The J. M. Smucker Company ($SJM)

Good morning, and welcome to the J.M. Smucker Company's Fiscal 2026 Fourth Quarter Earnings Question-and-Answer Session. This conference call is being recorded. [Operator Instructions] I'll now turn the conference call over to Crystal Beiting, Vice President, Investor Relations and Financial Planning and Analysis. Thank you. You may begin.

Good morning, and thank you for joining our fiscal 2026 fourth quarter earnings question-and-answer session. I hope everyone had a chance to review our results as detailed in this morning's press release and management's prepared remarks, which are available on our corporate website at jmsmucker.com. We will also post an audio replay of this call at the conclusion of this morning's Q&A session. During today's call, we may make forward-looking statements that reflect our current expectations about future plans and performance. These statements rely on assumptions and estimates, and actual results may differ materially due to risks and uncertainties. Additionally, we use non-GAAP results to evaluate performance internally. I encourage you to read the full disclosure concerning forward-looking statements and details on our non-GAAP measures in this morning's press release. Participating on this call are Mark Smucker, Chief Executive Officer, President and Chair of the Board; and Tucker Marshall, Chief Financial Officer, Executive Vice President, Frozen Handheld and Spreads and Sweet Baked Snacks. We will now open the call for questions. Operator, please queue up the first question.

[Operator Instructions] Our first question today is coming from Andrew Lazar from Barclays.

Maybe to start, I know one of the biggest points of uncertainty for the group currently is really the macro outlook and what that might mean for costs. Understanding the challenge of needing to guide to a full year in the context of this environment, I guess I'm curious what sort of visibility you have to your low single-digit inflation outlook, excluding coffee in terms of hedges and such? And is there a risk that this estimate could ultimately be higher as we move through the year if sort of the macro environment persists and sort of the offsets that you might have in terms of productivity generation to manage through that?

Andrew, thank you. As you've noted, within our full year outlook, we do expect mid-single-digit percentage deflation. And again, that's largely driven by green coffee. But as you've shared, excluding green coffee and tariffs, we do anticipate cost inflation of low single digits across the balance of our portfolio. And that's largely coming through packaging, ingredients and transportation. And we have embedded our best outlook for those increases in our current guidance. And as you know, in any given fiscal year, we'll monitor and address any additional cost inflation either through how we procure the given item or how we think about our hedging strategy, along with ongoing cost and productivity savings, inclusive of taking pricing when and where appropriate. And so right now, this really reflects the best estimate. And again, we look to absorb these changes within our total guidance range. And just acknowledging that the primary driver of this is the geopolitical tensions in the Middle East. And depending upon the duration of those does have an implication to the cost outlook and how we manage over time.

And then in coffee, given the expected mid-single-digit price decline or price realization year-over-year for the coming year. I guess, why wouldn't we expect a somewhat greater volume outcome or volume improvement with pricing moving lower?

Thanks, Andrew. I'll take the second question. This is Mark, of course. I can't help but at least comment, first of all, that we had a great quarter and a solid outlook for our new fiscal year. And so just feeling positive about the momentum in our business and overall, the portfolio that we have being both complementary and cohesive just because we play in different categories, but they all work together to achieve a great hole. And then specific to your question just on coffee, it is a great category. We continue to lead the category across segments and the value spectrum with Bustelo being a very significant growth brand now beyond $0.5 billion in sales. So just confident in our ability to continue to manage our branded position in coffee as well as our or commodity. And as we noted, we do expect to see profit improvement in coffee from the moderating commodity. And as it relates to how we're thinking about forecasting the business, we really just wanted to be, frankly, prudent in terms of how we're factoring in elasticities we acknowledge we did have some favorable -- more favorable than expected elasticities in the inflationary period, but just acknowledging that the consumer continues to be cautious we wanted to be prudent in how we model the deflation. And as we are starting to give back some pricing to the consumer in the form of trade just making sure that we're thinking about those elasticities and the trends in the category from a prudent perspective. So that's really the driver there.

Your next question today is coming from Peter Galbo from Bank of America.

Mark, I was hoping to press a little bit on that last point you made around prudence as it relates to the top line guide for the year, obviously talking about flat sales in the first quarter and then a deceleration, I suppose, to get to the full year down 3% to 4%. So understanding that maybe there's some prudence baked into the coffee side of the equation. Maybe you can just touch a little bit more on prudence in the other segments, particularly, I think frozen handheld may be down despite Uncrustables growth potential. Just if you could provide a little more detail there, please.

Sure. So if you think about our frozen handheld and spreads business, I think it's important to think about that business holistically, right? Because we are seeing a little bit of pressure in spreads, but our Uncrustables brand continues to perform very well. And so it is -- if you think about that holistically, it's a peanut butter and jelly story, it's a sandwich story, right? And Uncrustables, we hit $1 billion. So we have a tremendous performance in Uncrustables and we do expect to continue to see growth in the Uncrustables brand, and that's going to continue to be driven by the breadth of our position in the frozen category, both -- and that includes our offerings, the fact that we're addressing consumer needs, both through flavors, through format and also different occasions, notably with the higher protein sort of morning offering, if you will, and now fridge friendly. So our position in Uncrustables continues to give us great confidence that we will continue to see growth it won't be double-digit growth, but nonetheless, as the leader in the category with the strongest share of voice, we do continue to believe that there is runway both through distribution household penetration, innovation and then ultimately, strategic investments in supporting the brand through our brand-building efforts. So again, great confidence in Uncrustables overall. And then just the total spreads handheld category being more about that PB&J total story.

Okay. And just as a follow-up, Tucker, there's obviously been some trade press around potential further actions on a portfolio review basis as it relates to the Hostess business. Just curious, as you all are evaluating potential options, just how you're thinking about portfolio construction and potential for further actions across the portfolio.

Yes, Peter, it's Mark. I'll take that as well. As we think about our portfolio in general, we've been on this journey for quite some time in terms of our portfolio. We always consider the makeup portfolio and so that's something that is important to us. But what I would focus on right now is as it relates to Sweet Baked Snacks and Hostess, our focus continues to be stabilizing that business. and improving profitability. Notably, we have strengthened the portfolio in terms of SKU rationalization. Obviously, Donettes grew 13% and represents about 40% of the portfolio. So that breakfast occasion for Hostess continues to perform very well. I would also highlight that we did complete our manufacturing footprint consolidation. And although we did have a fire in the prior quarter, we did recover from that more quickly than expected. So definitely some positive indicators, some innovation, notably Suzy Q's, among some of our other seasonal and LTO things, we're going to continue to focus on stabilizing the portfolio. It's going to take some time, and it's going to take a bit of time until we actually see top line growth but suffice it to say stabilizing the business and improving profitability is where we're focused right now.

Next question is coming from Tom Palmer from JPMorgan.

In the prepared remarks, you gave some specific margin expectations for coffee and Sweet Baked Snacks. I wonder if you might give some added detail for frozen handheld spreads and Pet segments. So for Pet, do you expect low single-digit top line growth to translate to profit growth? And then for frozen handheld to what extent might the margin strength of the fourth quarter be sustained into 2027?

Yes. Tom, as you think about the construct of our $0.85 EPS growth year-over-year. What you're really seeing is $0.75 coming through our business portfolio, which is driven by segment profit growth from both coffee and Hostess being offset by frozen handheld and pet. And really, when you think through that is coffee growth year-over-year is largely coming through lapping unmitigated tariffs and in the green coffee deflation that is beginning to materialize through the portfolio. Hostess' growth year-over-year is largely driven by improved cost outlook, inclusive of a list price increase to cover cost inflation. And then frozen handheld and spreads will be down year-over-year as volume momentum in Uncrustables is offsetting the spreads portfolio, but also as we continue to make strategic investments across Uncrustables and we support marketing of that brand as well. And then within the Pet portfolio, we see continued volume momentum across both the Meow Mix and Milk-Bone, but we are also making investments in terms of marketing and the inflation that we're experiencing is largely impacting our pet portfolio. And then lastly, as you just think about the momentum of the portfolio, we do expect the Away From Home business to roughly be flat year-over-year from a profit standpoint.

Great. I did have a follow-up on marketing. I think relative to what was laid out in the third quarter, marketing was a lot lower in the fourth quarter. Just any color on the decision to pull back in the fourth quarter and kind of how quickly it ramps up to start out the year?

Yes. So we are committed to supporting the growth of our brands and to develop our brands through ongoing marketing. And we've called out that we're about 5.7% of net sales for the upcoming fiscal year. It's going to look like up $30 million year-over-year, almost $0.5 billion spend. And it will be fairly balanced throughout the year, but it will begin in our first quarter in terms of those investments to support the portfolio. And I would just say there was nothing abnormal in our fourth quarter. It's probably more just around timing and focusing around various activities. But again, we are committed to the portfolio and the spend of those marketing dollars as we move forward.

[Operator Instructions] Our next question is coming from Robert Moskow from TD Cowen.

Tucker and Mark, there's some comments about what the transformation office is up to, they're rather brief. And a lot of your peers are doing some accelerated work to reduce overhead costs and you might have some opportunities that you want to get to. Is there anything that you're looking at to accelerate the efforts of the transformation office, if not in fiscal '27, maybe even a year from now?

Yes, Rob, we remain committed to ongoing in annual cost and productivity initiatives. And I would say that each fiscal year, we target a gross cost savings amount that is a couple of points of revenue to support either reinvestment in the business to cover inflation or to ultimately return to shareholders. As we think about the ongoing positive momentum of our transformation efforts under Rob Ferguson's leadership, he's really thinking about the next generation, which is refilling a multiyear pipeline and really began to focus on really 2 areas, I would say, our make -- our key word to refer to it is our buy, make and move environments within our supply chain. And also how we think about bringing technology forward to advance our cost picture as a company. And so over time, we will be able to share more with you and others as we think about sort of the next phase of our transformation efforts.

Your next question today is coming from Chris Carey from Wells Fargo Securities.

I wanted to start with coffee and just get a bit more context on the pricing actions. So first is just from a timing perspective, at what point are you transitioning from trade spending into with price reductions. And then is that pricing strategy happening across the portfolio? Or is it primarily focused on the roast and ground piece given the proximity to the actual green coffee commodity?

Chris, thanks. It's Mark. No, we -- coffee is a pass-through category, right? So we do pass through up and down costs to our customers and our consumers. We always are -- we do it prudently. We do it in a justified manner. When we speak with our retail customers, we certainly are going to have conversations that are fair and justified as we take those. As I did mention, and you point out currently focus a bit more on trade. We can't commit to specific timing, but what I will tell you is when we do cross key thresholds that are essentially dictated by us, the timing of when we take physical inventory of lower-cost coffee, that would dictate when we would actually take a list price decline. But we want to make sure that we, of course, continue to take a measured approach that also supports our financial goals for the year and our ability to both be fair with our customers and consumers and of course, deliver some degree of profit recovery, which you've seen in our guidance.

Chris, I would also acknowledge from a flow standpoint, if we've called out a down 3% to down 4% of top line net sales, in our prepared remarks, we talked about our first quarter being flattish. We'll really begin to experience the deflation associated with green coffee and our second quarter onward. Just to give you a sense of kind of the flow through the year from a top line standpoint.

Okay. Understood. The second question is on Sweet Baked Snacks. The outlook for the year I think, implies something in the 30% growth range from a profit perspective, given the margin improvement you're expecting thereabouts anyways. The visibility of this business has been a bit challenged in recent quarters. Can you just give us a sense on your ability to forecast accurately this business? How do you feel about that? How did fiscal Q4 come in relative to your own expectations? And maybe a bit more context on the confidence that you have in a strong profit acceleration for the business in fiscal '27.

Yes, I'll start and maybe pass it to Tucker if he has anything to add. We've gotten our arms around this business in terms of visibility, as you point out. Last year, we did have some challenges with trade and the timing of that. I think we've done a very nice job and I have to give the team and judge a lot of credit just in terms of how we're managing through this, both in terms of the production network, the consistency of how we're producing the products as well as how we are consistently managing our customer and trade relationships.

And Chris, I would acknowledge that your direction of up about 30% year-over-year from a segment profit standpoint, is correct. We believe that we continue to work to control costs within our bakery environment. We continue to focus on executing the best level of trade against the brand or the portfolio. We are taking a list price increase across the Donettes portfolio in certain select areas. And as we think about the objectives for this year, it stabilized the business and achieve our profit targets and then over time, work to growth across the portfolio. But we also acknowledge that we will continue to deal with both headwinds and tailwinds. But we're confident, as Mark said, with the visibility that we have and the fact that the teams have their arm around -- their arms around, excuse me, what needs to be accomplished.

Our next question today is coming from Max Gumport from BNP Paribas.

First, I just wanted to talk about the Spreads business. You called out this partly due to broader category dynamics and partly due to the decision not to repeat certain promotional activities. So I was hoping we can get a bit more color on both the -- so one, what you're seeing in the category. And then two, on this decision not to repeat promo activity. We've heard others in the industry talk about consumers waiting to buy in promotion and that leading to poor returns. Are you seeing this dynamic as well?

Max, our Spreads business, obviously, is a key component of our frozen handheld and spreads. And what I would tell you is having chosen not to repeat some of the promotional activity, the behavior of the categories themselves as well as competition within there continues to be mostly rational. We're not seeing unusual activity. In the peanut butter category, specifically, obviously, we're the leader in both categories. And some of the softness that you have seen in the peanut butter category was in part driven by some volatility. There have been some weather events, some stock up because of storms and so forth. We do not believe that this is structural in the peanut butter category. We think that those are generally one-off events, and we will continue to focus on our leadership position in the peanut butter category by continuing our strong share of voice and brand building efforts and just reminding the group that we do play across that entire segment. So having the leading stabilized peanut butter and then also 4 of the 5 leading brands of natural and organic peanut butter, we are well positioned. And then notably, we just launched this Jif Simply product, which is a limited ingredient stabilized peanut butter, which again, is intended to lead where the consumer, in some cases, is moving towards. So we feel very good about the portfolio in peanut butter and spreads broadly. And then over the coming year plus we will continue to make strides to improve our Fruit Spreads business as well. But I would think about both the Peanut Butter and Jam segments as foundational to our total Frozen Handheld and Spreads business.

Great. Really appreciate all that color. And then on Uncrustables and the Fridge Friendly format that we'll be launching very shortly. Just curious if, one, if you've got any insights on how -- on retailer reception and maybe even pipeline fill and then how that is working. And then also if you're able to quantify what exactly is embedded in your outlook from this innovation. And as also relaying just any difference in the margin profile of the Fridge Friendly versus the [ core part ].

So first of all, thanks for the question. Great reception on Fridge Friendly, right? So both consumers and customers look to be very excited about that. Keep in mind that all Uncrustables will be fridge friendly. So we are transitioning every sandwich to that format and the entire portfolio probably in the mid-summer time frame were very close. Everything you see in the stores should be pride friendly.

Max, as you think about Uncrustables now being a $1 billion brand total company, our outlook for that business for FY '27 is mid-single-digit growth, which is really driven by volume mix momentum just partially offset by some strategic investments. And then as you think about the composition of the portfolio, about 75% of Uncrustables go through traditional U.S. retail sales and the balance of 25% go through Away From Home, we'll see a slightly faster growth rate in Away From Home, just based on its relative size and incremental opportunities as we have prioritized over the years, the growth in U.S. retail ahead of Away From Home. But it continues to be a bright spot for the company and a very positive story and we see great momentum across the portfolio through innovation. And the one example of innovation is the Fridge Friendly.

Our next question is coming from Megan Clapp from Morgan Stanley.

Maybe to follow up there, Tucker, just on Uncrustables in terms of the strategic investments with price being down slightly. I believe you took a price increase on the brand. I think it was the first time in 3 years last year. So just in the context of that, can you maybe just unpack a bit more about where those investments are focused specifically?

Megan, over time, we've talked about the importance of advancing the volume growth momentum of the portfolio, both in traditional retail and Away From Home. And we're doing that through base distribution. We're doing that through innovation. And at times, we're also doing that through pricing as well. And pricing is not only strategic, but it's also to recover some inflation as well. And so as we move forward, the important thing for us, and we've talked about this on the last couple of earnings calls, over the last few fiscal years is just to acknowledge that we need to continue to make sure that we have the right price and promotion, i.e., merchandising. We need to make sure that we advance marketing behind the brand. And we will continue to absorb ongoing manufacturing costs as we bring on additional capacity to support the future growth. And so this fiscal year is really just a demonstration of now growing off the $1 billion mark where we're seeing nice volume momentum, but we will strategically make the right decisions around pricing to support the brand in its growth and overall momentum in the portfolio.

Great. That's helpful. And then maybe a follow-up on tariffs. In the prepared remarks or in the release, you mentioned that the outlook does not assume any impact from tariff refunds at this point. Could you just maybe give any [indiscernible] around the potential opportunity there? Have you applied for refunds? I think it depends on whether you're in the direct importer of record or not. And just help us understand anything in terms of timing or magnitude that you could share? And if refunds were to materialize, would you expect that could flow through to the bottom line? Or would you be more inclined to reinvest some of that?

Yes. Megan, big picture, I would acknowledge that we experienced tariffs in FY '26, and we continue to experience tariffs at a 10% level in our FY '27 outlook. We are pursuing tariff refunds previously paid. But honestly, the scope and realization remains uncertain. And we've just made the decision not to factor any of these decisions into our outlook, and we're continuing to monitor and assess any changes to existing tariffs or new tariffs, and we'll continue to provide updates over time. But I think at this point in time for us to make any declarations is probably not appropriate just as we navigate the overall environment.

Your next question is coming from Scott Marks from Jefferies.

First thing I wanted to ask about, just in the quarter, as we think about both the Frozen Handheld segment and the Pet segment profitability, I think they came in materially ahead of what folks were expecting. Just wondering if you can help us understand the drivers of that and maybe quantify the magnitude of contribution from those drivers?

Yes. We had roughly a $0.15 sort of overdelivered expectations in our fourth quarter of last fiscal year. And I would say we saw some volume benefit, we saw a little bit of an improvement in our gross profit margin and then we work to control our SG&A expenses in the quarter. What we saw in the fourth quarter on frozen handheld and spreads was just nice momentum across our Uncrustables portfolio as we continue to support and advance that brand. And Pet came in nicely just due to the underlying momentum in Meow Mix seeing some signs of stability in snacks, but also acknowledging to their ability to control costs in the quarter as well. And I just think those elements enabled us to finish a strong fiscal year and carry that momentum into our current fiscal year as we announced our guidance today.

Okay. Appreciate the color there. And then just second one for me. I know you gave some commentary around Q1 expectations as well as expectations for Coffee segment, kind of top line cadence through the year. As we look maybe through the rest of the business, the other segments, marketing spend, SG&A, how should we be thinking about cadence as we progress through fiscal '27?

Yes. So as you think about earnings per share, we talked about a kind of a mid-teens Q1. I would just acknowledge that our second quarter will be better than mid-teens. And then our third quarter would be sort of low single digits. And then our fourth quarter would be flat to slightly down as you think about the flow over the year, and again, that will change directionally because we're not trying to sort of articulate quarterly guidance, but we understand that you kind of have to model sort of the outlook. So hopefully, that provides some context. And we're certainly happy to follow up with you post call here.

Next question is coming from Rob Dickerson from BTIG.

Just to circle back on coffee, I guess, one more time. Tucker, just given all the comments you've already made on the call today, it's a very easy clarification question. I know you had stated in the prepared remarks that retail coffee will return to the high 20s in fiscal year '27. But clearly, it sounds like the real benefit starts to come through in Q2. So I'm assuming the assumption here is that Q1 is a little bit more muted and then really that benefit in high 20s is really like a Q2 to Q4. Is that fair?

You're correct.

All right. Simple enough. All right. And then just -- I guess, just to kind of touch on capital structure, kind of where you stand, haven't talked about yet in the call. Did almost $1.2 billion of free cash flow in '26, which was great, almost company high. Now we're looking for, I guess, around $1 billion in fiscal '27 inclusive of probably some of the inventory benefits, especially on Coffee. And you just paid down, I think, $500 million or so in debt in the back half of the year in '26. So kind of like as we think about any capital, real capital needs in '27 vis-a-vis the free cash flow. Like is this -- are we at a point now or maybe you feel pretty good about your leverage? You don't have as much of a deleverage need. And I know you kind of called out the guidance excludes any type of share repurchase. So just trying to get a view as to -- got to where you would like to place any of the excess capital and kind of how that relates to where the [indiscernible] stock price is.

Yes, Rob, we remain committed to our financial priorities and policies and to generating $1 billion or greater in free cash flow in support of our cash deployment model. And as you noted, in fiscal '26, we had $1.2 billion of free cash flow. That benefit enabled us to pay down over $700 million of debt and pay just over $450 million of dividends. So as we move forward, we remain committed to free cash flow generation after capital expenditures, which are roughly flat year-over-year at $325 million. We want to make sure that we support the quarterly dividend and grow it where and when appropriate. We also acknowledge, too, that we want to pay down an additional $500 million of debt because that will support getting down to around a 3x leverage profile by the end of this fiscal year. And as a reminder, we exited this past fiscal year around 3.8x. As we began to achieve our leverage objectives, that opens up additional opportunity for capital or cash deployment where we could contemplate potential share repurchases in the future.

We've reached end of our question-and-answer session. I'd like to turn the floor back over to Mark for any further closing comments.

Thank you, and thank you all for joining us this morning. As we shared in our prepared remarks, our fiscal year '26 results highlight the strength of our focused strategy and portfolio optimization efforts, and our differentiated portfolio is delivering results. We are pleased with the momentum of our portfolio as we enter fiscal year '27. Our focus is on our 3 strategic priorities of driving focused organic volume growth across our key platforms, improving profitability and accelerating earnings growth for the company and maintaining a disciplined approach to capital deployment. Our strategy is working, and the strong foundation we have established gives us confidence in our ability to increase shareholder value and deliver long-term growth for the company. In closing, I would like to thank our employees for their unwavering focus, dedication and outstanding contributions. Their efforts continue to drive our momentum and position us for future success. Have a great day.

Everyone, this concludes our conference call for today. Thank you for participating, and have a nice day. All parties may now disconnect.