Q2 2020 Earnings Call
Discontinued standby. Thank you for your patience.
Good morning, and welcome to the J.M. Smucker companies the school 2022nd quarter earnings Conference call.
This conference is being recorded and all participants I don't listen only mode.
Cost of the company, we will open the conference up for questions and answers.
Paired remarks.
Please limit yourself to two questions. During the Q1 day session and re queue. If you have additional questions.
I'll now turn the conference call over to Anvil, Vice President Investor Relations. Please go ahead Sir.
Good morning, Thank you for joining us for fiscal 2022nd quarter earnings Conference call.
After this brief introduction Mark Smucker, President and CEO will give an overview of the quarter's results and an update on our strategic priorities.
Mark Belgya, Vice chair and CFO will then provide detailed analysis of the financial results and our updated fiscal 2020 outlook.
Your next question will follow the prepared remarks.
During today's call we will make forward looking statements that reflect the company's 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.
Encourage you to read the full disclosure concerning forward looking statements in this mornings press release, which is located on our corporate web site at J.M. Smucker dotcom.
Additionally, please note the company uses non-GAAP result to evaluate performance internally as detailed in the press release.
We posted a supplementary slide deck summarizing the quarterly result in fiscal 2020 full year outlook. The flight can be accessed on our website and will be archived there along with a replay of this call.
You have additional questions. After today's call. Please contact me I.
Well now turn the call over to Mark Smucker.
Thank you Aaron good morning, everyone and thank you for joining us.
Before we get into our detailed results I will began with the changes to our leadership structure that we announced last week.
First after nearly 35 years at Smucker, and 15 years as our Chief Financial Officer, Mark Belgya announced he will retire on September 1st 2020.
Mark will be succeeded by Tucker Marshall, our current Vice President Finance.
The transition will begin on Monday, and Tucker will become senior Vice President and Deputy CFO .
He will succeed Mark as CFO on made first 2025.
Following the completion of our current fiscal year.
Mark has agreed to stay on its vice chair until his retirement, ensuring a seamless transition.
Since joining smucker seven years ago tougher has become an integral part of the Smucker organization.
He brings significant financial management experience and a deep understanding of the company.
With respect and confidence of his colleagues and the board.
I'm looking forward to partnering with him in the years to calm.
The second announcement was the evolution of our executive leadership structure.
This new structure is designed to improve the execution of our strategy enhance accountability and streamline decision, making to ensure we move with speed and agility to deliver on our strategic and financial priorities.
The change in structure includes the creation of a chief operating officer role.
We have initiated a search for an executive who will provide strategic and operational oversight of our business units.
As well as our operations and supply chain.
We also started the process to identify a new leader of our U.S. sales organization.
In addition, we have initiated a search for new pet leadership for new leadership of our pet food business.
Which in the interim will be led by Rob Ferguson and officer of the company, who has 14 years have management experience in the pet category.
Prior to joining smucker, Rob served as a member of the executive leadership team, a big heart Pet brand.
Rob has demonstrated a strong track record of leading change and driving results for our company.
Including being instrumental to the integration of both pet business acquisition.
And the delivery of over $250 million of synergies.
Are there supporting the pet business, Jeff waters, former President and CEO Ainsworth pet nutrition will serve as a strategic advisor.
I am confident these changes ensure the alignment of a team that has deep knowledge of the smucker businesses and our industry.
The new executive leadership team will continue to refine our strategy and evaluate our portfolio of brands and sharing we remain focused on delivering growth and creating value for our shareholders.
Let me now discuss for second quarter result.
We were able to offset softness in sales of certain brands to generate adjusted earnings per share above our projection.
Reflecting benefits of the targeted actions, we're taking to prioritize financial discipline across the business.
At a high level. These actions include.
Increasing focus on investments in consumer facing marketing.
Reprioritizing companywide resources and initiatives to increase focus on key growth platforms, such as Uncrustables and premium pet food.
And reducing discretionary spending.
Through these diligent actions, we delivered adjusted EPS of $2.26 compared to $2.17 in the prior year representing growth of 4%.
While pleased with our earnings results our aggregate net sales performance does not reflect the potential of our brands or the progress, we're making toward a strategic growth imperative.
We are committed to improving topline performance and taking decisive corrective action where necessary.
Net sales declined 1% compared to the prior year, excluding prior year sales related to the divested U.S. baking business and foreign exchange.
While total sales were slightly below our projection there were many highlights during the quarter, including strong performance for key brands within snacking coffee and pet food.
Beginning with snacking sales grew 18%, including double digit growth for the Smuckers uncrustables, So Holly snacks and yet Powerup brand.
We expect further acceleration for snacking in the third and fourth quarters with the increase production capacity for Uncrustables and expanded distribution for just power up.
In coffee, we continued to increase household penetration in the quarter.
Sales for the Duncan Cafe, Bustelo and 18 50 brands all grew.
Also we grew volume in all formats, including mainstream premium K Cup and instant while net sales were comparable to the prior year due to increased trade spend as lower green coffee cost are being passed through to consumers.
In pet food.
We delivered growth for our largest brands in the portfolio, including new Trish Meow mix and a milk bone. Despite total segment growth being impacted by plan declines for private label product.
In addition to declines for the natural balance brand.
Excuse me in our pet snacks in cat food businesses, we achieved mid single digit growth.
Which marks the eighth consecutive quarter of year over year sales growth for our cat portfolio.
Meow mix nine lives and nutritious cat food each grew household penetration.
In the latest 52 week period Meow mix now has the highest household penetration of any brand in the dry cat food segment.
We remain excited about the prospect for both short and long term growth for our portfolio, a pet food and pet snacks brands.
Recent softness for the portfolio is isolated to premium dog food.
There's been an increase in competitive activity from a proliferation of brands entering the category, which are investing significantly to generate consumer trial.
While the nutritious brand sales increased 3% in the quarter. This was less than we had projected and we anticipate the competitive headwinds in premium dog food to continue.
We expect the brand to decline in the back half of the year due to competitive activity and a reduction in forecasted performance for both new distribution and innovation launches.
Also the targeted actions we are taking to improved nutrition performance have begun to be reflected on shelf and we expect further reflection throughout the third quarter.
These actions include incremental investments aimed at improving the consumer value proposition to drive increased trial and loyalty and launching new advertising later this fiscal year.
For natural balance sales in the quarter decreased over 25%.
Brand has been impacted by increased competitive offerings continued growth in premium dog food in the grocery mass and ecommerce channels.
And continued weakness in the pet specialty channel.
Given the recent performance we are reevaluating, our plans, which may go beyond the previously communicated actions to restage the brand late this fiscal year.
We remain confident in growth opportunities for the total pad business.
And with new leadership in place, we expect further refinements to our overall pad strategy, which we will share over the coming quarters.
I'll turn now to the progress made against our consumer centric growth imperative to lead in the best categories.
Build brands consumers love and be everywhere.
I will share a couple examples from the quarter of how we are leading in the best categories.
Snacking remains a key focus area driven by Smuckers Uncrustables sandwiches.
We expect continued acceleration for uncrustables and forecast growth to exceed 25% in the second half of the fiscal year.
We expect the momentum to continue and we remain on track to grow this business to over $500 million a net sales within the next few years.
In coffee sales trends improved throughout the quarter led by double digit growth for all K Cup brands, including Folgers.
Consumer take away for our portfolio of K Cup continues to perform well ahead of total segment growth.
Further the Duncan brand continues its momentum and now owns the number three market share position across the total coffee category in the latest scan data or for 13 and 52 week period.
This combined with the leading market share position in the mainstream segment for the Folgers brand positions, our coffee portfolio to firmly maintain the number one dollar and volume market share across the total coffee category by a wide margin.
Turning to our strategic imperative a building brands consumers love.
We are excited about the recently launched creative for the Jeff Smuckers and Cafe Bustelo brands during the second quarter and additional brand refreshes are underway.
Our new advertising for the Jeff and Smuckers brands has been on air since September and we are pleased with the initial feedback on the campaign, which align with recent share gains for Smuckers fruit spreads and improved volume trends for Jeff.
We also saw strong sales momentum for cafe, Bustelo up 14% in the quarter supported by its first national advertising campaign, which highlights and heritage and authenticity.
The new campaigns strengthen our brands positioning in today's culture with breakthrough advertising across multiple media and social platforms to support long term growth.
We remain on track to deploying new campaigns for 10 brands this fiscal year.
Our latest brand refreshes are underway as the Meow mix remix campaign launched in early November .
And new Folgers advertising will begin airing next week.
And new support for the 18 50, and Dunkin' brands are debuting in December .
Marketing spend for the quarter was 6.3% of net sales and 6.9% of net sales through the first half of the fiscal year.
We are realizing the benefits of our new marketing operating model as expenses in the quarter decline compared to the prior year, while increasing the effectiveness and reach of our media spend.
We remain committed to our investments in consumer facing marketing and project marketing spend of 6.5% to 7% of net sales for the full year.
Our third quarter, our third growth imperative is to be everywhere.
We know that consumers shop, and interact with brand on demand and a multi channel therefore, we need to be wherever consumers shop and available anytime.
Within the E Commerce channel, we continue to deliver solid growth, particularly in the pet food and coffee category.
In the second quarter, our sales to pure play ecommerce retailers continue to grow double digits accounting for nearly 5% of total U.S. retail sales.
Factoring in the fast growing online sales for brick and mortar retailers approximately 8% of our U.S. retail sales are through e-commerce .
We will continue to prioritize investments and initiatives to capitalize on the momentum in both the pure play and Omnichannel E Commerce as the channel still has significant runway and is expected to be a catalyst for growth over the next several years.
The focus of our away from home business has always been on our branded products that consumers desire fall outside of the home.
With increased production capacity for Uncrustables, we're excited about the growth potential of the platform in additional away from home outlet.
As capacity constraints previously lemonade meaningful expansion beyond K through 12 schools.
Also within our away from home business, we're very pleased with our expansion into premium coffee through our Eighteenfifty brand and have plans to further expand this platform next fiscal year.
Before turning over to Mark here, a few thoughts we hope you take away from my comments first we are committed to taking decisive corrective actions to improve topline performance.
Second the recent leadership changes are designed to improve the execution of our strategy enhance accountability and streamline decision, making to ensure that we move with speed and agility to deliver on our strategic and financial priorities.
And third our entire organization has embraced a financial discipline mindset further focusing our resources supporting earnings growth and generating cash flow.
And finally key parts of our portfolio are responding to the investments we are making against our strategic growth imperatives, which overtime will deliver long term financial growth and increase shareholder value.
Finally, I want to acknowledge our dedicated employees.
Thank you for all you have done and all you will do to driver business forward.
I will now turn the call over to Mark Belgya. Thank you Mark and good morning, everyone. Let me begin with some added color on the quarter.
Regarding the U.S. baking divestiture and FX net sales declined 1% to second quarter, reflecting lower net pricing on coffee and peanut butter, partially offset by price increases in pet food and had snack.
Volume mix was flat as declined for dog food, primarily private label in the natural balance brands were offset by gains for coffee and Smuckers uncrustables.
Adjusted gross profit decreased $18 million from the prior year or 2%.
Gross margin improved 30 basis points to 38.5%.
Excluding the baking business gross profit was down 1%, primarily reflecting net impact of lower pricing not fully offset by lower cost.
This was partially offset by favorable volume mix.
Adjusted operating income declined $25 million compared to the prior year, a decrease of 6% a 27 million dollar gain on sale and 9 million dollar contribution to segment profit from the divested U.S. speaking business, where the primary difference at the gross profit decline was offset by it.
Reduction in marketing expense.
Below operating income interest expense decreased $5 million driven by a reduction in debt, resulting from repayments made over the past 12 months other income and expense was $5.9 million more favorable in the quarter due to litigation cost incurred in the second quarter of last year.
Finally, the adjusted effective income tax rate was 24.3% slightly lower than our previous full year guidance range of 24, and a half 25%.
The prior year effective tax rate was high at 30%, reflecting the impact of income tax expense associated with the sale to baking business.
This resulted in second quarter adjusted earnings per share of $2.26 compared to $2.17 in the prior year, an increase of 4%.
Let me now turn to segment results beginning with Pat.
Net sales declined 2% compared to the prior year.
Sales of private label products were 3% headwind to the quarter, which include the plan discontinuation of certain business.
Meow mix nine lives and new Trish drove cap to growth of 4%, while milk bone led growth of 4% for pet snacks.
These gains were offset by decline for the natural balance brand.
Food segment profit increased 11% compared to the prior year. The increase was driven by favorable net pricing synergy realization and lower marketing expense being partially offset by increased input costs and a decline from volume mix.
Turning to the coffee segment net sales were comparable to the prior year.
Lower net price realization, reflecting the pass through of lower Green coffee cost by the way of increased trade spend was mostly offset by favorable volume mix.
Growth for the Cafe, Bustelo and Dunkin' brands offset a decline for the Folgers brand.
Pick up sales grew 14% with growth for each brand in the portfolio the strength in K Cup shipments more than reverse the decline in the first quarter related to the timing of new distribution.
Coffee segment profit increased 5%, mostly reflecting the favorable impact of volume mix, the net impact of lower pricing and lower input cost was neutral to profit.
In consumer foods, net sales decreased 8%, reflecting the divested U.S. speaking business comparable net sales decreased 1% driven by lower net sales for the Jif Crisco brands offset by an increase of 9% for the Smuckers brand with growth across uncrustables topping and fruit spreads.
Excluding the prior year profits and the gain on sale of the divested baking business consumer Foods segment profit declined 8% due to the net impact of lower price not fully offset by lower cost some peanut butter, partially offset by favorable volume mix and lower SDMA costs from reduced marketing instead.
And expenses.
Lastly, in the international and away from home segment net sales declined 3% compared to the prior year.
All you mixed accounted for a two percentage point decline most notably in the Mexico market as we lap to sell off of inventory in the prior year relating to closing facilities in country and transitioning to a distributor export model.
Next negatively impact net sales by $2 million.
Segment profit decreased 11% due to the impact of lower volume mix in an unfavorable price cost relationship partially offset by lower SDMA expenses.
Second quarter free cash flow was $161 million, which represented a $36 million increased over the prior year, reflecting an increase in cash provided by operating activities and a $14 million reduction in capital expenditures.
Reflecting the completion of the first phase of the Longmont, Colorado facility.
Capex for the quarter was $63 million were 3.2% of net sales.
The company continues its intention of deleveraging by paying down $73 million of net debt in the quarter. We finished the quarter with total debt balance of just over $5.7 billion based on trailing 12 month EBITDA of approximately 1.6 billion our leverage with 3.6 time.
Let me now provide information on our revised outlook for fiscal 2020.
Reported net sales are anticipated to be down 3% compared the prior year, which includes $106 million a baking sales from the prior year, an incremental $25 million haynesworth sales recognized in the first half results.
On an organic basis net sales are expected to be down 2%.
I haven't label Pet food remains a headwind with approximately $10 million decline expected in the third quarter.
Changes from our previous sales guidance, primarily reflect the second quarter sales results, which were below our expectations expected declines in the back half of the year for premium dog food, notably the nutrition natural balance brands in a general de risk at the back half recognizing competitive activity and strong fourth quarter comp.
Coffee in peanut butter.
We continue to expect gross profit margins to be approximately 38.5% as overall commodity cost projections remain in line with our previous forecast.
Were slightly ahead of our synergy projection and expect to realize full year incremental acquisition synergies just over $30 million by the end of the fiscal year delivering on our 55 million dollar cumulative target.
Adjusted earnings per share is expected to be in the range of $8.10 to $8 in 30 cents.
Key factors that impacted the change to our adjusted EPS guidance range include.
The estimated earnings impact of reduced sales guidance, partially offset by DNA expenses declining approximately 2% compared to the prior year, reflecting the continuing benefit of the actions taken in the quarter to maintain financial discipline.
Interest expense is now projected the low end of our range at $200 million and finally, an effective tax rate 24.5%.
And looking at the third quarter, we would expect net sales and earnings per share to be down low single digits.
Full year free cash flow is projected to be approximately $850 million with capex between 300 320 million.
The reduction primarily reflects the revised earnings outlook and an expected increase in our inventory balance at year end.
We will continue to prioritize cash for debt reduction and expect to repay an additional $300 million by year end, taking our leverage down to approximately 3.3 times at the end of the fiscal year.
In closing, let me reiterate marks opening comments now while challenges to sales growth persist in certain categories, which drove the revision to our full year guidance much of our business is performing at expected levels were above.
We remain diligent toward delivering our revised earnings will making prudent investments for future growth. In addition, we continue to make meaningful progress executing on key growth initiatives, which are reflected in the underlying results.
Overall, we remain confident in our ability to deliver long term value to our shareholders. We thank you for your time. This morning, and we'll now open the call up to your question operator, if you. Please queue up the first question.
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Since you have additional questions you may be can't and the company, we'll take questions as time allows.
Please standby for the first question.
My first question comes from Angeles our of Barclays.
Good morning, everybody and thanks for the question.
Turning Andrew Hi, Mark I guess, just a broader question to start us off a little bit obviously smuckers as revise the full year 20 outlook throughout the last two quarters I'm just trying to get a sense of maybe how you would characterize the new outlook in other words you see this is now providing the company with sort of the needed flexibility to get there.
Trends on the right track and accelerate the organic momentum.
Or maybe is there a risk if this is still maybe not enough to fully address some of the root issues aggressively enough from their therefore could still be a bit of a drag as we think maybe forward into fiscal 21 years, particularly in light of some new team members coming onboard that would presumably also.
We want and expect to have some input and such.
For the starting thank you.
Thanks, Andrew well first of all let me just start by saying you know delivering on guidance is a foundational priority that I have as CEO and it's it's extremely important so.
Given the fact that we have missed guidance a couple times. This year. We this this round we took a very hard luck.
With a very critical eye and really made sure that as we look forward, we were judging both the opportunities and risks.
That.
That is really exist in the business and that were we are giving ourselves the appropriate flexibility as you put it. So we do believe that the topline guidance is prudent and does reflect adequate adequately both opportunities and risks.
And so while there are some.
Challenge is to sales growth in isolate it really too.
Premium Pat.
That more or less what Joe by revision, we still look at the majority of our business is actually still performing at expected levels or above.
Great Thats helpful. Thank you and then.
Hi, Andrew Andrew.
If I can just maybe add onto marks comments and dollarized, a little bit what I had in my prepared comments so fit for the benefit everyone on the call. If you look at.
The basically the change in our topline guidance. So for everyone. You'll recall was it was zero to negative one before so if you take the midpoint of that and just call. It down a half a percent and basically trying to explain the 250 basis points to get to learn our new minus three there's really three components that I called out.
First of all about 50 basis points and that was due to this quarter, where we fell short of expectations. Okay. The second component I would suggest is about 75 basis point of this de risking in both in as it relates to the competitive activity in some of the think that Mark just outlined is it related to Pat but also we had really strong comps as you'll recall in Q4.
Peanut butter and coffee and that's that's sort of half of it. If you will and then the other half would be a 125 basis points to get there would be primarily in the premium Pat.
So so that's how we go about so based on that we've got a fair amount of.
Loose term here cushion on that 75 basis points of de risking and then if you just translate that to the earning side that de risk portion probably account somewhere between 10 and 15 cents. So just to explain how we get to that that 810 number at the low end of the guidance that is taking into account sort of the de risked portion of that sales number.
Great. That's very helpful. I'll leave it there. Thank you so much.
Thank you. Our next question comes from Ken Goldman of JP Morgan. Please state your question.
Thank you and congratulations to both Tucker and Mark Belgium, Mark. Thank you for all your help over the years.
Kevin.
I wanted to start off by saying are asking really.
You are making a change in leadership in pet.
But at the same time.
Least when I hear you know the fingers being pointed mostly a competition. Some channel shifts things that maybe are described best as exhaustion is so I'm just curious to get a better sense of what you think internally.
Smucker may have done as a company a little bit or maybe you should have been a little bit differently and maybe what some of the changes should be going forward that you can control within the petside.
Okay can this is mark Smucker I'll start.
So I guess, what I would say first of all as I would go back to the prior quarter, where we acknowledge that.
We did not adequately anticipate the level of competitive pressure that we would experience from new entrants.
Not just one and trends, but but there are multiple brands in the competitive space nor did we react fast enough. So I would really point the finger at just the fact that there were a multiple competitive dynamics that that we're going on that we should have reacted faster too.
In terms of the broader.
Leadership.
Challenges are or changes rather.
Obviously marks transition has been plan for a long time, and we took a very thoughtful approach to the to the holistic leadership structure and so this was not a knee jerk reaction. These were changes that we had that through thoroughly and had decided to sink.
Some of the broader leadership changes.
Along with the CFO announcement.
And then ultimately at the end of the day I just go back to my prepared comments that the intent of the structure.
Outside of any individual change is really at intended again too.
Increase agility make sure that we have the right level accounted accountability and the right sets of eyes on the business that are going to really drive strategy.
Great. Okay. Thank you for that.
Then a quick follow up.
Thank you mentioned that the 18 50 brand was up in terms of sales.
At least in the takeaway data that we see.
Some of the distribution has maybe shrunk a little bit on that brand can you walk us through whether that's an accurate read of what's happening and if it is maybe what the plan is to sort of reverse that a little bit.
Yes.
We still have seen that eighteenfifty. It continues to perform at expectations as I mentioned again prepared comments, where we are launching new advertising.
Isn't on air yet, but we actually got some some nice publicity pre on that in some of the advertising.
You know the.
Industry rags that we've had some good good feedback there, but ultimately we continued to remain very focused on eighteenfifty and we do expect to see continued growth in the brand yep.
Can I just would add also we from home we introduced it there and then also ecommerce it's shown up well there. So there's some other aspects of growth.
Great. Thank you so much.
Thank you. Our next question comes from Bryan Spillane of Bank of America. Please state your question.
Hey, good morning, everyone.
Just just the first question and I think it kind of follows up on what what Andrew was asking.
I guess sort of still trying to understand or get a sense for his with.
New management.
New people coming into the organization are planned to have a new people come in.
How much flexibility is there or or or potential that you know the strategy, which you laid out for us a year ago, we'd be open to two really being materially changed and not just goal split but also just.
The actual strategy itself is there a chance that that would be reset a baby meaningfully from what you what you communicated a year ago.
Brian This is mark Smucker, I don't see a meaningful or significant shift in our total strategy we continue to.
View that are three growth imperative are still the right. One we still believe in the categories in which we play.
And we still believe in the brands within those.
If there are subtle shifts across categories.
That could be possible I think I mentioned in the prepared remarks natural balance and that we may take a broader and look at that brand to make sure that we're doing the right things for it and so we will continue to potentially think about all of our categories and how we refine them.
But I think the fundamental priorities against the business remained sound and the the existing leadership team.
Very committed to those as well okay. So so it's fair to characterize a lot of what's happened is either execution or needing to make some adaptations to some competitive activity competitor activity.
That's fair, Okay, and then second one for me just for more Belgium.
In the in the you know the protein market.
It is pretty dynamic right now, especially.
With potentially more product being exported to China.
Particularly like within chicken, where maybe some parts that were.
Sort of directed towards the pet food industry, you could actually be export. It. So it's sort of trying to get a sense for is your thought on how you're monitoring.
Protein input for the pet food business that is there you know a potential or a likelihood that you'll start to see some inflation there.
Hey, Brian what I would probably say to that is it I would just pushed back to the comment I had I think with my scripted or just around CCAR commodity outlook in general when we would take those kind of considerations indoor expectations, but right now we don't see a significant.
Change.
In any of our categories as it relates to commodities, including much. What you. Just described obviously if that were to play out were significant we as I'm sure. The other competitors in the mix would would look at that from pricing perspective.
Okay, great. Thank you.
Thank you. Our next question comes from Pamela Kaufman of Morgan Stanley . Please state your question.
Hi, good morning, good morning.
Can you elaborate on no competitive dynamics that you were seen in the premium pet category and the proliferation and premium dog food products that you mentioned in his prepared comments.
There really is no elaboration from what we've previously communicated I would just this could characterize it as as Mark smucker by the way.
Just characterize it as a continued.
Pretty consistent level of intensity, if I could just I can give you some specific color on our actions in terms of what we communicated previously as you know we have taken very specific actions as it relates to a.
Customer support both in store some of some of that is pricing as we've discussed previously obviously, we can we actually ramped up our on aircraft Vince for new Trish, we actually are shooting new advertising for new trash in the coming weeks, which won't show up in market probably until.
You know sometime in the third quarter.
And and so all of those things remain we remain very committed to I think the only change from prior quarter is that the implementation of does has taken a little bit longer, particularly at the customer level than we would expect and so although we have now just as.
Even this week.
You know starting to reflect at the customer level it isn't across the entire market, but through the disk. This Q3, we would expect to see all of those actions really come to fruition.
Got it thanks.
And then what was the contribution from innovation in the quarter do you still expect it 100 million contribution from products launched this year I guess generally how happy are you with the performance of innovation. This year in general what I would say broadly in aggregate, we feel that our innovation is actually meeting.
And there are obviously puts and takes a and that you know I think our milk bone. For example, innovation is is going well and you think about snacking and I've already spoken eighteenfifty those are broadly meeting expectations.
Okay. Thanks, and then just on the contribution from innovation and the quarter on for the full year, yes.
Mark I was you were really trying to step away from bad I mean I think.
Mark Twain, we're pleased with the performance.
I think as time passes particularly in that $100 million, we've talked in past, how that's going to.
Be stretch out over a little bit more time, so we'll periodically update that that's not something we will look to do each quarter.
Got it thank you.
Thank you. Our next question comes from Jason English of Goldman Sachs. Please state your question.
Hi, This is a big serve us the speaking for a decent English Oh. My question is on the impact of Bcm on Green tree pet food sales.
If you ever missing Dream free seems turns listening in many of the dog food brands are due to building consensus around DCM, including reach Andrea where greener Presales has declined 7% in tractors. So since there would be announcement in June .
Well, what Chris do you see from this and the month ahead, how have things being pet specialty and what steps you're taking to address the thank.
Yes, so if you look across.
Some of the FDA comments that they came out I don't know a couple of months ago.
There has been a modest impact to all brands that were named in that and that that does not include.
That concludes our brands, but it also includes all of the competitive brands as well it is difficult very difficult to quantify what that is.
And we continue to make sure that we are offering a wide variety of products to our consumers. They they have the ability to choose between grain free or eliminate ingredient or what have you.
So we continue to believe abroad, a broad portfolio is the right thing to do.
And we will continue to support to support those brands in and across the entire portfolio.
Thanks.
Thank you. Our next question comes from Robert Moskow of Credit Suisse. Please state your question.
Hi, Thank you for the question to actually.
Can you just give me a little more color on on the coffee division sales being flat Nielsen retail tracking data indicates down 3%.
Mark Belgya I think you mentioned ecommerce being a benefit.
But are there other channels that are are benefiting this or is there are risks that theres, some inventory kind of loading up in the in the channel like what happened last year and then secondly, I think you made a comment mark about inventory balances being higher at the ended the year can you give us a little more clarity on that thanks.
Yeah. So Rob this is mark I'll, just so in terms of coffee. So I did did mention the ecommerce was up actually ecommerce I think was our scripted comments is about 5% of our total company sales in coffee actually saw a nice increase this quarter. So.
That could be part of what you're seeing you know there probably is a little bit of shipment.
Shipments ahead of take away, you'll recall last quarter, you know our commentary was coming out of Q4 that coffee at a strong Q4, a softer Q1, and we believe it out all the reasons to the new distribution and some other things and so we delivered on all of that particular in K cups, so that could explain a little.
What you're seeing.
It relates to take away.
On the inventory right now our balance or inventory balances are running a little higher some of that is where we are with sales I know the teams are working to it to work those numbers down now, but as it as we're looking at our free cash flow as I said with the take out an earnings.
And where inventories stand right now, although I think numbers will come down some we just added a little bit of.
Of softness or little bit of increase I should say in inventory balances and thus a reduction in these and the cash generation. Rob. This is mark Smucker I might just elaborate on.
Give some clarity on stuff that might not come through in that in the scan data that's positive.
So broadly across the coffee portfolio. We were we had a very good quarter and we were pleased to class every brand and so if you look at.
Growing dunkin' growing all of our K cups boost allergan very well Dunkin for example, not only the number three but it is the fastest growing premium brand and the reason that thats not showing up in the scan data is because canister Duncan canister, which is doing very well.
Falls in that in mainstream segment and so if you take dunkin in aggregate it is growing faster than Starbucks in both the an all of the for 12 and 52 week periods and then folgers specifically.
As you know both in peanut butter and coffee, we have we've experienced significant deflation, but that said folgers is playing the role that we want it to the volume was up in the in the quarter and so despite the fact that we have that deflation we've seen both volume growth and we've been able to.
We maintain our profitability on the business. So coffee overall is a very nice success story for us in the quarter.
Okay, maybe it could sneak one more in marketing as a percent of sales I think the guidance was to be 6.5% to 7% this year.
Do you think it will be below that because of more just cuts to discretionary projects.
No no no I would even maybe go one step further Rob is that because I know that we've been asked are going I guess this goes back to one of your other question sort of around strategy investing in our brands.
We would really like sort of draw the line in San now for our for our marketing dollars. So we will end in that 6.5% to 7% range and in the us [laughter] events in the unlikely event that sales were to change from our guidance. We would still look to hold the dollar spend on marketing for the rest of the year.
Okay. So judging from the get goals I think I'll raise my marketing spending in the back half at all.
Maybe I'll I'll get back to you on that Mark. Thanks, So much for yeah. Thank you so much for your help over the years I. Appreciate you betcha. Thank you.
Thank you.
Our next question comes from Alexia Howard of Bernstein. Please state your question.
Good morning, everyone that congratulations to Tucker and thank you so much to mark and so the first question that I have is around the free cash flow guidance. It looks as though free cash flow guidance is brought down a little bit more than the sales guidance in the earnings per share guidance I was just wondering around the at the mechanics of actual what clothing.
That revision downward.
And then my second question is really.
About the visibility into earnings growth from here.
Obviously, there's been a couple of guide downs in the past couple of quarters.
I guess I'm wondering.
Is the visibility deteriorating at this point and what does that mean for the validity of a long term earnings growth algorithm and also what are the major factors that are now harder to predict than they were previously thank you.
Okay. Like this is mark Belgya. So in terms of the free cash flow I think if theres only certain components and I would say, it's predominantly the too that I called out on the earnings and on the inventory, there's probably maybe just a little bit we're working capital, but as you know that ultimate number won't be a figured out until April thirtyth when when all the balance sheet items are finally.
Wise, but there's nothing dramatically in any other areas or components of that that calculation.
That would we'd be off.
In terms of just the your second question and let me just take a step back and Mark Please jump in here so.
In terms of just forecasting generally I think that.
You know with some of the.
The de risking if you will have our guidance for the rest of the fiscal we feel that we have taken a prudent approach to consider the competitive activity, particularly in premium Pat I thought through where we had some strong finishes last year that might be a bit more of a challenge to get through and and do feel that we have appropriately recognize that we would expect earnings growth, albeit not.
As fast as we originally expected beginning year, but we would expect that's being.
In Q4 as I commented on Q3 being down slightly and I don't think theres any anything dramatically different in our ability to do so I think that as we've said the last quarter almost two quarters now in our intent is to continue our cost management program to.
To help alleviate some of the softness that we have incurred and help sort of protect that had ability hit the guidance and where we stand as of right now we feel pretty good about our estimate on topline and how that parlays into our earnings guidance, Yes, I guess I would just add one comment on forecasting which as you know although we are.
Not pleased with the guide down I would I would comment that this is a reflection of better visibility into our forecasting and making sure that we're taking the prudent steps in terms of de risking as mark spoke to earlier, but making sure that were record reconciling operate.
Rational and financial forecast in the appropriate manner, and providing not only us the senior leaders, but also the individual businesses with the appropriate level of visibility.
Thank you very much I'll pass it on.
Thank you next question comes from Laurent Grandet of Guggenheim. Please state your question.
Hey, good morning, everyone.
Good morning.
My <unk> I'd like to focus my first question on the on the new organization. So.
Could you. Please comment on the reason why your parents to see.
And what would be the exact.
Rule on yours.
That nucor's. Please please.
Uh huh.
Where are you thinking well during the process and when you see coming down you can feed this role as well as the new U.S. Allison, Doug but for juniors venture.
Sure Laura Thank you for the question so.
I did answer this in their prepared remarks, but.
My focus needs and remain on obviously delivering results.
And really making the right strategic decisions for for the business.
The a chief operating officer will help in terms of making choices across all of the businesses.
And will really help to operate the businesses on a day to day basis.
Which I do today, but I also feel that I need to spend a little more time, just on strategic matters as well and obviously building the organization for success.
You know obviously for the long term.
Feel very good about the team that we have in place today I think that everybody is very much aligned on the strategic priority and I think as COO will will quite frankly just help.
Specific decision, making and execution at the business level.
And in some of the process on some of timing for for this Roland I was a two of the rules well, where we were in a search we have begun.
Search for for those for those roles and those are underway, it's hard to say.
When we will actually fell down I'm you know those things can take time, we're moving as fast as we can but we want to make sure that we find the right individual that has both the right the right level of operating experience, but also the appropriate at level of leadership experience in terms of developing.
People and culture, so I won't commit to a timeframe, but suffice it to say we're on it and we're moving as quickly as we can.
Yes, one one more question in small and the pet food. So in your prepared remark you mentioned you talked about $20 million in private label themselves.
And just.
During the quarter I mean, you mentioned the truth be about 10 million don't on some low seem to sort of quarter.
How should we think more off these private label business going forward I mean, it's a business that's you're planning to to move away from and how big is that Oh. Thank you very much.
So generally as a company.
Philosophically, we only engage in private label businesses, where it makes strategic sense.
Where we know we can.
Generate growth and profitability and so where we have exited those were conscious in most cases those were conscious decision to exit or parts of the business that were not generating the appropriate return. So we do remain engaged in some of our private label Pat.
Businesses. It is specific to those areas, where there's a strategic benefit partnership with customers and so we will not abandoning the we will be prudent in terms of how we how and where we engage strategically and on private label.
Thank you very much.
Thank you. Our next question comes from Rebecca shipment of Morningstar. Please state your question.
Hi, good morning, so I'd like to start with the leadership changes as well and if you could just kinda talk about the process and how you works to that your to do you look at best practices across the industry or was it more of an internal.
Analysis I, just like the 10 here, but the process.
At yes, sure, we Didnt look and best practices across the industry to be sure.
We have a and ongoing relationship with the search firm that we are using even for the CFO search I would tell you. We did we did do a thorough search externally and a tougher actually went through a very rigorous process external evaluation process with a couple.
Outside partners, one being the search firm and so even in every case, we are taking a prudent approach in terms of how we are looking at filling those roles and just wanting to make sure that we're looking both at best practices, but also making sure that we're taking the appropriate time and necessary steps to put the right.
Talent in each role.
Okay. Thanks, and then my last question, Yes, you had mentioned in the prepared comments about some possible changes you're considering for the natural balance strategy.
And others.
Just wondering if you could elaborate about some of the.
Changes you're considering for example are you looking at.
Possibly entering into food drug and math I'm, you know that would seem to align with your your be everywhere strategy and I'm just wondering if that's something that you're considering.
Sure I can't give you much more color so I'm not sure you'll be.
That pleased with the answer but I do what I would say as we previously talked about a restage.
We continue to move forward with the restage.
That includes a whole host of things, including.
Packaging alignment.
Consumer communication I mean, it really is it is very broad and it does take time because it is it is a relatively deep exercise I think what we have said previously is that restage would be toward the end of the very end of the fiscal year.
But but beyond that we will consider.
A more street a broader strategic review of the brand if it could include things like you're suggesting but we want to hold off and communicating anything until we really have gone through our own internal process.
Okay, great. Thank you Simon.
Thank you I'll now turn the conference call back to management to conclude.
Thank you offer for listening we appreciate the questions I guess I would hope that everyone takes away that you know there.
Many areas of our business that are performing very well because where we focus we are winning you know the softness is isolated to premium dog and obviously, we've seen some deflation in a couple of our categories, but hope that you all take away that we have taken very specific and decisive actions whether.
Be in the marketplace financial discipline investing in our business the leadership changes it ultimately I really starting to yield results and so we do have a commitment to you all that we will you know we will continue to work and the goal of course is to grow our business in aggregate.
And just want to thank our fantastic employees for their commitment to the company and wish everybody on the call I'm very happy Thanksgiving. Thank you.
Ladies and gentlemen, this concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.
Oh.