Q3 2020 Earnings Call
[music].
Good morning, and welcome to the JM Smucker companies' fiscal 2023rd quarter earnings Conference call.
This conference is being recorded all participants are in listen only mode.
That's a request for the company will open the conference call for questions and answers after the prepared remarks.
These wouldn't yourselves the two questions during the Q day session and re queue. If you have additional question.
I'll now turn the conference over to Aaron Broholm, Vice President Investor Relations. Please go ahead Sir.
[music] good morning.
Thank you for joining us for fiscal 2023rd 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, Belgium, Vice Chair and CEO, Paul will then provide detailed analysis of the financial results and our fiscal 2020 outlook.
Also joining us for acuity fashion. Following the prepared remarks is Tucker Marshall Senior Vice President and Deputy CFO.
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 I.
I 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 Dot com.
Finally, please note the company uses non-GAAP results to evaluate performance internally.
Detailed in the press release.
We have posted a supplementary slide deck summarizing the quarterly results in fiscal 2024 your outlook.
Slides can be accessed on our website and will be archived there along with a replay of this call.
If you have additional questions. After today's call. Please contact me I will now turn the call over to Mark Smucker.
[music] good morning, everyone and thank you for joining us.
It was great to see many of you last week a cagney.
We appreciated the opportunity to provide an update on our vision and strategy.
Progress being made on our growth imperatives.
Purpose.
And related E.S.G. efforts.
We continue to take decisive actions to improve performance and remain focused on executing against a clear set of priorities.
We will deliver earnings growth and long term shareholder value by prioritizing resources toward our key growth platforms.
Continuing increased investments to reinvigorate our brands.
Enhancing category leadership.
And executing focused operational and financial discipline.
Overall, our third quarter financial results were inline with our expectations.
As our anticipated decline in net sales was offset by the benefits of our targeted actions to deliver adjusted EPS growth.
4%.
These actions include an increased focus on consumer facing marketing.
Prioritization of resources and a reduction in discretionary spending.
[music] net sales declined 2% compared to the prior year, reflecting softness in our dog food business.
Particularly related to our private label products and the natural balance brand.
Net sales for the balance of our portfolio were essentially flat.
With the deflationary commodity costs being passed onto consumers through lower pricing in coffee and peanut butter.
Mostly offset by volume growth.
[music] highlights from the quarter included strong performance for key brands within our focus categories of pet food and pet snacks.
Coffee and snacking.
[music], starting with pet food, our cat food business achieved low single digit growth.
Which marked the ninth consecutive quarter of year over year sales growth for our cat portfolio.
While dogs snacks declined slightly overall, primarily due to the shift of a large retailer promotional event in the third quarter of the prior year.
The fourth quarter of this year.
We were pleased with the performance of our category, leading Meltblown brand, which achieved low single digit growth and benefited from innovation, which is expanding the brand into new treat segment.
Including Rawhide alternative.
[music] as anticipated new Trish pet food net sales declined due to the impact of retailer inventory build related to new distribution in the prior year.
And competitive activity in the premium dog food category.
As we discussed on last quarter's call. The team is executing a set of targeted actions to improve the nutrition brands consumer value proposition and reinvigorate performance.
During the quarter, we saw positive consumer response to these actions as household penetration for the brand improved and consumer take away across all channels grew by 5% sequentially from the second quarter.
Including online and the pet specialty channel.
Looking forward further actions will be implemented in the fourth quarter.
Including the new marketing campaign that Leverages, the equities, Rachael Ray and real food ingredient.
Well consumption trends are improving we expect shipments to decline in the fourth quarter as we lap significant distribution expansion in the prior year.
We remain on track to return the brand to growth in fiscal 2021.
In coffee.
Segment profit grew even though net sales were comparable to the prior year as lower green coffee cost are being passed through to consumers.
Volume in the segment grew for the sixth consecutive quarter.
And the Folgers brand achieved its highest volume quarter in over three years.
Duncan and Cafe Bustelo continued their growth trend.
Up 4% and 13% respectively.
Benefiting from expanded distribution.
Increased household penetration and the impact of new marketing campaign.
K Cups sales also increased 7%.
Growth for each brand in the portfolio.
And snacking, the Smuckers uncrustables brand accelerate into 23% growth in the quarter.
And we expect similar growth in the fourth quarter.
As we shared at Cagney last week, we're excited about the potential of the Uncrustables brand.
Its continued trajectory for growth.
The upcoming innovation that will expand the platform beyond peanut butter and jelly into convenient meat and cheese snacks.
As we announced last week, we made it difficult decision to discontinue do you have power ops early next fiscal year.
Our principles of financial discipline guided this decision to reallocate resources to areas of the portfolio, we believe will generate faster and greater financial returns.
Such as upcoming Jeff innovation, and the Uncrustables platform.
While power ups was successful in attracting new consumers to the jets brand and will contribute approximately 20 million to net sales this year.
The long term profit projections in the competitive bar category were below our expectations and we believe this is the right long term decision.
I will now turn to the progress made against our consumer centric growth imperative to lead in the best categories build brands consumers love and be everywhere.
Let me start with leading in the best categories.
In coffee this was the first quarter in five years that the category experienced retail sales contraction due to deflation.
However.
With the number one and number three brands in the category, we grew volume share across all formats, including canister premium bagged NK cap.
The Duncan and Cafe Bustelo brands continued to perform well with increased household penetration and market share gains this quarter.
In snacking Smuckers Uncrustables is the fastest growing brand in the frozen snacks category.
With the new production facility online.
And phase two expansion underway, we will have ample capacity to support demand and achieve our goal to grow net sales for the uncrustables brand to over $500 million annually in fiscal year 2023.
Further expand our leadership in this category.
Turning to our strategic imperative of building brands consumers love.
We're excited about our new advertising as we have now launched new campaigns for 10 of our largest brands this fiscal year.
Our new advertising campaigns have received accolades across the advertising industry.
Commercials for the G.S. and 18 50 brands received recognition as the top 100 global adds in 2019.
While it is too early to measure the full impact of the new campaigns indications from the launches earlier in the fiscal year are strong and correlate with the recent market share gains for the Jeff and Smuckers brands.
Marketing spend for the quarter was 6.1% of net sales and 6.6% of net sales through the first nine months of the fiscal year.
We remain committed to our investments in consumer facing marketing and continue to project to marketing spend of 6.5% to 7% of net sales for the full year.
Our third growth imperative is to be everywhere.
We know that consumers shop, and interact with brands on demand and across multiple channels.
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 third quarter, our sales to pure play ecommerce retailers continue to grow double digit.
Accounting for 5% of total U.S. retail sales.
Including click and collect through traditional retailers our E commerce sales account for nearly 8% of our U.S. retail sales.
The Eighteenfifty brand is performing excellent online with sales quadrupling over the past year.
We have also extended the brand into the Canadian and away from home channel.
In closing we remain confident in our strategy and are making progress against our growth imperatives.
We will continue taking decisive actions to improve performance and remain focused on a clear set of priorities, including.
Prioritizing resources to focus on key growth opportunities, including premium pet food pet snacks premium coffee and Uncrustables.
Continuing investment to reinvigorate our brand.
Enhancing category leadership by strengthening key consumer and customer facing activities to build competitive advantage.
And finally practicing strict financial discipline.
This is all in addition to the leadership searches we have underway.
We are actively evaluating candidates for the positions announced in mid November.
We are pleased with the quality of candidates and are confident we will fill these critical positions with leaders who will strengthen our organization.
Execution on all of these actions is creating momentum for growth and increasing shareholder value.
Finally, I would like to thank all of our dedicated employees for their continued effort, which firmly position the company for a bright future.
I will now turn the call over to Mark Belgya.
Thank you Mark good morning, everyone.
Before discussing third quarter results I wanted to summarize the for financial priorities, we outlined last week he cagney.
First consistent sales and earnings growth second increase free cash flow.
Third capital deployment in a balanced manner with approximately 50% reinvest in the business and 50% return to shareholders, including maintaining investment grade rating and fourth improvement of our return on invested capital.
We are committed to ensuring that the topline growth translates to improved earnings per share performance.
As we increase marketing investments to accelerate top line growth improve asset productivity and sharpen our spending discipline, we will deliver earnings and free cash flow growth.
We have been building upon these financial priorities this year with a line of sight for momentum to continue.
Encourage you to review our full cagney presentation available on our Investor Relations website.
Now, let me turn to third quarter results.
Net sales declined 2%, reflecting reduced volume mix for dog food, primarily related to private label and natural balance.
For the balance of our portfolio lower net pricing on coffee and peanut butter was mostly offset by increased volume mix for coffee and Smuckers uncrustables.
Adjusted gross profit decreased $24 million from the prior year or 3%.
The gross profit decline resulted from the net impact of lower pricing in excess of lower cost for coffee and peanut butter and the reduced volume mix in dog food.
Adjusted operating income declined $10 million compared to the prior year also a decrease of 3% has the gross profit decline was partially offset by a reduction in marketing and general and administrative expenses.
Both gross profit in operating income benefited from incremental synergy realization, which has now achieved our 55 million dollar goal.
Interest expense decreased $7 million driven by a reduction in outstanding debt, resulting from repayments made over the prior 12 month.
Other income and expense was $7 million favorable in the quarter due to nonrecurring litigation cost in the third quarter last year.
Finally, the adjusted effective income tax rate was 23.1% persons 25.8% in the prior year, reflecting final adjustments from certain new provisions of U.S. tax reform.
This resulted in third quarter adjusted earnings per share of $2.35 compared to $2.26 in the prior year, an increase of 4%.
Let me now turn to segment results beginning with pet.
Net sales declined 5% compared to the prior year, driven by both branded and private label dog.
Softness in premium dog continued as expected with a 13% decline for the natural balance brand and a 4% decline for the Trish brand.
Sales of private label products continued to be a headwind in the quarter impacting net sales by 2%.
These declines were partially offset by cat food as the Meow mix brand continues to grow.
Both our total cat portfolio and the Meow mix brand achieved the highest quarterly net sales since we entered the pet category.
Dog stacks declined slightly compared to the prior year, primarily due to a large retailer promotion in the third quarter last fiscal year that will occur in the fourth quarter of this year. However, the milk bone brand delivered continued growth.
Pet food segment profit decreased 1% compared to the prior year.
The decrease was driven by lower volume mix, which was mostly offset by an 8 million dollar litigation settlement related to a supplier issue in a prior year in a decrease in marketing, reflecting a reduction of non working expenses in a timing shift to the fourth quarter from new advertising.
I'll wrap up the pet segment with an item noted in our press release this morning.
Due to the continued sales decline for natural balance in the pet specialty channel and our decision to reposition the brand within our pet foods portfolio. Our GAAP results included a noncash impairment charge at $52 million attributable to the natural balance brand.
Going forward, we anticipate ongoing work to optimize the mix of grain in and grain free offerings, a refreshed marketing campaign and sharper price points will improve trends for the brand X fiscal year.
Turning to the coffee segment net sales were comparable to the prior year, a five percentage point impact from lower net price realization, reflecting the pass through of lower Green coffee cost by way of increased trade spend was mostly offset by favorable volume mix, particularly for Dunkin' Donuts and Kathy Bustelo Brad.
Yes.
Dunkin grew 4% in the quarter and Cafe Bustelo grew double digits with a 13% growth in the quarter.
These brands, mostly offset a 4% sales declined for the Folgers brand, where most of the price reduction was incurred.
K Cup sales increased 7% with growth across each brand in the portfolio.
Coffee segment profit increased 3%, mostly reflecting the favorable impact of volume mix and lower marketing expense, which was slightly offset by the net impact of lower pricing and lower input cost.
In consumer foods net sales were comparable to the prior year.
Favorable volume mix driven by increases for the Smuckers Uncrustables and shift brands contributed four percentage points.
This was offset by lower net pricing primarily attributable to the Jif brand, resulting from a list price decline taken in the fourth quarter or the prior year.
Across the board sales growth in this segment was 29% in the quarter and 45% on a two year stack basis.
Consumer Foods segment profit declined 12% driven by a net unfavorable impact of lower pricing in excess of lower cost in a seven and a half million dollar equipment write off related to the discontinuation of Jeff power ups, partially offset by a benefit from volume mix.
Lastly in international and away from home segment net sales were comparable to the prior year volume mix and net price realization were slightly unfavorable and were more than offset by favorable FX of $1 million.
Segment profit decreased 7% due to the impact of lower volume mix and higher SDMA expenses.
Third quarter free cash flow was $465 million, a 132 million dollar increase over the prior year, reflecting an increase in cash provided by operating activities and a reduction in capex. Following the completion of the first phase at the Longmont, Colorado facility.
Working capital initiatives contributed a large portion of the improved cash flow in the quarter.
The company made net debt repayments at $320 million in the quarter ending January with a total debt of just under $5.4 billion.
Based on a trailing 12 month EBITDA of just over $1.6 billion. Our leverage was 3.3 time, we continue to progress toward our goal of three times.
Let me conclude my comments with an update on our full year outlook as noted in this mornings press release and communicated at Cagney, we maintain our full year guidance expectations are for net sales to be down 3% compared to the prior year or down 2% on an organic basis.
Adjusted earnings per share is expected to be in the range of $8.10 Ti dollars 30 cents.
Key components include gross margin of approximately 38.2%.
DNA expenses declining approximately 2.5% compared to the prior year interest expense at $200 million in an effective tax rate of 24%.
Our projections for free cash flow remain $850 million with cap ex estimated at 300 million to $320 million in closing, let me reiterate that we're pleased with this quarter's earnings performance and remain focused on delivering on our guidance for the year I'm confident that we have put.
In place to building blocks to deliver against our financial priorities consistent earnings growth free cash flow growth.
Balanced capital allocation, including Delevering, the balance sheet and improvement a return on invested capital, but thank you for your time. This morning, we will now open the call to your questions. Operator, please queue up the first question.
Thank you the question answer session will be going at this time.
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Our first question today is coming from Andrew is all from Barclays. Your line is no.
Good morning, everybody and good to see you all last week.
Thanks, Andrew Good morning sure.
I guess first off.
Just kicking in on gross margins came in.
Somewhat below what we and I think many had modeled for similar reasons you talked about mark around costs.
You know in excess of.
Pricing and.
I guess with which the expectation for fiscal 2001 for sales to be flat to slightly up and more reinvestment obviously to continue to drive the topline I guess I'm trying to get a better sensors gross margin in 21 can be maybe a bit of a funding mechanism for some of this planned investment.
Or not and what might try that.
And just a follow up.
Okay.
Good morning.
I will probably not be able to go deep in his question only because what we said last week that where we aren't our planning process.
For those that did not here we.
We said that our topline Rx locations that it would be flat to maybe slightly up and then we expected earnings per share growth, but we really didn't go deeper than that I guess my only other response would be as you know just going through the first nine months of kind of what we called out at the gross profit gross margin level.
There's been a few things in what jumped out most notably the longmont overhead situation, where because of the startup we had significant under absorption.
Well certainly be running much more volume that plant next year, so that would be an additive but to go much beyond that or to quantify it the I don't think where to place to do that.
Understand I understand the minimum.
Some of the other three Q.
Upside I'm trying to get a sense of if there are some any discrete reasons that you see at this point that some of that would come out or for Q2 dimensions, maybe some some shifting of marketing in impact into the fourth quarter. So I'm trying to get a sense of how much of that upside in EBIT, let's say relative to where expectations were would come out of Fourq you for let's say some just.
Great reasons that you know about versus not thank you.
Yes, I think that typically the fourth quarter, the marketing would be what comes to mind. We certainly we're behind last year's third quarter. Some of that would definitely due to timing and would come through in Q4, I think when you look at other cost I don't think there's anything.
Specifically that I would think would reverse itself to the negative.
In Q4.
Thank you. Our next question is coming from Ken Goldman from JP Morgan Your line is alive.
Good morning, Thank you.
Good morning, Ken.
Hi, good morning to for me.
First if I look at the midpoint of your 2020 guidance range.
I know, which abroad sort of set of numbers there, but it does imply you're a little bit of improvement to your sales growth sequentially from the fourth quarter two the fourth quarter from a third at a pretty good gross margin to at least a lot better than what Youve previously showed in the fourth quarter. So I just wanted to know if we could walk through sort of sort of collect some of the tailwinds that are.
You know leading you to what I think is reasonably optimistic number there you talked about marketing.
You talked about the timing of a dog snacks promo Im just wondering if there's any other areas where you expect.
You know, maybe a meaningful sort of push toward that fourth quarter, maybe it's the pricing comparison, it looks pretty easy.
Just curious what I'm missing something big there.
Cubic smartcards, yeah, I think the one other things on the price. He mentioned is that we did take the price.
On now Jeff last year in fourth quarter. So we will be lapping that so in terms of topline that's.
One point, although we had a really strong fourth quarter from a volume perspective, peanut butter sort of give you some offset.
But in terms of that.
There's really not a whole lot kind of back to Andrew.
That is significantly different.
Versus the third quarter in terms of gross profit items or yes DNA.
Okay, I'll follow but that offline.
Yes. It can you know I'm, sorry, just one of that bought kits.
The other thing to comes into play and it's just unfortunately, it's very little bit in that failed in volume mix, but it probably some positive mix on the sales that are coming through that does tend to benefit us and we think that will continue into Q4.
Okay. That's helpful. Thank you.
And then I had a question for for Tucker I think you said talkers available for that for for the P. whenever he is yeah theater.
Talk or some of the as you think about sort of your role. It was an incoming CFO. Obviously long term targets are part of that the company still have some growth targets out there for the long term better I think many investors would consider fairly aggressive I really do these are they will kick in until 23, but.
Just curious your level of comfort with some of these numbers, especially given that you know I guess somebody's targets were forged.
Maybe a bit before the company became more committed to ROI see it all of its decision. So just curious for your thoughts on like the 2% to 3% topline, 8% bottom line items like that.
Okay.
Can I certainly appreciate the question good morning.
Just let me begin by a couple of things one is I would just begin by saying that focused on delivering this fiscal year.
We're really focused on making sure that we get the right plan for next fiscal year, and then as we think about the longer term growth algorithm.
I always consider that over the long term as we as we consider the business and at the appropriate time, we probably would re address that with with you in the investors and as you know that in the fall we have our first investor day for this upcoming.
Fiscal year, and so that probably would be the appropriate time to re address those long term rates.
Thank you. Our next question today is coming from David Driscoll from GE researcher wise.
Great. Thank you and good morning, everybody.
Morning.
I wanted to follow up just had a little bit natural balance and the pet specialty channel and Mark could you just talk a little bit about the strategy I know you're still looking for your permanent ahead of that unit, but can you talk a little bit about the strategy and when we when you took several together branch into grocery.
Your natural balance seemed like it was really well positioned to be a solid brand within that pet specialty channel and even potentially E commerce.
You know kind of I guess, where it's confusing for me is everybody criticized one of your competitors and thought that pet specialty would be really harsh and you would have a real advantage with natural balance why hasn't that maybe played out exactly as we all thought it would in how big of a lift is it going to be to get natural balance.
Back to the growth rates that maybe we think it can or should be at just given how strong premium is.
Hi, David It's Mark Smucker. Thanks for the question you know if I may I'd like to just back up I will answer your question, but I'd like to just backup to the total total pet category as you know we're in the category because it's a growing category, it's a great category and our business.
Is really about three legged stool, it's about pet snacks.
About cat food and then it's about dog food and so just reminding the group that as you all know the shortfall in the quarter was was isolated to premium dog, but there were a number of fantastic positives and so our strategy is fundamentally about.
Out.
Playing offense and making sure that we maintain and dry leadership in pet snacks, which we clearly are the clear leader, it's the most profitable segment.
And as you heard in the prepared remarks cat has been doing very well over nine quarters, and so we're winning there and even in our mainstream Dod business that is going well. So just to highlight this back again that did that this is an isolated issue.
Rob has brought a tremendous amount of focus.
At two to the business and so we were very pleased with the work that he and the pet.
He is doing.
And natural balance if you think about the channel. It's a $14 billion channel again, we have not been playing offense on that particular brand we're getting back to doing that there's no question that the brand itself has the right to win in the pet specialty channel and.
So yes, it is going to take a little bit a time, but as we talked last week.
Between rebalancing the portfolio between Green tree.
And not.
You know getting the right packaging architecture pricing structure, and then really getting back to actually marketing the brand. So.
No, we really think that.
Uh huh.
We can continue to win and and natural bounce, but it is going to take time. If you look at you know total pets fat.
Okay.
And E com.
Both of those.
We're growing both both of those channels.
Thank you. Our next question is coming from Brian Splay from Bank of America artists.
Hey, good morning, everyone.
Right.
Just two quick ones from me first I guess given the.
The performance in dog food.
Both natural balance and the Trish.
Have you lost distribution and I guess, what I'm really after its just as we're thinking about 21, well there has to be.
Some effort and some some resource allocated to maybe rebuilding some distribution that you may have lost this year that I've a follow up.
Fundamentally there hasn't been any significant losses in distribution I mean, just building on the comment about natural balance.
Continues to grow in E com I didnt quite say in the last comment, but clearly there's good growth. There. So we're not we haven't lost any significant distribution in pet specialty and in new tranche. We think that really to highlight is that we're lapping a very strong pipeline fill.
All last year, and so that is not helping comp the comp is not helping the results this quarter, but again on new trash all of the actions that we have.
Implemented are bearing fruit as we as you see we don't we have started to two increased household penetration. So really just again, playing offense and making sure that we're doing now both brands.
Okay, and then and then just.
Last one for me just on on.
The de leveraging and free cash flow remember it right you've got a target of wanting to get the leverage down to two times by 2023 and I guess.
With the stock you know being at at the valuation at that you know is two times.
Still the right number is there a possibility that you'd think about maybe slowing that pace of deleveraging and leaning into the stock at some point over the next two years, just just given that you're generating plenty of cash in and it seems like three times leverages should be something that you could be also comfortable with.
Hi, Brian It's Mark Belgian let me just say couple things then I'll turn it suckers if he wants to add so.
You're right we have in prior presentations talked about at two times levered by the by year to shed 23, I think thats, probably more mechanical than anything I, where I would hone in on more as what we said as it relates to a more recent time period and that would be getting to three times in the near term, which we projected due again to fiscal 21, Mike.
And I'll just ask Tucker to maybe comment on our deployment thoughts going forward, which probably closer dresses. How we would think about buyback on a go forward basis, yes, Mark. Thanks, just to support will Mark said, our goal of getting down to around three times would open up strategic capacity to consider share repurchases and then also M&A activity.
Which has been consistent with our.
Basically our financial policy over overtime.
That would enable us to that get back to more of a balanced deployment model.
Thank you. My next question actually is coming from Chris Growe from Stifel. Your line is now alive.
Hi, good morning.
I just had a couple of questions for you.
Yes, you first to go back to a question Andrew asked earlier on the gross margin.
The overall gross margin outlook for the years, a little lower than where it was before and I.
I guess I just want to understand was that mostly due to the little weaker performance in the third quarter, but it looks like based on that outlook give an improved outlook for the fourth quarter, maybe just some of the factors what have you kind of pushing this up in Q4.
Yes. It was I mean, I think yeah were 38, one for the quarter, which is below even where we are projected full year 38 too so.
And some of that would.
Certainly the topline softness.
That we experienced in the quarter.
I think someone mentioned earlier you know the fourth quarter sales would would project a little bit more positive. So that should help also turned the gross profit, but it really is comes to the regions, where we talked about cost in pricing and then and then just the volume shortfalls in the areas, we called out and Pat.
And I just one follow question if I could on on the Pet Food Division, where you talked about an increase in promotional spending.
Reflective.
We obviously have gone through a nutrition natural balance and some of the challenges in the portfolio today is that trade spending in producing the sort of volume effect that you expect it was that related to competition in terms of you're seeing a competitive increase.
Hi, I'm sorry, what are you asking about treat Chris sorry, I talk about some a pet food in general I thought I felt the increase in treatment. It was in pet food.
Yes, I mean, there is you there would be sound that is related to you know some of the getting the value proposition right I'm, particularly on new trash, which we've done I think when we spoke to that a little bit last week. It cagney and so yes, it would be a bit of incremental there just yet.
Thing that as as a lever.
To to make sure that we're getting the right.
Right, yes pricing in the category.
Thank you. Our next question today is coming from Pfizer.
Your bank your line is.
Great. Thank you good morning.
So I wanted to I wanted to talk about the nutrition brand a little bit more so I know you talked about innovation and new marketing, but then you also talked about.
To be sharpening the price point there.
So I guess, what we're seeing is that some of the higher priced sub brands within Rachael Ray nutrition have been losing distribution.
And then.
The entry level point has been increasing so just wanted to talk about how you're thinking about that as you. As you look at 2021 do you expect to the brand truly consolidate around you know the entry level price points.
You know the under $2 level, two dollar to dollar level or.
You know do you expect sort of will hold the stick decrees across price decrease across.
All the sub brands.
Yes.
The answer to that very limited Mark Smucker, the answer that very last question is no.
We wouldn't expect you know.
Pricing to to get lower I mean, obviously, we're not experiencing deflation in the pet category.
Just highlighting again at new trash in total is a very important brand to our portfolio. You know obviously the actions again that we have taken are starting to bear fruit, which is great.
The sub lined have played an important part in and rounding out the brand, but clearly there is a core there, which you which you highlighted.
Of the base nutritious skews and that is it's very important for us to continue to support those base skews. So.
By no means that we.
Abandoning the soft lines they each play a unique.
Position within within the portfolio within the in the brand specifically, but we are making sure that that base. This core nutrient skews are healthy.
Okay. Thank you.
I wanted to clarify a little bit around fiscal 21. So I think you were very clear around what you expect sales to be but I think last week it.
A little bit of confusion around how you're thinking about profitability.
You know in 2021. So I was wondering just wanted to give you the opportunity to maybe clarify.
How youre thinking about that.
Yes. Good morning. This is tougher I guess just in terms of of that clarification.
What we specifically said this is that we are committed to ensuring that the topline translates to earnings growth.
And the three points that we said in there were one maintaining our marketing investments around current year levels too is just the advancement of ongoing profit or margin management cost programs and then lastly, as just continuing to addressed improved asset productivity and then lastly, I'd just say I think it's best for us to further the conversation.
Next fiscal year on our fourth quarter earnings call.
Thank you. Our next question is coming from Rob Dickerson from Jefferies. Your line is now.
Great. Thank you so much.
So I guess you know your first question.
It's really just on the Green free space in General No. Obviously, there's this.
Elephant in the room, which is you have to use investigations willing to do you see.
I just bring it up because I feel like.
I think it was one of the marks a whatever was stayed on the call said you, though and then also renovation in grain free it sounds like it was actually emphasized.
So I'm, just given a I'm I'm a bit distant from a discussion with retailers and overall, let's say you know trends within the trade.
I'm just curious if you can provide any color or kind of what you think the perspective is at this point given we haven't heard from the FDA and while I'm at obviously, you know consumption seems like it's been dented, a little bit, but some people seem to call. So kind of be blowing it off to an extent. So just any color you can provide would be very helpful.
Sure Rob It's Mark Smucker, I would just start by saying you know.
Asset quality is one of our basic belief and so we obviously it here to on unwavering safety and quality standards.
The FDA has really made no clear link between DCM and the root cause of any specific diet because it isn't known no. Obviously, we're going to continue to cooperate with the FDA and the pet food Institute to make sure that we can support any of the research.
This is happening you've seen that consumers have made some assumptions about what the link might be and we have seen slight decrease in sales for great for grain free, particularly in the pet specialty channel.
But our brands, where each less than 2% at the mentioned cases in the FDA report.
Yeah, and then I guess finally, you know.
<unk>.
Success is really about being close to the consumer and so we will continue to listen to the consumer and make adjustments.
Within each brand or our portfolio as necessary and we are launching we're getting ready to with new.
With green products to make sure, particularly in those brands that have been mentioned that we are striking the right balance between grain and grain out products.
Okay that makes us a natural balance so to speak.
And then secondly, just in retail consumer foods.
No I'm the assumption is a margin profitability on Uncrustables is probably fairly impressive.
Well at the same time, we've seen some marketing margin contraction over the past couple of years, even when including a divestment of.
Baking. So you know if we're thinking forward.
Not just a 21, but just in general.
Do you feel as if kind of coming out of that baking divestment and now that you have already ramped.
Your marketing spend and adjusting the mix.
Kinda at that level of profitability call. It you know that low 20%. So to speak 20, 21% kind of feels like a proper run rate for that division all and that's it. Thank you.
Hey, Rob as Mark Yeah, I think Thats right I mean, if you look at this quarter it was.
Down to probably about 150 basis point from that average because of the write off of the jet power up equipment.
But I think you're right I think we've got a marketing run rate.
It's probably comparable I mean, certainly components will change over time.
And then as I mentioned earlier go as we'd run more product through the up the planned Colorado, we get that over or under absorption corrected that will help but I think your overall assumption is pretty pretty good for now.
Thank you. My next question is coming from Pam Kaufman from Morgan Stanley. Your line is now lives.
Hi, good morning.
Good morning.
I wanted to ask about coffee margins, which were at peak levels. This quarter, how much of the expansion as it related to lower green coffee prices versus lower marketing spend and the segment and how sustainable do you view this level of profitability to be.
Hey, Pam and it's Mark Smucker, Yes, we do get this question a lot and we've been pretty consistent in saying that you know it is that it is a commodity category with where we pass through.
Ups and downs to to our customers and consumers.
So there can be some volatility in the margins, though but we have been consistent in saying and have a.
Hi degree of confidence that we can maintain margins around that 30 ish percent a in any given year. If you could see fluctuations, but we don't see any significant erosion in that I guess the other point is as we continue to drive growth.
In the premium and K Cup.
Segment.
There is it a little bit less propensity in the premium in K Cup segments for for a volatility as much volatility into that will help to maintain margins in a on a relatively stable basis.
Thank God and can you comment on the timing shift and promotional event you mentioned in the pet segment that shifted into the fourth quarter, how much did that impact the third quarter and what are your contribution to be.
Next quarter.
And this is mark Belgya. It was yeah, we called out effectively treat performance if I recall from scripted comments.
Well it with significant enough to call out for the impact on treats that nope I was actually up for the quarter. It was not overly significant to the whole pet business. So there will be as you noted a pickup but it will not be significant Q4.
Thank you for next question today, it's coming from job.
From Wells Fargo. Your line is normalized.
Good morning, Thanks for the question.
Hi, John maybe.
Mark Smucker I wanted to focus a bit on.
The power ups were launched with a lot of confidence that you found an opportunity to extend that brand more broadly across snacking. That's been discontinued after about two years folders eighteenfifty, that's down a solid double digits, losing distribution and I understand not every new product launches successful, but I'm curious just wanted to focus on what you've learned from this recent slate of innovation.
In terms of the test market versus the everyday market and any changes to the integration approach from here and I guess, maybe related to that you seem to be doubling down on uncrustable tooling into the snacking part of the portfolio does the juice experience have you seen differently about the potential to extend your other consumer brands going forward. Thanks.
Hi, John Thanks for the question.
So as you pointed out not all innovations are successful I <unk> from a from a top line perspective, we actually would view the power EPS was successful you, obviously, bringing new consumers into the brand and so forth, but as we got further into the launch and recognize some of the challenges that we might have going forward, that's really would cause.
This to it really a implement our financial discipline and recognizing that we can probably divert some of that support into a brand like uncrustables, so but from a macro perspective innovation is going to continue to be important. It is not the only driver of topline growth.
We have to continue as we said to invest in in some of our larger more legacy brands, but innovation will play a role in both growth brands as well as some of the mainstay brands as well and that is really about striking the right balance between.
In some cases platform and in other cases more line extension driven innovation. So an example in path as we have continue to see some very nice growth on the milk bone brand. The innovation near for example is meeting our expectation.
It is performing as we expected. So you know it's just.
I think the power of for example is one where we chose to make it to take a very decisive action for the benefit of the of the broader business and it was the right decision.
Okay. Thank you Mark.
Thank you. My next question today is coming from Robert Moskow from Credit Suisse. Your line is now lives.
I just a few a cleanup questions I guess coffee in fourth quarter last year I thought that there was.
Inventory build in the trade.
And then it came out in first quarter fiscal 20, well you have a tough comparison in fourth quarter this year to that last year.
The next question was.
Got snacks in general this more of an observation you have a great brand with milk bone and pet snacks is a big priority, but but your disclosure on how that.
Group of brands is doing is a little inconsistent like sometimes we get a number and sometimes we don't is it possible that you might going forward give us like pet snacks altogether, what kind of gross it's generating especially since it's such a priority in high margin.
Hey, Rob it's Mark Belgya yell at last year's fourth quarter. Your your recollection is correct. We had you know up a strong Q4.
But I'll tell you with the performance that we have seen.
Notably Duncan and Bustelo.
We still think that the growth will continue in the quarter, but you are right I think we as we called out in Q1. This fiscal year, we felt the impact of that.
Mark this sector. He was asking about pet snacks, and how we report pet snacks, we've been a little bit inconsistent.
Rob can you just repeat the question please.
Sorry, I <unk> you are sometimes I think you give us a total pet snacks growth number sometimes you don't it's a big priority for your company can you would you consider being more consistent and giving us a total pet snacks growth number going forward.
Yes, I think it's a fair ask you know, we do kind of defaulted time to milk bone.
But certainly we have other brands in that so well taken into consideration. Thanks.
Okay I'll hop off thanks.
Thank you. My next question is coming from Alexia Howard from Bernstein. Your line is now.
Good morning, everyone.
Good morning, Hi that.
Two questions.
First of all we've talked a bit about innovation.
During the call can you just where youre at the moment in terms of new product set up incentive sales I don't know what do you interest you measure that over the past three years or over the past, yeah, and maybe whether that's been increasing or staying stable over time and way you would hope it to get shape.
Over the longer time, and then the follow up question that I have I think it's a little quicker than.
Well the African flying fever, kicking in I'm, probably over the next several months putting on meat input costs. Oh is that something that you were planning for how do you anticipate not playing asking the pet food segment. Thank you and I'll pass it on.
Hi, I like the it's Mark Belgya to answer your first question. If you look at how we define new products that would be products that have introduced over the last three years of current sales. It represents about 5% and that's I think been fairly consistent we certainly a few years back when we introduced some of the Dunkin', particularly the K Cup that was.
Probably maybe a couple percentage points higher, but it but 5% pretty good number for us and then as it relates to the second question again, I think I'll just differ a little bit too one of the earlier questions as it relates to a to forward looking we would look at all costs.
And comment on those when we talk to you folks in June.
Certainly if it was significant enough to take actions or something you know in intermodal that might be different but for right. Now will include that just in our overall cost perspective, when we talk about 21 in June.
Great. Thank you very much I'll pass it on.
Thank you.
Thank you. Our final question today is coming from John Anderson from William Blair. Your line is now lives.
Hey, good morning, everybody. Thanks for the question appreciate it good morning.
A couple of quick ones, just coming back to Uncrustables.
As you you look to should drive the business North of 500 $500 million of sales can you talk about the levers that gets you. There is this more about distribution at retail is it more about new product types or for each of the uncrustable product is that about away from home just.
And to get some some some a little bit more granularity on on what drives you to that level of sales.
Yes, John and it's Mark Smucker, it's in you touched on many of the levers I think at the what I would highlight is.
We have so much runway on uncrustables.
One of the one of our.
Smaller competitors that it had similar product is actually from what we understand exiting the business and just given the fact that we brought the Colorado plant online that really supports the runway and so as you know we have not just in core peanut butter and jelly we have not.
Spent dollars on marketing until basically now and so.
That product has continued to grow as.
You know convenience and other factors at the consumer wants really have had had driven that and so there is a tremendous amount of runway encore. We are continuing to invest in the Colorado facility to make sure that we can support the half a billion dollar.
Target and then yes, the innovation will play will play a role, but I would just.
Stressed the amount of runway just suncor PV NJ at this point.
Super helpful.
The one other question I had was on K cups.
Can you talk a little bit more about.
Yes, where your portfolio sits today and is the K Cup category it aggregate still growing.
With with the changes that you made I think just some of your partnership arrangement.
Is there pricing stability in the category now or just trying to understand how kind of how that segment of the coffee market is playing out right now with growth in stability and profitability. Thanks.
Yeah K Cup is still obviously very important it is.
In dollars it's.
It's not quite half is probably 40, 45% of the dollars in the at home category. As you know the growth has slowed I think actually in the latest 52 weeks.
The growth of K Cups has been about 1% to 2%.
The this is just first.
Quarter, where we've actually seen.
The total coffee category have a slight contraction in dollar primarily driven by just deflation and then and the lower commodity costs and KCAP is growing it as it continues to grow.
We're very pleased with our portfolio. If you look at across all of the brands in the portfolio, we did see growth.
In the quarter on all of the brands and includes of course, Folgers and Bustelo Eighteenfifty Duncan and so it's a country and gaining share. So continues to be important the partnership with curing has been great. As you know we have benefited from over the last couple of years from some lower.
Tolling rates, if you will and that has been that had been beneficial pricing is generally stable I think it is the competitive environment has.
The dust has settled so to speak and I think that we're in a more stable.
Environment in that part of the the category.
Thank you. Our next question is coming from Scott Mushkin from our five capital your line is that lives.
Hey, guys. Thanks for sneaking me and I got kicked off the call and had to come back and so I'm going to kind of just.
That's a little bit more about the other businesses.
But just about the spending shelf space and.
Placement allocations at retailers and kind of the key can peanut butter jelly and coffee brands.
I guess, we're continuing to see a little bit of private label, making further envelope rose maybe dollar volume, but certainly on shelf space allocation and placement.
And we're seeing the same thing a little bit with premium local and gourmet offerings. So it's just wondering if you could talk about things that you guys can do to make sure your core brands don't road.
Okay.
Scott, It's Mark Smucker, I think the first comment it starts with having number one brands and the number and leading brands like Jeff Smuckers Folgers et cetera.
Have a right to exist in a REIT to play in each of the categories. In so, whereas you may see some growth of private label.
And you know to a lesser is much lesser degree some of the gourmet brands.
You may see some some shifting around in the shelves that but generally speaking it would be the this is you know this number three brands are going to probably a softer than most and first so weak.
Maintaining category leadership, continuing to partner with the retailers.
Leveraging the fact that private label typically compares themselves to the leading brand.
All all tend to in general terms work in our favor.
Hi, Thanks, guys appreciate sneaking me.
Thank you we reach of our question answer session I went to turn the floor back over to management for any further closing comments.
Wanted to thank everyone for taking the time today appreciating you all at Cagney and.
Really feel very good about where the business is and our ability to continue to grow and focus where we need to and again. Thank you to our fantastic employees for all their efforts.
Ladies and gentlemen, this concludes our conference call for today. Thanks.
Participating and have a nice day all parties may now disconnect.