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

All right. Welcome back. Please find your seats, we'll kick off our next fireside. I'd like to welcome back to our conference, The J.M. Smucker Company. With us today are CEO and Chairman of the Board, Mark Smucker, and CFO, Tucker Marshall, Mark and Tucker are going to go through some brief prepared remarks, and then we'll sit down for some questions. Mark, over to you, and thanks for being here.

Thanks, Andrew. It's always great to be back. And clearly, great to see everyone. Thank you for being here today, whether you're listening online or here in the room. We appreciate you guys taking the time to be with us. Tucker and I will provide some brief comments and then we will reserve the remainder of the time for your questions. But as always, please note that certain information provided today is forward looking based on current views and assumptions. Also, we use non-GAAP results with 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. So with that, let's get started. My commentary today will be centered around 3 key points. First, we are confident in the long-term growth potential of the company, driven by the strength of our portfolio of leading brands and the attractive categories in which we operate. Second, our world-class brand-building model continues to be an advantage for us as consumers turn to brands they know and trust and we continue to bring consumer-led innovation to market. And third, we are focused on delivering on our capital deployment model and our ambition to generate over $1 billion in free cash flow annually. Each of these reinforces the strong foundation we have established and demonstrates the benefits of our portfolio optimization over the last several years, through which we have fundamentally transformed the company. Our strategy is working. And while we are navigating through a dynamic environment, our portfolio continues to deliver top line growth supported by strong consumer demand for our leading brands. All of this leaves me with a high level of confidence in our ability to create long-term value for our shareholders. Let me share some examples of how we are prioritizing resources to our largest growth opportunities in each of our businesses through our key growth platforms: Cafe Bustelo, Uncrustables, Meow Mix, Milk-Bone and Hostess brands. Starting with the coffee segment. Our portfolio is performing well as we navigate record high green coffee prices and continue to demonstrate the ability to recover increased commodity costs through responsible pricing. Overall, price elasticity of demand trends have been favorable to our initial expectations and historical averages. This demonstrates the resilience of the at-home coffee category where we have a strong leadership position with 3 of the top 8 brands and reinforces the strength of our world-class brand-building model. We are focusing resources on the Cafe Bustelo brand, which continues to be one of the fastest-growing brands in the at-home coffee category. Cafe Bustelo has tremendous momentum which we continue to fuel through a national marketing campaign with creative that build upon the distinctive and unique Esta Aqui campaign. We also launched innovation through new roast profiles now in market. This includes medium and dark roast expanding from the brand's traditional espresso brew to blends that can be brewed more easily in traditional drip brewers so to appeal to younger, more diverse buyers while remaining authentic to its Latin roots. In cold coffee, we are providing consumers with convenient offerings to drive incremental occasions. We recently launched Cafe Bustelo multi-serve and we are launching the Cafe Bustelo brand into a single-serve ready-to-drink format later this month. Take a look at some of our new marketing. [Presentation]

Our proven brand-building model continues to give us confidence in our ambition for Cafe Bustelo to become a top 4 brand in the at-home coffee category. Our actions will increase brand awareness and household penetration, and we are excited about the opportunities ahead. Next, our frozen handheld and spreads business and the Uncrustables brand. This fiscal year, we anticipate growing annual net sales for the Uncrustables brand to over $1 billion. Growth will be driven by our brand-building model through a national advertising campaign, distribution gains and innovation. Let me touch on each of these. For marketing, we are still early in our journey, but the results are impressive. Since we turned on demand-generating activities, we have made significant strides in household penetration growth adding over 4 million new households in the last year alone. And the brand continues to infuse itself throughout pop culture and social media. Let's take a look at some recent influencer content at the Little League World Series. [Presentation]

From a distribution perspective, we continue to gain traditional freezer space and are also expanding into convenience stores. This new channel will not only provide more availability for the Uncrustables brand, but also unlocks the benefit of immediate consumption. Uncrustable sandwiches are now selling in over 30,000 convenience stores and more than 2/3 of the top 100 chains are either selling Uncrustables sandwiches or have committed to distribution. We are also seeing the benefits of accelerating our innovation efforts, Take, for example, the new Uncrustables peanut butter and Raspberry Spread sandwich. We anticipate this innovation will generate over $50 million in net sales this fiscal year and is proving to be highly incremental. We also launched a new Berry Burst variety for the summer and are excited to launch a new peanut buttered choco craze variety this fall, which we have in the back to taste. This regular cadence of limited edition flavors continues to generate excitement for the brand experience, and we will continue to bring consumer-led innovation to market. To that end, we are excited to announce we are launching a new Uncrustable sandwich variety focused on higher protein. We have already received strong retailer acceptance with distribution expected later this calendar year. Though our growth has been tremendous, we remain most excited about the future. The #1 SKU in the total frozen category is an Uncrustable sandwich with 2 SKUs in the top 10. The Uncrustables brand is leading the entire frozen category and new buyers for households with kids, Millennials and Gen Z. We are creating a truly iconic brand with widespread multigenerational appeal, which will soon be a top 3 brand in the total freezer aisle. For our Pet segment, we have leading brands in Milk-Bone dog snacks and Meow Mix cat food. Pet population trends continue to be positive and are expected to grow over the long term. And as the pet population has grown, so has the humanization of the category. We continue to drive this trend by launching the first dog treat featuring a human food brand, with Milk-Bone peanut buttery bites made with Jif Peanut Butter. This innovation exceeded our expectations and was the largest dog treat launch in the category last year. Given its success, we see a tremendous opportunity in this brand partnership as a platform for future growth. We will be extending the Jif and Milk-Bone brands collaboration with innovation launching early next calendar year. And we continue to focus on the next generation of pet parents that are still forming their treating preferences. The Milk-Bone brand is in a strong position as a trusted brand in the category to build deeper connections with these young consumers through culturally relevant and engaging marketing that matches their evolving media consumption. We are even partnering with superheroes. Take a look. [Presentation]

Shifting to cat food. We have strong momentum with the Meow Mix brand, and the cat category is experiencing tailwinds in pet population growth with U.S. cat households continuing to grow. Our innovation also continues to demonstrate strong results as we are elevating the mealtime experience through Milk-Bone Gravy Bursts. This innovation brings gravy indulgence to the dry aisle providing excitement for cats and convenience for pet parents. Meow Mix Gravy Bursts is the top dry cat category innovation this year. Next, the Hostess brand, where we are executing on our 3 priorities to stabilize and position the brand for long-term growth by strengthening the portfolio, elevating our execution, and reigniting sustainable growth. We are advancing this strategy by continuing to take decisive actions, most recently by reducing our SKU count by 25% to simplify our offerings as we prioritize high velocity and margin accretive SKUs. We are closing the Indianapolis manufacturing facility, which will deliver $30 million in annual cost savings. And we continue to apply our proven brand-building model through culturally relevant marketing and refreshed packaging. Our speakie snackie advertising campaign is is culturally relevant and speaks to the entire universe of sweet snackers. See for yourself. [Presentation]

Our new marketing campaign continues to deliver strong results with unaided awareness and purchase intent both increasing double digits for our target market. The campaign has also successfully increased consumer sentiment attributes around both taste and loyalty. These actions support our strategy by driving share and velocity performance and aligning segment margins with the company average. We are already seeing results from our strategy as base velocities are improving, we have returned to share growth at several key customers and segment profit improved sequentially in the first quarter. As we look to the future and reigniting sustainable growth, we are focusing on the unique areas of strength -- by evolving our demand creation strategy and shifting our innovation strategy to ensure we are strengthening the iconic parts of the Hostess portfolio. This includes Hostess Cupcake Minis and [indiscernible] Donettes. And we are bringing back the iconic Hostess Suzy Q's this month. We continue to apply our proven brand-building model to Hostess which remains an iconic brand with strong awareness, category-leading household penetration and beloved products. In closing, the investments in our brands, our portfolio optimization and our focus on our key platforms is driving top line growth and continues to give us confidence in sustaining momentum for the business. Our strategy is working and we are well positioned to deliver long-term growth and increase shareholder value. I'll now turn the discussion over to Tucker.

Thank you, Mark. Good afternoon, everyone. It's great to join you for this year's conference. As Mark highlighted, although we are navigating near-term dynamics, we continue to feel confident in the long-term growth potential of the company as we execute on our strategy and successfully manage those things that we can control. . We did exactly this in our first quarter and are pleased with our start to our fiscal year. Our first quarter results and business momentum, primarily in our coffee portfolio, gave us confidence to raise our full year net sales guidance to 3% to 5% growth compared to the prior year. Given the current external environment, we maintained our adjusted earnings per share guidance range of $8.50 to $9.50. The increase in our net sales guidance will be offset by what we anticipate to be a higher cost impact from U.S. tariffs. We remain confident in our ability to deliver consistent execution toward our financial targets. Turning toward our longer-term expectations, which is comprised of the following: 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. We see these objectives as steady, compelling and compounding including a commitment to a disciplined capital deployment model. Our company has consistently demonstrated the ability to generate strong cash flow that allows us to take a balanced approach to capital deployment in support of shareholder value creation, including investing in the growth of our business, paying down debt and returning capital through quarterly dividends and opportunistic share repurchases. Our objective remains to generate at least $1 billion in free cash flow annually. Business growth, working capital management and a reduced level of capital expenditures are the key components to achieving this. Our long-term strategic target for capital expenditures continues to be approximately 3.5% of net sales. Capital expenditures have been elevated for the last 5 years, primarily driven by our efforts to support the rapid growth and required capacity expansion for Uncrustables sandwiches. This fiscal year, we expect to finish at approximately 3.6% of net sales at the midpoint of our guidance range. We plan to prioritize debt reduction by paying down $500 million of debt annually this fiscal year and next. With this anticipated debt reduction and overall business growth, we anticipate a leverage ratio at or below 3x net debt to EBITDA by the end of our fiscal year 2027. This level of leverage provides the financial flexibility for a balanced approach to capital deployment. Finally, we remain committed to our dividend which has increased at a 6% compounded annual growth rate over the past 10 fiscal years. In July, we announced that we increased the dividend for the 24th consecutive fiscal 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. Our capital deployment model also enables us to reinvest in the business and fund our largest growth opportunities while delivering sustainable returns for shareholders. Looking forward, we remain committed to delivering total shareholder return of approximately 10% or greater over the long term. In closing, we remain confident in our strategy and our 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 for your time today. Andrew, I'll hand it to you.

Thanks very much, Mark and Tucker. Maybe to jump in, Smucker just reported fiscal first quarter earnings last week. What are the couple of key takeaways that you want investors to come away with from recent results?

Well, Andrew, first of all, I would say obviously, in our prepared remarks, we really are focused on delivering our strategy. And as you know, we've been on this journey for the last few years to really get our portfolio focused and where we think it needs to be to deliver that growth, and we're very pleased with the portfolio as it stands today. And we're delivering on our commitment and our own expectations in terms of what we put out there for guidance. And we increased our guidance. We delivered in the quarter, 3% comparable growth, and then raised our top line guidance by 1 point based largely on the performance of coffee and supported by Uncrustables and our performance on Meow Mix. And so just despite the fact that we're in this very uncertain environment where costs are changing, you have highly elevated coffee costs, we have tariffs, we have other factors at play. The fact that we've been able to continue to deliver organic growth is one of the most important things that we really want to communicate to our investors and our confidence and our ability to sustain that over time.

The company delivered comparable sales in fiscal 1Q, certainly well above your initial expectations. Results were a bit nuanced, as you mentioned, because obviously, there was really good strength in U.S. Retail Coffee, which helped drive the upside. The other retail segments were a bit below track consumption data. I guess sticking with coffee for the minute, some of the upside was largely due to volume elasticity that so far has been more modest than initially forecast. What are you seeing in the coffee category overall right now in terms of consumer behavior in response to the industry pricing? And why is it do you think that elasticity has held up as well as it has so far? .

So answering the last part first. again, we have great -- we have a great coffee portfolio. We play across the spectrum of value. We have premium brands. We have more affordable brands and overall, the -- our portfolio is performing. Part of the reason why we see consumption still reasonably solid is because it's affordable to drink coffee at home. Despite the significant inflation, we continue to see about 70% or more of cups consumed are consumed at home. I mean the cup of coffee that you brew in a regular drip brewer is about $0.10 to $0.15 a cup versus what you might -- if you go out for it or if you -- in other forms. And so it's still very affordable. We're pleased with the elasticity performance. But what we want to make sure that we remind our shareholders is that we are at a moment in time with the most significant coffee inflation that we've ever seen in history. And prices have never been at these levels for green coffee. And so as you know, we've taken multiple price increases. On top of that, you've got tariffs. Recently, you have new tariffs as it relates to Brazil specifically, where 1/3 of the world's coffee has grown. And so because of the significant pricing, obviously, the underlying cost, we feel that we just have got to take a very prudent approach, and we are not projecting beyond sort of normalized elasticities going forward, because we expect the inflation is going to continue. And then eventually, and no one knows when we may see some moderation. .

Yes, makes sense. The company is able to deliver EPS certainly above expectations in the first quarter, but you maintained your full year outlook. And a lot of this had to do with what's been obviously favorable coffee elasticity thus far, but being offset by some incremental tariff pressure. I guess moving forward, assuming tariffs stay where they are, if the company is able to continue to over deliver on the fundamentals, perhaps elasticity, assumptions continue to prove conservative, we'll see. How do we think about the upside that could flow through to the bottom line. Obviously, EPS is expected to be lower this year year-over-year, again, because of inflation. I'm trying to get a sense, will the company try and recoup as much of earnings as it can? Or would you lean further into reinvestment given the still dynamic consumer environment. Trying to get a sense whether, as you mentioned, fiscal '27 has the potential I mean on how things go to be well above kind of algorithm mirror?

Yes, Andrew, we're very pleased with our first quarter results. As Mark shared, largely driven by the performance of our coffee portfolio. And that portfolio is really just demonstrating the resilience of not only the category, but also our brands within the category. And our outlook for coffee is a key driver to our full fiscal year and elasticities for our summer time pricing have really come in better than anticipated. We're sort of taking a historical view in our late summer pricing activities and we're taking a little bit of a greater than historical view on the price elasticity of assumption for the kind of the winter months in terms of pricing. But as we think about delivering our fiscal year, we think that we have a prudent guidance out both in top line and bottom line. I think the important thing is for us to take it quarter-by-quarter to understand not only the performance within U.S. Retail Coffee, but also the balance of our portfolio. We will always balance return and reinvestments from a bottom line standpoint. We understand the importance of building back earnings over time, but we also understand the importance of investing in our brands in our portfolio. And we would also share that we should see sequential improvement, not only from a bottom line standpoint throughout our portfolio as we go through the balance of the fiscal year, but we will also see the margin profile within our U.S. Retail Coffee business improve as we get to the fourth quarter as well. We think all of this bodes well to not only set up the long-term success and health of the company, but really to begin then thinking about what the outlook could look like for next fiscal year.