Q2 2021 J M Smucker Co Earnings Call
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Good morning, and welcome to the J.M. Smucker Companys fiscal 2021 second quarter earnings Conference call. This conference call is being recorded and all participants are listen only mode.
They will open the conference up for questions and answers after the prepared remarks.
Please limit yourself to two questions. During the Q1 day session and then re queue. If you have it there's no question.
I will now turn the conference over to Aaron Broholm, Vice President Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us for our fiscal 2021 second 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 initiatives and fiscal year priority.
Tucker Marshall CFO will then provide detailed analysis of the financial results and our updated fiscal 2021 outlook.
During today's call we will make forward looking statements that reflect the company's current expectations about future plans and performance. These.
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 website at J.M. Smucker Dotcom addition.
Additionally, please note the company uses non-GAAP results to evaluate performance internally as detailed in the press release.
We have posted a supplementary slide deck summarizing the quarterly results.
These slides can be accessed on our website and will be archived there along with a replay of this call if.
If you have additional questions. After today's call. Please contact me.
I will now turn the call over to Mark Smucker.
Thank you Aaron good morning, everyone and thank you for joining us from.
First I want to acknowledge that the co bid 19 pandemic continues to impact our every day way of life, making the operating environment dynamic and difficult to predict.
Incredibly proud of our employees, who have worked tirelessly to deliver exceptional operational and financial results.
And I would like to recognize our suppliers and retail partners, who have supported us during this unprecedented time.
As we are entering the winter months and are experiencing a nationwide search in co bid 19 cases, we remain committed to prioritizing the safety and well being of our employees supporting the communities, where we do business.
And providing a steady quality supply of food for consumers and their pet.
In the second quarter net sales increased 4% versus the prior year and was slightly ahead of our expectations.
At home consumption remains elevated as sales in our coffee consumer and international retail businesses collectively grew 10%.
Sales in the pet food and snacks segment were in line with expectations as continued growth for cat food and dogs snacks were offset by anticipated softness per dog food.
Finally, the away from home business continued its sequential improvement from the fourth quarter last fiscal year. When many of our customers were either closed or shut down.
Adjusted earnings per share was $2.39 an increase of 6%.
Benefiting from increased sales volume improved profit margin and reduced interest expense, partially offset by increased EPS DNA expenses.
Due to stronger than anticipated results through the first half of the fiscal year and updated assumptions for the second half of the year. We have increased our full year expectations to include net sales growth of one to two per cent versus the prior year.
And adjusted earnings per share in the range of $8.55 to $80.85.
This updated guidance does not include the impact of the pending Chris go divestiture Tom.
Tucker will provide more details regarding the inputs informing our fiscal 2021 guidance.
This fiscal year, we have been focused on force specific priorities.
Driving consistent net sales growth.
Increasing our focus on financial discipline, with an emphasis on maintaining or improving our strong profit margins and cash flow generation.
Strengthening our commercial execution and building competitive advantages through harnessing our full suite of capabilities.
And living up to our commitment to our company's purpose of feeding connections that help us thrive.
The execution of these priorities will help us to continue delivering on our long term strategy to lead in the best categories build brands consumers love and be everywhere.
At the halfway point of the year I am encouraged by the progress we have made against these priorities.
We will continue to execute against these priorities in the back half of the year, while furthering our focus on the brands and categories that have the greatest growth opportunities over the long term.
We continue to benefit from strong demand due to incremental at home consumption related to the pandemic and achieved a third consecutive quarter of net sales growth above our expectations.
Key metrics for consumers purchasing our products improved in the quarter with household penetration.
Repeat purchasing rate and dollar spent per buyer, all having increased versus the prior year and sequentially from the first quarter.
Showing that many of the new consumers gained during the initial phases of the pandemic have remained with our brands.
We continue our efforts to retain these consumers and anticipate many will remain loyal consumers of our brands beyond the pandemic.
In the second quarter.
We are pleased to have increased our dollar market share in core consumer and coffee segment as well as our cat food business highlighting the strength of our broad brand portfolio in these categories.
In aggregate, we grew share for brands, representing roughly half of our sales.
And we grew retail dollar sales for over 80% of the portfolio.
This growth has been enhanced by capabilities, we have built for our E Commerce business, which continues to capture a greater portion of consumers grocery spend.
Our total ecommerce business grew 45 per cent compared to the prior year and accounted for 11% of total us retail sales.
We anticipate ecommerce growth to remain sticky as consumers are increasingly adopting and maintaining online grocery shopping habits.
Our sales performance across the company has been supported by the outstanding work. Our teams are doing to maintain high levels of production.
While we are adequately maintaining production to meet customer demand, we are producing at or near capacity at many of our plants.
We have experienced an uptick in customer orders over the last two weeks with the resurgence in co bid cases, and we continue to monitor potential supply chain limitations and are taking proactive measures to minimize any potential disruptions that may be caught us by a shortage of materials reliable.
Transportation or increased demand.
Turning to our segment results in pet food, our cat food and market, leading dog snacks business.
Delivered another quarter of net sales growth.
Sales for Cat food led by the Meow mix and nine lives brand grew 9%, representing the 13th consecutive quarter of cat food growth.
And our market share improved by over half of a point in the quarter.
The dogs snacks category continues to experience growth related to increased treating occasions with pet parents spending more time at home with their dogs translating to net sales growth of 3% for our brands led by Pepperoni, Rachael Ray new trash and milk bone.
Our dog foods sales declined with the largest decreases attributed to private label and the natural balance brand.
New Trish dry dog food experienced anticipated weakness. However, we are confident that our actions will improve the trajectory of the brand.
These efforts include increased marketing investment enhance packaging and improved assortment through SK, you optimization and unique innovation launching in the fourth quarter.
As a total brand nutrition sales were up low single digits in the quarter as increases for wet dog food dog snacks, and cat food and cat snacks offset the declines in dry dog food.
Turning to our coffee business, we delivered net sales growth for all brands in our market leading at home coffee portfolio as total segment net sales increased 9%.
We increased our dollar share by a half point and now have over a 25 point share with three of the top 10 brands in the category.
Growth was led by Duncan and Cafe, Bustelo with both brands, achieving 20% retail sales growth.
In the K Cup segment, we continued to grow at over two times the category rate and gained nearly two share points in the quarter.
Over 1.5 million net new households, consumed at least one of our coffee brands during the quarter.
As new coffee habits have formed during the pandemic.
We have the opportunity to retain a substantial portion of these new consumers for the long term.
We will support continued momentum with increased marketing investments in the back half of this fiscal year.
In our consumer foods segment growth across all categories drove a 12% increase in sales.
In snacking are Smuckers uncrustables business continued to deliver exceptional growth.
Second quarter net sales increased 16%.
And the brand gained nearly a full retail share point.
We remain on track to add capacity at our long line facility in early calendar year 2021.
And we've accelerated future capacity plans.
We are confident we will be able to continue this strong growth moving forward.
In peanut butter, the Jif brand return to market share growth and has now gained six share points had meant since mid may do to replenish product assortment being back on shelf.
Growth in the quarter occurred across both volume and dollars inclusive of a list price increase in August to reflect higher peanut cost related to reduced crop yields.
With our full assortment back on shelf upcoming distribution expansion and innovation.
And promotional and marketing programs, returning we anticipate further peanut butter share growth in the back half of the year.
Underpinning the improvement in net sales and market share has been strong commercial execution and a continued commitment to financial discipline.
Retailer inventories have improved and we are resuming some investments in marketing and promotions that were delayed as consumer take away outpaced available production in certain categories.
We plan to increase marketing investments in the second half of the year inclusive of mass media.
Targeted digital consumer engagement E commerce, and click and collect programs.
We continue to balance return with reimburse us reinvestment to support our brands and to benefit from structural changes in consumer behavior.
I want to highlight one additional critical area of our continued execution improvement during the quarter.
While growth through acquisitions has and will continue to play a role in our strategy, we continually evaluate our portfolio and have been willing to divest businesses that are no longer consistent with our strategic focus.
We did this with the divestiture of our us canned milk and us baking businesses the past few years.
Furthering our plans to exit the us baking category, a few weeks ago, we announced the signing of a definitive agreement to divest the crisco oils and shortening business.
These divestitures underscore a commitment to further focus our resources on brands and categories with the greatest growth opportunities.
As we move ahead, we will continue to evaluate all elements of the portfolio and make changes when necessary to align our portfolio for growth.
In summary, I would like to reinforce a few key points one our business continues to perform well and the actions we are taking to deliver our fiscal 2021 priorities are leading to improvement in key metrics, including market share that position us well for the remainder.
Of the year and beyond.
Two we continued to make progress against our consumer centric growth strategy, including increased marketing investments to position us for sustained growth even with the future moderation of co bid 19 related demand.
And three I am incredibly proud and thankful to all our employees for their dedication and perseverance through this extraordinary time.
I'll now turn the call over to Tucker.
Thank you Mark.
Good morning, everyone let.
Let me begin by providing an overview of the second quarter results before giving an update on our financial outlook for fiscal 2021.
Net sales increased 4% driven by favorable volume mix and the us retail coffee and consumer foods segments.
From by elevated at home consumer demand, partially offset by a decline in the away from home business.
Adjusted gross profit increased $34 million or 4% from the prior year Mark.
Mostly driven by the positive contribution from volume mix.
The net impact of price and cost was also favorable primarily due to manufacturing operating leverage from the increased volume and net pricing benefit partially offset by higher input costs and freight expense.
Adjusted operating income grew $18 million or 5%, reflecting the increased gross profit, partially offset by higher SDMA expenses within us DNA general and administrative expense increased $23 million primarily.
Primarily reflecting higher incentive compensation and the reinstatement of salary increases.
Below operating income interest expense decreased $4 million and the adjusted effective income tax rate was 24% compared to 24.3% in the prior year.
Factoring all this in second quarter adjusted earnings per share was $2.39.
Pair to $2.26 in the prior year, an increase of 6%.
Let me now turn to segment results.
Beginning with pet foods.
Net sales were comparable to the prior year with cat food growth of 9% and dog snacks growth of 3% offset.
Offset by a dark for a decline of 8%.
Pet Foods segment profit declined 9% compared to the prior year, driven by lower net pricing and increased marketing expense, reflecting investment for the new Trish Brad.
Turning to the coffee segment net sales increased 9% led.
Led by the Duncan and Cafe, Bustelo brands, which continued their strong trends growing 24% and 19% respectively.
The Folgers brand grew 2% driven by gains for both roast and ground and K Cup format.
Total K Cup sales in the segment were up 15%.
Coffee segment profit increased 11% driven by the favorable volume mix and reduced EPS DNA expenses, partially offset by the unfavorable net impact of pricing and costs.
In consumer foods net sales increased 12% with growth for all major brands in the segment.
Sales for the Smuckers brand grew 11%.
Led by 16% growth for Uncrustables frozen sandwiches, which marks the sixth consecutive quarter of double digit growth.
The Jif brand grew 12%, reflecting a list price increase reduced promotional activity and increased volume for peanut butter.
The discontinuation of Jeff power ups was the 6 million dollar headwind in the quarter.
Consumer foods segment profit increased 48% due to the favorable net price and cost efficiencies related to the higher throughput at our plants increased volume mixed.
And lower EPS DNA expenses.
Lastly, and international away from home net sales declined 10%.
The away from home business contracted 24%, primarily driven by declines in coffee and portion control products due to the continued impact of co related changes in consumer behavior.
International growth of 7% was primarily driven by increases in Canada for the baking coffee and condiments categories.
International away from home segment profit decreased 22%, mostly driven by the lower volume mix and the away from home business.
Second quarter free cash flow was $326 million, which represented a $166 million increase from the prior year, reflecting a decrease in net working capital requirements.
The growth in earnings and reduced capital expenditures.
Capital expenditures for the quarter were $52 million.
We finished the quarter with cash and cash equivalent balances at $406 million.
We paid down $216 million of debt during the quarter, resulting in a total debt balance of $5.2 billion.
Based on a trailing 12 month EBITDA of approximately $1.8 billion, our leverage ratio stands at 2.8 times.
The combination of the improvement in earnings and debt repayments over the past three quarters has resulted in our leverage ratio below our three times stated target.
We continue to prioritize the use of free cash flow towards dividends and debt repayments, while maintaining our investment grade debt rating.
In evaluating other strategic uses of cash for future growth and shareholder value creation.
The expected divestiture of oils, and shortening business creates additional strategic flexibility for reinvestment and the ability to offset the earnings dilution with the after tax cash proceeds overtime.
Let me now provide additional color on our revised outlook for fiscal 2021.
The severity and length of the pandemic and related applications continue to create uncertainty and our financial outlook.
Changes in consumer purchasing behavior retailer inventory levels macroeconomic conditions, and any manufacturing or supply chain disruption could materially impact our actual results.
That said, we are sharing our expectations based on our current performance and understanding of the overall environment.
Net sales are now anticipated to be up one to two per cent compared to the prior year, which reflects the sales performance from the first half of the fiscal year and the low to mid single digit sales growth anticipated in the third quarter.
Fourth quarter net sales are projected declined substantially due to the lapping of a $185 million benefit in the prior year related to the initial consumer stock up purchasing day.
During the beginning of the pandemic.
We continue to anticipate full year gross profit margin to range from 37.5% to 38%.
The projected deceleration and gross margin for the back half of the year includes incremental trade spend investments primarily for the pet business.
Timing of fixed cost expenses related to manufacturing absorption and increased freight and transportation costs.
As DNA expenses are projected to increase 1% to 2%, primarily reflecting increased marketing spend and incentive compensation.
Total marketing spend is expected to approximate six and a half percentage of net sales with additional back half brand reinvestments, partially offset by a reduction and plan not working marketing spend.
Net interest expense is now anticipated to be $180 million.
We continue to anticipate an effective tax rate of 24% and a weighted average share count of 114.1 million.
Taking all these factors into consideration, we anticipate full year adjusted EPS to be in the range of $8.55 to $8.85.
Due to the incremental reinvestments and the projected reduction in gross profit margin third quarter. Adjusted EPS is anticipated to be down mid single digits year over year.
For your free cash flow is anticipated to range from 975 million to $1.025 billion with capital expenditures of $350 million versus the prior guidance of 300 million.
As noted in our press release. This morning, our full year outlook does not include the impact of the divestiture of the crisco oils, and shortening business, which we expect to close in the third quarter.
The divested net sales for the remainder of the fiscal year is estimated to be $100 million and the earnings per share impact before any use of proceeds is estimated to be 20 cents.
Earnings per share estimate includes five cents of stranded overhead not anticipated to be covered until the beginning of next fiscal year.
In closing, let me reiterate Mark's opening comments, we are pleased with the second quarter results, which showed the strength of our brand portfolio and the health of our categories.
With continued financial discipline, we are committed to delivering sustainable and consistent long term value for our shareholders.
Thank you for your time, we will now open the call to your questions.
Operator, please queue up the first question.
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Our first question today is coming from Ken Goldman.
Hi, good morning. Thanks.
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I wanted to ask Mark.
Mark earlier this year you laid out your four key priorities.
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And one of these was an increased focus on financial discipline I think.
No that was maybe partnering with your customers on on allow you to take more pricing what appropriate if I read that right.
You did have some pretty good pricing. This quarter. This is the first increase in any quarter for the total company in almost three years Im just curious how much you credit.
Changes that you've made to day to your financial discipline.
For that price increase versus just the ability to sort of take pricing during co base, which I think is a little bit easier for everybody can you just give us a sense on how much you sort of strategic change has helped you I think it would help us understand how sustainable some of the maybe the pricing maneuvers can be.
Thanks for the question.
First of all I guess I would just highlight when we talk about financial discipline, we mean all of it holistically in terms of.
Cash generation, what we do with the cash our day.
Net pay down.
Continuing our our our our cost reduction.
Continuous improvement mindset, all of that being part of that.
From a pricing perspective, I think we've been pretty consistent over over time in terms of our ability to take price.
No.
We're always very prudent when we do so we work with our customers we need to ensure that the pricing is justifiable and in this case in particularly in peanut butter.
It was very clear that that we were experiencing cost pressures and could demonstrate that to our our trading partners and so for us. So.
Having price discipline, and making sure that that we can pass along price increases and in some cases decreases in categories like coffee, we will continue to do so its fundamental to the success of our business and our ability to deliver our financial.
Result, and goals.
Okay. Thank you for that and then from us.
Follow up you talked about maybe.
Resuming a little bit of marketing that was delayed but.
But you've also talked about I think being still tight on capacity, which makes sense and.
Having an uptick in orders the last couple of weeks I'm. Just curious do you have much flexibility in your marketing spend if you feel like the return on that investment won't be as good as you anticipated even if it's for all the right reasons right.
Just mainly because demand is already there excluding marketing.
Yes, great question, So first of all.
As we have demonstrated over the last few quarters, our ability to continue to improve our share numbers.
It it really is important too.
Connect with our consumers at this particular time, because as we have experienced a significant uptick in households, and our brands have been in some cases rediscovered by consumers.
To really engage with those consumers is critical and given the fact that we're now seeing obviously a second or.
Maybe in some cases, a third wave the industry is better prepared for this wave in many cases, even though the supply chain may be somewhat tight.
To deal with the increased demand so it affords us the opportunity to.
Make these investments to support our brands.
And do so in a very targeted way that we ensure we get the return.
Thank you. Our next question is coming from.
Oh.
Moving to bank. Please go ahead.
Yes, hi, Thank you good morning more non.
I guess I'm good.
I apologize for asking us fiscal 22 question.
But I'm, bringing it up only because.
Mentioned, the dilution impact from Chris go and you're talking about some reinvestments.
And what I'm really trying to get at is how.
How do you think about the pulse co of it.
And if there's any anything you can see around how we should think about.
As you enter fiscal 22 is the idea that deal.
Offset some of this dilution from.
Potential cost savings that you might outline.
Just just some color on how youre thinking about.
Hello.
Good morning, this is talker.
With respect to your question.
We believe that we have very strong underlying growth in our portfolio across both pet coffee and snacks and we believe that that momentum will continue into the next fiscal year.
On the other side of the pandemic.
And as it relates to the divestiture of the Crisco brand, we acknowledge that the contribution on a full year basis is about $270 million at top line and the EPS impact is about 45 to 55 cents.
As well and we would anticipate over time with a very strong balance sheet, a balanced capital deployment model and the after tax proceeds from the divestiture to have the opportunity to either reinvest in the business or potentially repurchase shares to to replace that dilution.
And then lastly, as we are always committed to a continuous improvement mindset to support our financial margins overtime in order to keep them strong to deliver profitability.
Okay. Okay. That's helpful and then if I could just ask about the increase.
Capex for the CR.
Thank you mentioned I might have missed us, but could you give us more details around that and then again, how should we think about sort of next year's capex.
Pfizer for this fiscal year at the beginning of the year, we had us from $300 million target.
We have increased that to $315 million for the balance of the year. The primary driver of that increase is due to our continued investment in longmont to support the growth of the Uncrustables brand.
And as we go into next fiscal year, we would anticipate seeing elevated levels of Capex as we continue to build out the next phase of the Longmont facility, which is a new bakery and additional manufacturing line.
Okay. Thank you.
Thank you. Our next question excuse me is coming from David Driscoll Research. Please go ahead.
Great. Thank you good morning, and congratulations on the strong results guys. Thank you.
Mark I wanted to ask about coffee.
Some interesting comments today and I want to explore them just a bit I think you said Dunkin' Donuts was up 24% bustillo up something like 19%. The question I have is like who's buying this is it new customers to the brands or is it a lot more consumption from the existing custom.
Mers and this is really leading to the to the thought process of what happens going forward do you do you have some stickiness to these new sales within coffee. Thank you.
David Thanks for the question.
I would start just by reiterating that in in total.
Our entire coffee portfolio did grow in the quarter, which is fantastic you're.
You're right exactly sure you're dead on in numbers on Dunkin' into Stello cake.
K cups were well over two times a pacing.
Over two times, what that segment is growing so that that's also good.
But again this million and a half new households speaks to the fact that there aren't some new consumers for sure.
Boost allo, obviously has a very strong.
South, Florida, and New York Latino base.
But continues to grow with with non Latino millennials that as a core consumer there and then Dunkin' has you know the the Dunkin' canister. We are now selling dunkin' in the cancer that that item has been doing extremely well also and in the case of dunkin, it's a little bit of both its just increase consumer.
Option, because it at home and some new consumers, but just great very proud of the results on coffee.
Great. Thank you so much guys.
Thanks, David.
Thank you. Our next question is coming from Bryan Spillane of Bank of America. Please go ahead.
Hey, good morning, everyone.
Morning.
Maybe just to follow up on the.
On the question around Capex and I guess, what it's tied to is I.
I think mark earlier in your prepared remarks, you talked about.
You know the idea of the expectation that some of this incremental demand would be sticky right. So you're going to retain some of these some of these sales and maybe some of these customers that that work here pretty co bid. So I guess, if that's the case how do you how do you how should we think about.
The need to invest right and partly Capex you know the supply chain manufacturing has been tight capacity from tight so.
If you've got a bigger customer base is there a possibility I guess that we will need.
To see an elevated level of capex beyond just what you're doing it across the board.
And maybe second to that would it require any other investments you know a growth in your sales force or.
Just anything else that would need to be sized up if the business has been rebates higher.
Brian Thanks for the question first and foremost we actually feel that from an organization standpoint, we are.
Very capable of absorbing the additional sales growth.
From a capex perspective.
Clearly our focus is primarily on uncrustables and increasing that we do feel that we have been able to meet demand and on the other categories and are monitoring their supply chain on a daily basis, if not 24 seven to make sure that net all of the link.
Links in the chain continues to work well and that has been a focus.
But.
From a consumer standpoint, if you just step back and think about.
The growth that we've experienced our confidence in our ability to retain some of these new consumers has grown and that is because we have seen continued repeat purchase rates.
And.
Now have the ability to target and make sure that we're spending incremental marketing dollars to ensure that we retain some of those so I think we feel very good about there definitely is some sticky net it's very difficult to quantify but though but we maintain our confidence that we can retain.
Many of those consumers alright. Thank you and then maybe just as a follow up to Dave Driscoll question with regard to the coffee consumer.
Any sense, yet I mean, some of that is clearly coming from away from home right, maybe people drinking dunkin' at home rather than go into the shops, though.
And especially if it's tied the K Cup.
Do you give us sense, yet as to how much of that consumption behavior could stick at home, meaning you know rather than stop on the way to work to buy coffee. You. Just grew the you grew the K Cup and bring it with you. So I guess my question is do you think that some of the coffee consumption that you're capturing now Dick's book.
'cause, you'll you'll actually take away from the away from home consumption.
You know.
We clearly acknowledge that they have been habit of change in folks have been have become.
More comfortable with brewing coffee at home.
I think as as routine GAAP.
Go back to somewhat normal you're going to see folks go through the drive through and obviously, we want our partners at Dunkin' to win but.
But clearly the comfort with you know obviously the growth in in hearing rumors.
At home also helps helps that trend so again difficult to quantify.
Confidence that we will retain some stickiness, but but I think yes.
I think we feel good where we are right now okay, Thanks, Mark and happy Thanksgiving everyone India.
Thank you. Our next question is coming from Chris Growe of Stifel. Please go ahead.
Hi, Good morning, Good morning, Chris Good morning.
I just had a quick question for you in relation to retail inventories it sounds like those were rebuilt a bit in the quarter.
Was there an increase in our second quarter inventories I'm, just trying to understand if you're at a point, where you been able to build inventory to a proper level.
Both around the the.
Baking season in particular, and like us and any potential second wave or whatever as you said in the third wave that we're on right now for the for the virus.
Yes, I think I think my earlier comment as the industry being better prepared for this way.
Wave.
Relates to not just inventory, but all of the links in the supply chain.
You know communicating better collaborating with our trading partners to make sure that we can deliver.
There has been some rebuilding of inventory, but I would also acknowledge that it's it's reasonably tight and so that's why we continue to manage on it literally a daily basis to make sure that all those links are working well together and.
It has to do with communication and just staying on top of it.
Are you able to produce to your two demand today. For example are you able to build inventories and your production or you just at a point, where you're keeping up with demand.
In some areas, we're building a little bit, but we're generally keeping up.
Okay. Just a quick question as a follow up on the gross margin you had a very strong first half performance.
You did indicate a lower gross margin overall to your today basis I'm just trying to figure how much of that is the the fourth quarter comparison, which is a tough one in.
And then how much of it is this incremental or kind of restarting the investing back in the business do we see that starting in Q3 or is it more about the Q4 comp that that affects the gross margin for the full on a full year basis.
Chris So as we stated we did guide to a 37.5% to 38% gross profit margin for the full fiscal year on.
The back half is going to be a little bit softer thats largely driven to the volume comps that you talked about in the fourth quarter, but it also has some incremental.
Pet trade investments included in there. Additionally, it has some lost manufacturing absorption and that it has some incremental freight or transportation expenses as well that are impacting.
The back half.
Okay. Thank you for that and happy Thanksgiving as well.
NGL.
Thank you. Our next question is coming from Rob Dickerson of Jefferies. Please go ahead.
Great. Thanks, a lot.
Sort of spend another minute or so just on the margin sorry, Tucker so secret.
Just I guess in terms of the of the pet tree.
Strength that you're speaking to is that.
Do you view that.
Certainly more temporary in nature.
You've given us some one offs or is this a situation such that kind of good.
If it works in tandem with that.
But the rebranding.
Krish and solidifying shelf right just kind of co.
Working all that door.
On that.
In store display piece and I'm just.
As I've, just try to right size kind of how that.
Margin or that imply a margin so to speak.
Vis-a-vis your guidance kind of falls through per segment, because it seems like the freight and the transportation it kind of across the segment.
Sales like pet might be a little bit lower year over year relative to the other segments, our net potentially lower as we go into next year, that's all assets.
Rob when you think about the investments and trade within the pet business Theres sort of there's sort of two elements there to consider one is.
As we think about supporting innovation and how we bring innovation to our retail or partners.
I can component as we continue to advance our placement and positioning within E commerce as well.
And then on the other coffee. Thank you you would consider those correctly across either manufacturing absorption and also across the freight and transportation as well.
Okay, great. Thanks, a lot.
Thank you. Our next question is coming from Robert Moskow of Credit Suisse. Please go ahead.
Hi, Thanks for the question this is.
More from model like.
Your your DNA is a lot higher in the quarter, you said a lot of it has to do with incentive comp.
Is that just kind of like a one quarter impacted Bennett tracks.
Cracks down for the next two or are you there.
Assuming that you are beating numbers, you're going to have an elevated spend for the next day for the back half us well versus year ago on Gionee.
Maybe you can help us on the corporate expense line to assets, if that's the right place to put it.
And then I was going to ask about the the trade investment in new Trish I mean, how significant is it what's it going to go towards.
Do you have to increase your space or is it really just you have to swap out a lot of old SK use and put a new one day, you're paying the slotting fees for that.
Rob. Thank you I'm going to cover the Sta question, and then hand, it to Mark to talk a little bit about the new Trish tactics.
As it relates to the quarter you are correct incentive comp was up year over year, that's largely driven by the performance of the company as compared to what we initially anticipated. So there was a true up in the quarter and then there will be incremental costs in the back half of the fiscal year, which is included in our guidance range.
And then as it relates to overall EPS DNA expenses, we are anticipating those to be up kind of 1% to 2% year over year, a part of that is the incentive compensation inclusive of the reinstatement of Mark.
Cost as well and then also our desire to reinvest marketing dollars in support of our brands.
Rob It's mark if I, if I can try.
Try to answer your question question around new Trish and little more holistically.
As you know, particularly read recently, we've really been trying to.
And sure that everyone understands that the success of our pet business really rests on three pillars, So cat snacks and dog and clearly in those first two we had great performance in the quarter and Theres still a little bit us softness in dog, what's what's great about new trash right now is.
You know as we focus on the total brand we grew it.
So whether that's good contributions from wet dog from.
Some snacks and some some cash performance there in aggregate the brand grew which is great.
We knew that we were going to continue to have a little bit of softness in dollars. It was more or less as we planned it.
And as Weve spoken in the past we've made some very specific and targeted actions on that but we're not done. So we are we remain very committed to that brand and ensuring that the dog portfolio gets healthy.
Several of the actions that we're taking don't really begin to come to fruition until more like the fourth quarter. So yes. There has been some trade support the brand in the interim our marketing was up 30% in the quarter on new trash and then as.
As we get into the back half you will see us some of the things that we talked about optimizing the portfolio in terms of getting the right skews refreshing and making the packaging more consistent and then obviously some new innovation coming in the fourth quarter. So it is that it is a journey we ran.
Moving now as it is not we're not going to flip the switch overnight, but we remain committed to the actions that we're taking and have confidence in the brand in its totality.
I understand mark but I.
I asked about what's the trade investment and third quarter is typically so is it is it price assessments or is it slotting fees to kind of optimize the merchandising in third quarter.
No Rob why don't we do this why do we take that offline.
Okay, all right. Thanks.
Thank you Mark.
Our next question is coming from Jason English of Goldman Sachs. Please go ahead.
Hey, good morning folks took learning toys.
First are you still targeting two times to throw us net debt to EBITDA, but fiscal 2003, and if so should we just assume that you'll use the crisco proceeds to pay down debt.
So as we think about our desired leverage profile, we continue to focus on being at or below three times leverage which we are there now we did pay off and an additional $200 million of debt in the second quarter and the term debt specifically.
And so we remain committed to healthy leverage profile also to the payment of dividends, but now we have begun to open up strategic capacity with either our free cash flow generation or with the proceeds from the divestiture of the Crisco business, which then enables us to continue to either enhance our debt position or.
Actually to buy back shares to replace the lost earnings overtime.
Okay, and you just sort of strategic capacity, but you referenced sort of buybacks.
Should I shall I say it seems like I should not interpret that the terms strategic capacity into to mean M&A.
Yeah, I think in the near term.
Large M&A is probably not what we're focused on I think we're focused on the execution of our business from the delivery of that while at the same time, having a balanced capital deployment model and returning cash effectively to share holders to drive value.
Thank you and one more quick one on Jeff.
Sounds like a great quarter for Jeff from congrats on that but in line.
Looking at the Nielsen data your price gap to private label sort of right back where it was before you went through that but that period of investment to try to get it down.
Do you think you can hold at this level or should we expect you to have to once again get back allows us price to re close that price gap.
Jason its mark the short answer is no I don't think we are going to have to give that back I think the I think the the dynamic that caused us to take the price increase are real and day impact the broader industry you know we have.
In our case, a very solid us supply and relationships with their suppliers on peanuts.
I think it's possible that there we continue to see some some supply disruption or in the market and so the dynamics, whether it be just higher cost peanuts.
Quality issues with peanuts, those are going to probably persist.
For some time and so you know I think we've we've demonstrated over the last several months that the actions. We have taken have worked and we will expect to stick to those.
Thats helpful. Thank you talk later bye.
Thank you. Our next question is coming from John.
Our net of Wells Fargo. Please go ahead.
Good morning, Thanks for the question.
You know John Mark I wanted to touch on single serve coffee just given the returns of share growth per Folgers M. I guess really just started sustained drop in market share for private label during coated.
What's your sense as to why private label goods. So pressure is it just a category where consumers are flocking to brands right. Now are you seeing different category management by retailers just how do we think about any more permanent changes in category dynamics their favorite brands going forward as co, but sort of normalizes. Thank you.
I think it's John I think it's a little of us all.
All of what you said I think there is some we have a very consistent supply we have a very robust and and scaled supply chain. There is no question from a consumer standpoint, a brand standpoint consumers are definitely feeling comfortable with brands that they know and trust.
The.
The primary players in the coffee category tend to hedge.
And and you know use financial instruments to buy coffee, we have seen that private label suppliers don't tend to hedge as much and I think that might have have had an impact on.
On some of the private brands, but we remain committed to our strategy of.
Producing and maintaining a steady quality supply of food and that includes coffee.
And working with our trading partners to ensure that we maintain those products on shelves and and and engage with the consumers were wherever we can.
Okay. Thanks Mark.
Thank you. Our next question is coming from Alexia Howard of Bernstein. Please go ahead.
Good morning, everyone morning, Alexia.
Hi, guys a couple of question submersible.
You've mentioned the freight cost inflation are quite a few times on so called this morning, what percentage of Cogs on just that represents and can you talk about what proportion of your freight costs are already contracted out for us is.
Well you are having to watch happened spot market and then I have a follow up.
Yes, Alexia as as it relates to the transportation costs.
They are probably in the low single digits sort of mid probably mid single digits in terms of freight cost as a percentage of our Cogs us I think what we've shared before.
And we are experiencing an increase in those transportation costs year over year, primarily driven by the environment that we've talked about.
Okay. Thank you and I have just a broader question backing.
Started the pandemic you hired a new COO I think that was the first chief operating office that you've had in the company I'm just wondering whether there are any priorities that have been.
Oh and opportunities and whether that.
What we might expect from the upcoming Investor day in terms of.
What you're going to be sharing with US next month, Thank you and I'll pass it on.
Thanks, Alexia you're right. It's the first COO under my tenure.
John would would be the first not not in our company history.
But I would highlight that rather.
Rather than maybe answer that specifically.
I really look forward to having you all have some interaction with my broader leadership team, including John and others at Investor Day, and part of what we hope to demonstrate.
Demonstrate to you during our Investor day, it's just the the strength and expertise of this team and how each of them truly do complement each other I I have to say I'm proud that I have.
Never worked with the team that this is a fantastic in my career.
And really hope that that we can GAAP.
Net you all to interact with John and the rest of the team on December 10th.
Thank you all profit on.
Thank you. Our next question is coming from Laurent Grandet of Guggenheim. Please go ahead.
Hey, good morning, everyone and warning.
From a so called up question like should you not like to come back to the the question about this but units Oh.
All saw off some of your segments here. So could you could you put US. Please let us know if the stickiness in your view should be more coming from retaining a new consumers that came into your franchise or you can get us consumption of existing consumers.
It's actually been both lower on it's been clearly as at home consumption has has increased we definitely have seen us.
Higher consumption.
Clearly, there's been a shift to E commerce, which does in many cases help repeat purchase.
And then again, having seen repeat purchase both in brick and mortar and ecommerce on many of our brand over the last quarter gives us that's what gives us the increased confidence of of.
These consumers remaining in our in our brands.
Thanks to us.
My second one is about the guidance you raised but getting from not really just on the top line.
Weve Odeon spoken to you about about coffee then why did you decide to increase guide US no latch on to some of your thought process here as I remember when I spoke to you took us about longer Goldman machines. It so it sort of volume.
Instead of being construed us was investor community. So being you know in a place where you should be able to beat guidance relative or get to the guidance was about us being.
Being shut in line or yes, moving to us you're so why did you.
I mean do you decide to go to guide Us no.
Uh huh.
I joined US and he has got out to you your support this year. Thanks.
Lauren as Mark and I may ask Tucker to chime in here, but clearly one of my fundamental responsibilities as CEO is to make sure that we are providing our investors with it.
It as much visibility into our current thinking as possible and setting targets that we can meet or exceed and I'm very pleased over the last three quarters that we've been able to do that.
I would I guess you know I would just highlight that these are very uncertain times, we do feel that we have a responsibility to our investors to to tell you what we know when we know it and.
And so the current revision reflects a change in what we believe we can deliver we clearly had an over delivery in a in the us in this in the second quarter, which caused us to think a little bit differently about the remainder of the year. So.
So it's really about making sure that we're communicating with their share holders and giving you. The best information that we can based on what we know today.
Mark Thats, well said I don't have anything else to add.
Thanks, guys and congrats on the good quarter.
Thank you Laura.
Thank you at this time I'd like turn the floor back over to management.
Today's call.
Thank you all for joining us I'd like to just acknowledge and thank our tremendous employees or so.
So many of whom are.
Coming to work every day and ensuring that we have.
Uh huh.
Quality supply of food for our countries, we really look forward to seeing and speaking with all of you on December 10 at 830, Eastern which is which is when our investor day, we'll begin.
And wish all of you have a safe and healthy Thanksgiving. Thank you.
Ladies and gentlemen. This concludes today's event you may disconnect. Your lines are mark up the webcast at this time and have a wonderful day.
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