inflationary and deflationary environment. And so for next fiscal year, you can probably expect some net pricing growth at the top line, but we are going to see an impact at the volume level just because of the associated price [ versus demand ] factor. Historically, we've been about 0.5, and we've performed around 0.5 elasticity. But as going forward, we may have to consider a higher factor just by the nature of this ongoing inflation. And we really believe what's driving it are the supply and demand fundamentals with the associated commodity. That's about [ 50 ] tight stocks or supply against continued ongoing global demand for coffee. We don't see any structural changes with the underlying crop. We believe that this is truly a cyclical, cycle back over time. But our outlook isn't for deflation in the near term, rather continuing to live and operate in this inflationary environment.

And Mark, maybe to step a little bit outside of that, I mean, is there a difference -- there's been obviously a large discussion about cocoa cost. But the coffee farmers, I think, are paid a bit differently. There -- is there typically a pretty fast supply response from coffee-growing regions? When the price does get this high, you'll see the farmers kind of plant more quickly?

No. What I would say, so coffee trees, right, are -- they don't bear fruit for 5 years after being [ planted ], right? It's a little bit like grapes, wine, whatever. And so they are different. If you look at Brazil, Brazil is the -- obviously, the largest coffee producer. It's the only country that has large-scale farms that have mechanical harvesting. Everywhere else in the world is all generally small farms. About a hectare is kind of an average, they're very small, and everything is hand harvested. And so it's a very manual crop. The supply chain is very long. Obviously, being a traded commodity, there are many factors that obviously drive the price. We've seen usually over our winter months, we see speculation, which is not driven by fundamentals. We're starting to get into a period as the harvest is coming in or where fundamentals theoretically drive more of the markets, the market pricing. But because it's such a long supply chain, it's hard to read. So we are waiting to see how the crop continues to come in. Some of the mixed signals that we were getting around the crop are obviously led by Brazil, and those signals were they got the rain that they needed but the rain came too late. And so that's what drove some of these -- the coffee trading house is predicting lower crops. But we're at a point now where we need to get deeper into the harvest to really understand the absolute size of the coffee crop. But I think Tucker touched on this. It's important for us to continue to use all of the financial, the derivatives, the futures, to use all the financial instruments available to us to manage our actual coffee cost so that we can deliver our financial results. And that's really what we remain focused on. We do have offices, coffee intelligence offices. They are not trading offices, but boots on the ground in both Brazil and Vietnam so that we do -- obviously, ear to the ground, trying to understand and work with the farmers, work with the trading house to understand what the crop is really doing. But at the end of the day, it's all about making sure that we're managing the cost to deliver our financial goals.

So Mark, one of the interesting things that I think we looked at and have had conversations with Tucker and the team about, in kind of the past 2 coffee super cycles, whatever you want to call them, in '12 and '23, that elasticity factor that Tucker mentioned kind of was the case. It was -- roughly 0.5. I guess the question we get a lot of is in these really inflationary period of green coffee, do you see a lot of that trade in from the away-from-home coffee to at home? Like has that been your experience in what you've seen in the data? Or is that more of a predictive for this time around what you're expecting at all?

We haven't seen it in the data. But what is encouraging is that the amount of coffee that is consumed at home, the number of cups consumed has been very consistent, in that 70-ish, 70-plus percent of cups consumed remain at home. I think one of the trends that we've been seeing, particularly with Gen Z and some Millennials, is a tendency to actually try to replicate their favorite coffee shop drinks at home. If you look at some of our liquid offerings and Bustelo, in particular, and Dunkin' those liquid offerings really support that trend because mixing pre-brewed, liquid or cold coffee with creamer and sugar at home or even with froth, milk or cream, it's something that we are seeing consumers do at home because it's affordable. And now the tools and the pre-brewed coffee are available to them. And so we feel very good that our portfolio continues to be positioned very well and to really capitalize on those trends and make sure that we can keep the at-home coffee consumer in our portfolio.

The most interesting one that we've seen recently is the ready-to-drink protein shakes being used as a creamer for the cold -- you get the protein and coffee, right? Like we're all trying to consume...

It sounds like something Tucker would do.

Yes. Sounds right.

So Mark, that's a great segue maybe into Bustelo. It's been such a growth driver for coffee. Maybe you can just dig into why the brand is kind of seeing this level of growth and kind of the plans you have in place. I think you introduced some new innovation at CAGNY. But kind of how do you sustain momentum for Bustelo?

Yes, I mentioned the liquid. I think that's really important. Even the base business. We've quadrupled the brand since we acquired it in '11, 2011. It's an amazing brand. The history very briefly is Cuban family here in Miami had the Pilon brand. They acquired the Bustelo brand from a family in New York. It was -- Bustelo began in New York. And they did a nice job sort of establishing Bustelo and Pilon as a sort of a true Latin brand in both the Northeast and here and Southwest or South Florida. And what's special about Bustelo is the branding, the packaging, the retro feel, and the fact that it's rooted in that authentic Latin culture has really been the critical aspect of the brand. I mean, it is -- the characteristics of the product are that it is very strong, very dark roasted espresso ground coffee that stands up to lots of cream and sugar. And just that authentic heritage with the bright yellow package, and Angelina Bustelo, who is the character on the package, really speaks to younger consumers, particularly Gen Z and Millennials. And so that's where we're seeing a lot of growth. And then the multicultural as well. And so having now begun to do real advertising, we've created an entire animated world where a very authentic Latin vibe exists, and that continues to push the brand out. All of the marketing is bilingual. So everything appears in Spanglish or in both Spanish and English. and so really keeping the product true to its roots and the brand true to its roots is really what's helped to drive it.

Right. So maybe we can move on to Hostess. We talked a little bit about some of the executional issues as the integration has kind of been ongoing. Maybe, Mark, you can just talk a little bit about some of the learnings and what specifically you're kind of doing from an execution standpoint to drive improvement.

Yes, sure. So we talked a little bit about recently on the call that we still feel really good about the brand and its potential. We -- the divestiture of the Voortman business as well as the value brands, that portfolio allow us to focus, right? And that was part of -- one of the pillars was evolving the portfolio really to maintain that focus on Hostess, on the brand. And I mentioned earlier, we did see some softness in the category in total. The convenience channel was part of that. But I will say that as we work very hard to [ establish ] that brand. The integration is complete. And although we had some executional hiccups, we're largely through those, and we're continuing to make sure that our distribution network is solid, expanding distribution both in traditional grocery as well as convenience has been important. Driving revenue synergies is important. That has a lot to do with Uncrustables and getting Uncrustables into convenience. That's going well early. And then ultimately delivering the base business. I mean, at the end of the day, we have to continue to execute. We're turning on marketing in actually this month. So I know you guys have seen some of that at CAGNY. It should be actually on air here in the next couple of weeks. And so really continuing to support the brand and getting that brand stable. And then as we get into new -- there's new mod resets coming in traditional grocery, and so that should also support the brand as well along with innovation, limited time offering. So it's a lot but it's kind of all of the above is going to be required to make sure we get that brand back to growth.

And in terms of the leadership change that you've brought into Hostess, just what are the learnings maybe from the pet side that's being brought over to try and improve on Hostess?

Well, the leadership change in a nutshell was all about driving execution across those pillars that I just mentioned. That's plain and simple, that's what it's about. When we transformed the pet portfolio, Judd was the Vice President of Marketing under Rob Ferguson, who's now on coffee. Those two individuals were instrumental in making the tough decisions required on the portfolio as well as the investment choices on pet to really get that brand back to growth and ultimately double the profitability, at least double the margins because of all of the decisions that we made. So given the track record that Judd has and the momentum that he has been able to sustain in pet, gave us the confidence that he is the right leader to manage through a lot of these issues on Hostess and really bring that brand back to growth.

And just on innovation that's coming, and I think you said you're going to turn on some marketing in Hostess, just kind of what expectations do you have for the new products with Hostess? And kind of where are you kind of prioritizing the investments?

Yes. Innovation is really important on Hostess. One of the things that the Hostess team does really well is fast-cycle innovation. So they have demonstrated an ability to lean in and get new innovation in a relatively short period of time. Sometimes they're short of 6 months from concept to commercialization. The mini cupcakes and the fritter rings are two of the ones we talked about. Obviously, the fritter rings is a play on Donettes, but with sort of a country fair kind of vibe, right, with the fritter rings and they're really tasty. And then the mini cupcakes are great because it's about portion size. And if people are seeking for a bit of something sweet maybe don't want a whole cupcake, obviously, the portion size plays to that. And we're really going to continue to drive that type of innovation because we think that the consumer is going to continue to seek smaller pack sizes.

And Tucker, maybe just one last one on Hostess. On synergies, I think you're actually [ coming this ] year than your initial expected $50 million. Maybe you can just remind us kind of on the cadence of synergies and how you think about the incremental opportunity next year.

Yes, absolutely. So we are on track to realize $100 million in synergies, which was our objective at the time of acquisition, which is great. At the end of this fiscal year, we will have achieved $70 million of that $100 million, so about $20 million more than we anticipated for this fiscal year, which will leave a balance of about $30 million for next year -- fiscal year '26.

Great. Okay, Mark, now on to everyone's favorite, Uncrustables. And if you haven't seen, we do have some offerings in the back there, the chocolate hazelnut, the raspberry, the new innovations. The raspberry ones are...

Awesome.

And if you haven't seen the photos of them in [ Mike Dick's ] CAGNY e-mail, I think that was everyone favorite recap part of it. Mark, look, the business is on track to do $900 million plus of revenues this year. I think we've talked about the opportunity for $1 billion next year now that the McCalla facility is up. Where do we kind of go from here? McCalla is only in Phase 1. What's the incremental opportunity once you get a Phase 2 up? Any parameters we can put around kind of where that...

We definitely think there's growth beyond $1 billion. We have not laid out a number specifically on that, but I mean, I believe, I know the team believes there is significant upside. I think at some point in the future, we will be a little -- provide a bit more clarity on that. What I will say about McCalla is that first phase is complete. There's a second phase plan. All of that supports growth beyond $1 billion. Obviously, the marketing, the advertising is new as of about a year ago. So that is clearly supporting the brand. Lots of new innovation. There's a mixed berry coming. I think we've talked about that publicly, which would be like a limited time offering. So we are going to be able to cycle through potentially some LTOs as well as more permanent SKUs like the raspberry. And really feel good about the potential for the brand. Even in core peanut butter as a foundation of the brand, still lots of growth in terms of the size of the shelf set, in terms of the top line growth. And we've talked about how long it took us to figure out how to make these things in a profitable and mass-produced, high-quality way. And now that we're doing that, we can really fire on all cylinders and drive the growth.

And Tucker, is there incremental CapEx we should start to think about conceptually for a Phase 2? Or is that kind of in this year as we think about going forward on a Phase 2 build?

Yes. So when we laid out McCalla, it was in excess of a $1 billion investment several years ago. And we knew it would be a multiyear journey as we built out not only the facility, but also the phases within the facility. And as Mark acknowledged, we're finished with that first phase. So when we think about capital, it's already been planned in our long-range plan. In our commentary as well about it, it's going to take us several years to get down to that strategic objective of 3.5% of net sales was where our capital expenditure target. So it will continue to be elevated in '26 and [ '27, ] but it will come down as a percentage.

Great. Mark, maybe just on to pet. I want to get perspectives on the treats category, which I think has been just weaker as a whole across the spectrum. Just what have you seen so far in terms of what's been effective to drive any sort of incremental purchases? And what are your perspectives on just why the category has been as weak as it has?

It's -- so because it's discretionary like human snacks, that's the primary reason why we've seen a bit of softness with the cautious consumer that we talked about earlier. That said, what has buoyed our [ brand ] is innovation and the affordability of the base product. So if you look at base biscuits, it is still a very affordable way to reward your dog. And then the innovation has performed very well, like we've talked a lot about the Jif Peanut Buttery Bites, which actually has real Jif in them. And those executions are great. And if you think about all the different types of treats, Milk-Bone plays in just about every segment, whether that's the soft and chewy, the biscuits, the longer-lasting chews. All of those things are areas that Milk-Bone has the right to play and does. I think just to acknowledge, we had a bit of a softer quarter, but that was driven by some supply chain disruption that we had on the brand, which we're past now. And so back to production and getting into -- back into full distribution in this quarter, which is our fourth quarter, all of that would continue to [ grow ] the brand. So we still feel really good about Milk-Bone even despite we're seeing a little bit of a cautious consumer. If we continue to execute on the fundamentals and innovate, we'll see that brand continue to grow.

And then, Mark, maybe just to the other side of the portfolio, cat food has been a real point of strength. Opportunities that you kind of see still in expanding wet cat outside of the dry cat food business and just kind of how you can really tap into that further?

So first of all, on Meow Mix, the base brand is doing exceptionally well, and that's also just the base portfolio as well as innovation. The Gravy Bursts we've launched was sort of a play on both wet and dry together. So that's actually performing very well in market. We do play in the wet cat space. Obviously, we're not the leader. So we do think there is growth on wet cat and we will continue to drive that and continue to innovate as well in wet cat.

And just a few more before we -- I want to make sure we have enough time for some questions. Tucker, at CAGNY, we kind of went back through the long-term algorithm. Your free cash flow guidance, you're still sticking to the reaching kind of $1 billion free cash flow target. Just what kind of are the puts and takes there from a growth driver perspective, cost efficiency that's going to help you get there? And kind of how achievable is that goal just given all the uncertainty that we're seeing in the market?

Yes. So we remain committed to delivering $1 billion or more in free cash flow. And that's all in support of reinvesting in the business and also returning cash to shareholders. And when you think about the strength of our portfolio, what's going to drive that and give confidence is just, a, the base business growth or momentum; b, is you have the opportunity to sharpen the pencil within working capital, improve turns. And you also have the opportunity to see capital expenditures come down as we begin to get on the other side of capacity expansion for Uncrustables. And so as we return back to that 3.5%, that will all support free cash flow generation. I think, too, our priority in the near term is to support the quarterly dividend but also strengthen the balance sheet through debt paydown, while maintaining our current investment-grade debt rating. But then over time, as we get beyond FY '27 where we realize that 3x leverage or below, that also brings back the concept of share repurchases as well, which just endures to the balanced capital deployment model that we so desire to have.

And as a reminder, Tucker, this year, your $800 million of debt paydown and it's another kind of $500 million over the next couple of years.

That's correct.

Great. And Mark, just last one. One of the big questions we get about the Smucker's portfolio, it's been this journey over the past 5 years to kind of optimize. And there's -- you haven't been shy about moving, whether that's selling or acquiring. Do you kind of feel like now you have the right pieces in play, you're fully kind of transformed in the model you want to be? Or do you see kind of further portfolio reshaping going forward?

I'll answer that in two ways. I would say, first of all, we're really happy with where our portfolio is right now. I mean, we've taken steps in each, if not all, but most of our core businesses in terms of getting that right. So really happy with the portfolio, where it sits right now. Obviously, you've heard us talk about all the different things that we have in the hopper to continue to work on that, whether that's innovation and really continue to be focused right now on driving organic growth. That's where we need -- obviously, we're fairly levered, which we're going to -- we're working really hard to delever. So we're really focused on the organic growth at the moment. So that's the first part of the answer. The second part is we're never done. And so to the extent that we can continue over time and potentially a bit farther in the future to continue to add to our portfolio where it makes sense, we would consider that. But rest assured that for this moment in time, our focus remains on organic growth.

Great. So we've got a little over 5 minutes for questions. So if anybody in the audience has any questions, please, there is a mic going around. And I think Brian's going to give us our first one.

All right. So I guess first question -- two actually. One is just, Mark, there's been a lot of press covering the change in government administrations and maybe what the attitudes may be relative to the food industry. So I don't know, like early thoughts in terms of what you've seen and heard and should we be worried about things like ingredient changes or changes to government feeding programs? Just where does it stand on the risk spectrum?

It's -- so the short answer is it's early, right? So we don't know a lot of -- there hasn't been new regulations put out. We continue to engage with obviously the administration and the various regulatory bodies in Washington. I spent a fair amount of time in Washington. And we have always had really good relationships with policymakers. So I think I'm actually hopeful and I'm cautiously optimistic that continuing to nurture those relationships will allow us to work with the various bodies in Washington and come up with -- I think there's a willingness on both sides to listen and to try to work together to come up with, if there are changes, things that make sense for both the consumer and our industry. So we have a long history of working with policymakers and regulators. And I feel that, that constructive dialogue will continue.

I feel like there's opportunities for things to change, like putting aside -- nothing is perfect, right? So is this an opportunity to actually maybe change some things that you hadn't really thought of now that we're kind of opening the page?

One of the things that I -- that we will continue to advocate for is if there are new rules or new regulations, that we would really advocate for regulations at the federal level versus state, whether those are ingredients, labeling laws, whatever, anything like that. As you know, state often try to put out separate bills. So I think what we're focused on as an industry and with the association, there is Consumer Brand Association, is really trying to work at the federal level to get rules and regulations that apply across the country. And I think that creates a much more level playing field and keeps costs manageable.

That's helpful. And maybe just one last one. You think about the channels in the U.S. that are performing -- outperforming other channels, right? So it's larger -- it's Walmart, Costco, Kroger. The shift is to maybe larger, more efficient retailers and away from maybe some of the less efficient retailers, especially efficient in terms of your ability to serve consumers. So to the extent that this changes, does that open up more opportunities, whether it's in terms of working capital or cash flow or margins? If retailers are more efficient, is that a kind of a different world for you?

I don't know if you have anything. Yes. We work really well with all of them. And we have really good relationships with our retail partners. I think you've seen -- I mean, I think there was an article in The New York Times and The Sunday Times about one of the larger ones, which we all know who that is, and their ability to strength in an online business that is beneficial in terms of home delivery. I think there's been retailers that have succeeded in that home delivery model, I think have really done very well. And there's actually a few of them that are doing that very well. And then as we want to try to work fairly with each of them, and obviously, we have an obligation to do that. But where we can punch above our weight in terms of the brands that we have and the relationships that we can build, I think that allows us to be a better competitor and ultimately win in an industry that is ultimately super competitive. I think those relationships and really brand support and category expertise allow us to strengthen our relationship with all retailers.

Brian, I would add too. One of our objectives is every year is to build share winning or gaining plans with each one of our retailers, right? And you've got to sort of skate to where the consumer is shopping. And that's always been a key component of our strategy. And then when we do that, it enables us to have the right partnership with the retailer and to make sure that we are managing both growth and cash flow for the company with said retailers. And that's always been our strategy and will continue to be our strategy.

Great. We probably have time for one more, if there's any other. Okay. We'll leave it there. Mark, Tucker, thank you guys for kicking off the conference. Really appreciate it.

Peter, thanks. Really appreciate it.