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

Good morning, and welcome to the J.M. Smucker Company's Fiscal 2027 First Quarter Earnings Question-and-Answer session. This conference call is being recorded. [Operator Instructions] I will now turn the conference call over to Crystal Beiting, Vice President, Investor Relations, Financial Planning and Analysis. Thank you. You may begin.

Good morning, and thank you for joining our fiscal 2027, First 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 could 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 Bake snacks. We will now open the call for questions. Operator, please queue up the first question.

The question-and-answer session will begin at this time. [Operator Instructions] Our first question is coming from Andrew Lazar from Barclays.

Great. Thanks 1 I guess as I understand it, it looks like you received an $0.84 tariff refund benefit in fiscal 1Q and anticipate about a $0.60 benefit for the full year, net of some incremental costs and spend back. I was wondering if you were able to give us a better sense of what's incorporated in that sort of $0.24 differential in SD&A. I guess how much is higher admin expenses for the build-out of Matala versus higher brand spend or something else?

Andrew, Yes, we did receive an $0.84 benefit from tariff refunds in our first quarter, and we are choosing to reinvest a portion of that in SD&A expenses largely coming through administrative expense along with some incremental marketing spend and advancing preproduction expenses associated with our McCalla, Alabama facility, all in support of the Uncrustables brand. and then acknowledging too, that we would use the balance of earnings or cash to pay down debt.

Got it. okay. Okay. And then you're still looking for coffee volume to decrease for the full year by low single digits. And I just wanted to explore this a bit more just because you've seen coffee volume actually increase despite the higher pricing more recently. So I guess with the understanding that elasticity has been modest as prices went up, why would we expect volume to weaken even as coffee shelf prices moderate from here? And maybe it's just conservatism at this point, but just curious on that.

Andrew, it's Mark. Thanks for the question. you are correct, because the commodity has continued to be very volatile, which particularly this time of year is not unusual. We just feel that it's prudent given not only the commodity, but category dynamics in the consumer environment to just think about the coffee business from a prudent perspective. I would highlight that as you pointed out, great results in the quarter on all 3 of our key brands with Bustelo growing supported by the game face campaign around soccer and then Dunkin' having relative pricing in line with where it needs to be, all of that has been supportive. But it's just, again, making sure that we're thinking about the go forward from a prudent perspective.

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

Mark and Tucker. If I could pick up on coffee. I think there are quite a bit of investor questions just around how you're thinking about the recent run-up on, I guess, more speculative nature of super El Nino at this point. And there was a change in terms of how you have the outlook for the year on the pricing side, so actually expecting less of a headwind on coffee price for the year to go, I think than previously just how kind of the recent moving coffee prices are impacting that decision had you planned a larger list price decrease. Now you're calling [indiscernible] that trade promotion. Just any additional detail on how we might think about the price piece as it relates to coffee.

Sure, Peter. It's Mark. So as I just mentioned, this time of year and obviously, speculation around weather and so forth is not unusual and we had contemplated a list price decline at the end of the fiscal, and wanted to just acknowledge that the commodity -- the base commodity is down versus last year. But we have not crossed key thresholds that would actually justify nor have we seen sustained deflation at this point. So having not crossed key thresholds, we won't take a list price decline at this point, but we have passed along some of that deflation to consumers in the form of trade using those levers, which is pretty normal. We will continue to watch the crop. The indications are having essentially finished the harvest that the crop is healthy and there could be a surplus. But at this point, since we have not seen that flow through, we'll just pause and continue to watch where the commodity goes and again, take a prudent approach.

Great. Very clear and helpful. Tucker, I noticed that in the prepared remarks, you reinserted maybe a bit more forcefully commentary around share repurchase, just given where the leverage has landed, some of that being tied to obviously the tariff refund. But maybe it felt intentional. So just curious if you can expand a little bit on potential for share repurchase, what we might be able to see it seems like potentially this year, which again, seems like a bit of a pull forward. So I'll leave it there.

Peter, we remain committed to a balanced capital deployment model where we can reinvest in the business and also return capital to shareholders. So we are on the journey to pay down about $500 million of debt this year and achieve the 3x leverage ratio, which candidly we did in this first quarter. So we're a little ahead of expectations. And we remain committed to the quarterly dividend, which we recently announced an increase, and we now have the flexibility to begin contemplating share repurchases as we move forward.

Our next question is coming from Tom Palmer from JPMorgan.

Maybe just to start out, I wanted to clarify some of the COGS inflation commentary. I think it's still mid-single digits, but 100 basis points higher than previously. How much of this is just related to coffee versus other costs moving around such as freight.

Yes. We are experiencing mid-single-digit inflation as you isolate the effects of green coffee tariffs and tariff refunds. And when you think of that sort of underlying mid-single-digit inflation. We're seeing an increase from our initial expectations coming into the year, largely driven by freight and some commodity and other ingredients and that's been factored into our guidance for the balance of the year.

Okay. And then I wanted to ask on the frozen handheld and spread segment. We have seen stronger margins the last couple of quarters. There's also -- I know the plant start-up costs here and I think maybe higher marketing. What -- I guess, how sustainable do you think about the margins we've been seeing lately in this business? And at what point do we really start to see the preproduction costs that McCalla become a factor?

Yes. We delivered a nice first quarter, both from a top line momentum standpoint and also the profitability flow through as well. As we think about the business, we continue to support growth. We now expect sort of high single-digit growth for the Uncrustables brand, total company, total venture -- and as we move forward, we'll continue to support the portfolio with ongoing marketing investments and also ensuring that we continue to bring production along as we support demand. And as you can see or you may have read, we are increasing preproduction expenses for the year in support of the McCalla, Alabama facility. And so the margin profile may take a slight step back in our next few quarters. but the profile continues to remain strong.

The next question is coming from Robert Moskow from TD Cowen.

Maybe I'll ask about retail pet food. I think you have volume mix for dog snacks flat and -- but Milk-Bone volume mix was positive. Can you tell me a little bit more about like how you're trying to manage that overall dog snacks business, which has been kind of challenged -- what -- do you have any new views on kind of the tail brands like Pup-Peroni and things like that? Like are -- they've been a drag -- do you have any specific actions to try to stabilize them? Or could there be portfolio changed longer term?

Sure, Rob, it's Mark. Actually, really solid quarter on dog snacks and in particular, Pup-Peroni. We still feel that the category of dog snacks is a great one. So we do want to continue to participate with the brands we have. Pup-Peroni was up 5% in net sales and 7%. So it was a strong quarter, largely driven by some brand refresh sharper marketing and some specific some events at some of our larger customers that were helpful. And then Milk-Bone also had a good quarter, returning it to volume growth that was supported by innovation, winning in the soft and chewy segment good marketing there. I do -- I think we've said in quarters past that we continue to focus on continuing to stabilize the biscuit segment through messaging around dog enjoyment and functional benefits. So more to come on that, but ultimately, very positive on the dog snacks category. And then it goes without saying we had a solid quarter on cat food as well.

Okay. Pardon me for getting the brands wrong. So were any of the snack brands down then? Because if Pup-Peroni is up and Milk-Bone is up, then there must be something else down.

Turkey treat was down. .

Next question is coming from Chris Carey from Wells Fargo Securities.

I wanted to ask about expectations going into fiscal Q2. But is sharp reversal yet it feels like momentum is good on frozen handheld comps get easier, similar dynamic on pet away from home is doing well, supported by uncrustable. Is this just a substantial reversal in coffee in Q2? Or is the Sweet Baked snacks business expected to get worse going into Q2. Can you just help frame the outlook going into the next quarter and some of the key drivers in the delta relative to the run rate that you're at right post Q1?

Yes, Chris, we do believe that there is ongoing business momentum as we head into our second quarter and we continue to acknowledge that coffee had great volume delivery in the first quarter and that we are being very prudent in our volume assumptions in the next 9 months on that portfolio. We're also sort of reversing a contemplated list price decline and bringing back the promotional activity to get to those rate price points within coffee. We see ongoing momentum in the frozen handheld and spreads portfolio, largely driven by the Uncrustables sandwich. And then really, the rest of the businesses are doing what we anticipated coming into this fiscal year. And so we believe that Q2 really is coming in line with sort of the expectations and has enabled us to support sort of our guidance revision for the year.

Okay. And on the Sweet baked snacks business specifically, is was Q1 more or less in line with your expectations? I don't know why it felt maybe a touch light on the top line. But I think even in that response, just now, you had suggested that the business is supposed to still running roughly in line with your expectations. Just give us a sense of where you see the business from a top line standpoint and also margins, where there's been a bit of volatility in your ability to have more visibility into the segment and just slightly connected and apologies for, I guess, the third 1 here, but how are you thinking about broader portfolio? You've been nimble about making decisions when required. I just wonder what the current state of affairs as you digest your current lineup?

Chris, it's Mark. The performance on Hostess in the quarter was essentially right where we expected it to be. So making progress on the stabilization journey, recognizing the journey itself it's slow and steady, but we do feel good about the progress we made and there were a couple of bright spots. Honestly, Donettes has been performing really well, outperforming, particularly in the larger bag size as well as some innovation on like the mini Curo donuts. Also the morning time occasion seems to be very strong. And that performance on Donettes was supported largely in the U.S. retail channels. We do recognize that the convenience channel as a whole continues to be challenges in terms of traffic, and we have not lapped SKU rationalization. So that might be a little bit of what you're seeing, but we do amend some innovation like on Suzy Q's also performing well. So a couple of bright spots. And then our goal is to continue to make incremental progress quarter-over-quarter.

Question today is coming from Nik Modi from RBC Capital Markets.

Just a couple of questions. One is on -- just on coffee. When you think about what's going on between the out-of-home and in home. It seems like while higher income consumers are certainly enjoying themselves out-of-home, some of the lower and middle-income consumers are feeling the pressure. And I'm just wondering if Mark, do you think there's a marketing opportunity, kind of a value kind of conscious message that you can kind of be more aggressive with just to capture some of those consumers. So I just wanted to get your thoughts on that. And then I have a second question.

Nik, I like that point. I do think there's an opportunity. And we've been pretty consistent in talking about this more than 70% of cups consumed are consumed at home and the fact that our portfolio meets a variety of value point for the consumer. And so we agree with you. We do think that will continue to be an opportunity. I would note Folgers being 1 of our more affordable brands had some great performance around America 250. There was some specific SKUs that we supported over the holiday period in July. And so I appreciate the feedback.

Great. Helpful. And then I guess this one is kind of an off-the-wall question, but some observations from recent trade shows in the pet space would suggest devices are really apps and devices are really the big kind of growth drivers, right? I think treats have been under pressure, dog has been under pressure. And it just looks like with all kind of the AI enablement and kind of tracking your pet's health more in real time. I'm just curious now that leverage is where it is. Like how do you think about capital allocation in the pet space? And is that something you've ever thought about?

Well, it's a good question. Strategically, we have considered over time, where can we play and where can we win? And I would say our -- our priority is going to remain on consumables, right? Things that dogs eat and cats eat -- so not that we wouldn't continue to think about that. But I would say right now, it's really focused on dog snacks and cat food.

Your next question is coming from David Palmer from Evercore ISI.

Fiscal fiscal '27 is already going to be an investment year and now it looks like you have the ability to lean in a little bit more, maybe $10 million to $20 million more, I guess, as of this morning. I'm wondering I think people are used to feeling good about investment spend because they think that easy comparisons on that spend next year just increases visibility, but I think the people are equally doubtful that there's going to be a return on investment from gross spending in the food space. And I know you're leaning in on -- or you've in the past said you're leaning in on crustables, dog treats and peanut butter. Crustables is crushing it. I wonder if you could give some detail on the types of spending you're making on those big 3 and maybe if the incremental isn't going into those, what your that on? And I have a follow-up.

Dave, it's Mark. Yes, we have been very disciplined in terms of where we spend dollars -- and we have tools that enable us to evaluate how much bang for the buck we get and where we're going to get incremental ROI. And with Katie Williams on board as our new Chief Marketing Officer, she brings to bear also a lot of expertise in that area along with all of our marketers that support each of our brands. And so I feel pretty confident that we can be choiceful and prudent with the dollars and put them where we're actually going to get a meaningful return.

And right, when we look at the Dog Treats data, peanut butter data, those are 2 areas that I would say you're going to want to stabilize going into next year. Is there a sort of cadence that we should be looking at for improvement in those. Two areas that those are 2 of the 3? And any sort of color about the -- what you're doing with uncrustables and the frozen to top product that seems to be working.

Yes, Dave, we remain committed to advancing all of our brands. And as you know, in Dogtreats, it's important for us to continue to build the brand, Milk-Bone and continue to advance its relevance in the treating occasion, and we will continue to do that. And it's certainly in our plans and has been an objective since we stepped into this fiscal year. It's important that we demonstrate our leadership in the spreads category, in particular, with peanut butter and fruit. And then as you think about Uncrustables, it continues to be a great story. It's going to demonstrate another year of growth. It continues to demonstrate growth in traditional U.S. retail channels and also in the away-from-home channel. We're also acknowledging that we're bringing along innovation. We're supporting brand building. and we are increasing capacity in support of ongoing demand. So it continues to be a good story. And much of what you're asking is built into our outlook and as a part of our, so to speak, blocking and tackling as we build these brands and deliver organic growth.

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