Q3 2021 J M Smucker Co Earnings Call
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Good morning, and welcome to the J M Smucker company's fiscal 'twenty 'twenty, one third quarter earnings conference call.
This conference is being recorded and all participants are in a listen only mode.
We will open the conference up for questions and answers after their prepared remarks.
Please limit yourself to two questions during the Q&A session and re queue. If you have additional questions.
I will now turn the conference over to Aaron <unk>, Vice President Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us for our fiscal 2021 third 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 strategic initiatives.
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 our current expectations about future plans and performance.
These statements rely on assumptions and estimates and actual results may differ materially due to risks and uncertainties 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 Dot com and.
Additionally, please note we use 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 you have additional questions. After today's call. Please contact me I will now turn the call over to Mark Smucker.
Thank you Erin and good morning, everyone and thank you for joining us as.
As we highlighted last week during our Cagny presentation, our results for the third quarter exceeded our expectations, reflecting the continued elevated at home consumption and improved execution of our strategy and momentum for our brands.
Net sales increased 5% versus the prior year, while comparable sales increased 7%.
We delivered net sales growth across all three of our U S retail segments with coffee sales increasing 12%.
Comparable sales within consumer foods, increasing 16%.
And our pet food and pet snacks sales increasing 6%.
Adjusted earnings per share increased 4% driven by increased sales volume.
Partially offset by higher costs and SG&A expenses, Inc.
Inclusive of incremental marketing investments supporting our brands.
Due to stronger than anticipated results through the first three quarters of the fiscal year and updated assumptions for the fourth quarter. We are pleased to increase our full year expectations to include net sales growth of 2% versus the prior year.
Adjusted earnings per share in the range of $8 70 to $8 90.
And free cash flow of $1 $1 billion.
We are delivering exceptional financial performance, while significantly increasing investments and our brands and strengthening our balance sheet and returning cash to shareholders.
All of which are important building blocks for supporting long term growth and increasing shareholder value.
And our Investor day, and last week's Cagny conference. We provided details around our current priorities that will strengthen our execution capabilities and unlock the full potential of our strategy.
These include driving commercial excellence.
Streamlining our cost infrastructure.
Reshaping our portfolio and unleashing our organization to win.
We made significant progress against these priorities and the quarter, specifically in the areas of improving commercial execution and reshaping our portfolio.
We continue to benefit from strong demand for our brands and achieved a fourth consecutive quarter of net sales and earnings growth.
Our performance reflects the outstanding work our teams have done to increase production and ensure our products are getting on shelf.
And minimizing any potential disruptions.
We continued our trend of improving market share across our portfolio as we increased our dollar market share and core consumer and coffee segments as well as for our cat food business, highlighting the strength of our broad brand portfolio and these categories.
In aggregate, we grew share for brands, representing 53% of our sales up from 46% and the second quarter.
We are confident the actions we are taking along with the macro events that have occurred over the past year will translate to sustained tailwind for our business.
We are well positioned to maintain a meaningful portion of increased consumption for the long term supported by our marketing investments enhanced commercial execution.
And improvement and share trends.
Our confidence is further supported by external factors, including retailers desire to simplify our assortment <unk>.
<unk> more shelf space for our leading brands.
Approximately half of the U S workforce is expected to work remotely on a part or full time basis post pandemic compared to just 30% before the pandemic.
Driving increased at home breakfast and lunch occasions, benefiting our coffee and consumer foods businesses.
And tailwind for the pet category with consumption projected to grow approximately 5% over the next few years as nearly 10 million households adopted a cat or dog over the past 12 months.
We have made great progress and reshaping our portfolio, having completed the sales of the Chriscoe and natural balance businesses and the quarter.
These divestitures underscore our commitment to further our focus on brands and categories that have the greatest growth opportunities over the long term.
As we move ahead, we will continue to evaluate all elements of the portfolio and make changes when necessary to ensure our portfolio is positioned for growth.
Turning to our segment results and pet food are market, leading dog snacks, and our cat food businesses delivered another quarter of net sales growth.
Sales for dog snacks increased 14%.
Led by gains for the milk bone, pepperoni, and Rachael Ray and nutrition brands.
Sales growth for the Meow mix brand led cat food growth of 9%.
Representing the 14th consecutive quarter of cat food growth with our share increasing in both the dry and wet cat categories.
And dog food sales for our largest brand new Trish grew 4%.
And consumption share trends for nutrition dog food have stabilized with repeat rates and dollars per buyer increasing versus the prior year.
For the total brand nutrition net sales were up 8% and the quarter, reflecting the growth for dog food as well as increases for cat food dog snacks and cat snacks.
Turning to our coffee business, we delivered net sales growth for all brands and segments and our market leading coffee portfolio.
And as total segment net sales increased 12%.
Led by the Dunkin' and Folgers brand.
The Dunkin' and Cafe bustillo brands as well as K cups have become an increasingly important part of our portfolio.
Collectively growing over 20% and accounting for over 50% of segment net sales in this quarter.
Cathay Bustillo and Duncan are the two fastest growing brands and the coffee category.
With 52 weeks sales up 28% and 21% respectively.
The Dunkin' brand has eclipsed $1 billion and all channel retail sales dollars inclusive of club and e-commerce over the past 12 months.
The Folgers brand gained 3 million new households at the height of the pandemic and had the highest repeat rate by new consumers during the holiday season.
Further our portfolio of brands gained more incremental households in the last year than any other manufacturer.
And has gained share in all channel consumption inclusive of club and E Commerce.
And our consumer foods segment growth across all categories drove a 16% increase and comparable sales.
The actions we have taken on the Jif brand led to over 20% sales growth on core peanut butter offerings.
And multi outlet retail sales, Jeff was the fastest growing national brand and the quarter, increasing over 13% more than twice the category average.
This growth reflects benefits of improved distribution and in stocks.
Strong marketing support pricing actions in response to higher costs and competitive supply disruption.
The Jif brand gained over three points of volume and dollar share sequentially from the second quarter and our total peanut butter portfolio grew to over a 50% share of the peanut butter category.
Our smucker and <unk> business also continued to deliver exceptional growth with.
With third quarter net sales increasing 21%.
Household penetration is up 23% compared to a year ago.
For our combined U S retail and away from home segment, the <unk> brand delivered $100 million of net sales this quarter.
Recording its 27th consecutive quarter of growth.
The brand is on pace to deliver over $400 million of net sales this year.
And is on track to exceed our $500 million target in fiscal year 2023.
Underpinning the improvement and net sales and market share across our businesses has been strong commercial execution on.
Optimize marketing investments to align with consumer behavior and.
And a continued commitment to financial discipline.
We plan for a continued step up in marketing investments in the fourth quarter inclusive of mass media targeted digital consumer engagement e-commerce, and click and collect programs as we continue to reinvest to support our brands.
Finally, we are sharpening our efforts to address issues that impact the quality of life for people and pets.
<unk> evolved agenda helps meet their need for quality food education.
Equitable and ethical treatment.
Community resources, and a healthier planet.
Additional details are available on our corporate website.
In summary, I would like to reinforce a few key points first.
We continue to deliver strong financial results and the actions we are taking to deliver our priorities are leading to improvement and key metrics, including market share that position us well for the remainder of the year and beyond.
Second we continue to make progress against our consumer centric growth strategy.
Third.
Through our execution priorities, we are becoming a more focused efficient and agile organization.
And fourth we are strengthening our core capabilities, which position us as a stronger company set up for delivering sustainable long term growth and shareholder value.
These actions will ensure we continue to deliver consistent sales and profit growth beyond the pandemic.
Leveraging a strong portfolio of brands and World class commercial capabilities, all of which are powered by our unique culture and dedicated employees, who I would like to thank for their outstanding contributions.
I'll now turn the call over to Tucker.
Thank you Mark good morning, everyone. Let me begin by giving an overview of third quarter results before providing an update on our financial outlook for fiscal 2021 and.
Net sales increased 5%, excluding the impact of divestitures and foreign exchange net sales increased 7%, primarily driven by favorable volume mix and each of the U S retail segments, partially offset by an anticipated decline and the away from home business.
Adjusted gross profit increased $23 million or 3% from the prior year, mostly driven by the positive contribution from volume mix, partially offset by higher costs and the non comparable impact of the divested businesses.
Adjusted operating income grew $8 million or 2%, reflecting the increased gross profit partially offset by higher SG&A expenses. The increase in SG&A expenses was primarily driven by incentive compensation and increased marketing investment, partially offset by reduced distribution costs.
Below operating income interest expense decreased $2 million and the adjusted effective income tax rate was in line with the prior year at 23, 1% factor.
Factoring all of this and along with shares repurchase that resulted in a weighted average share count of $112 6 million third quarter adjusted earnings per share was $2 45.
Compared to $2 and 35 and the prior year and increase of 4%.
Let me now turn to segment results beginning with pet foods.
And net sales increased 6% versus the prior year, primarily driven by favorable volume mix for dog snacks, and cat food, partially offset by lower net price realization the reduction in net pricing primarily reflects investment in e-commerce and new product launches.
Growth was led by our three largest brands and the segment, including increases of 8% for nutrition, 9% from your Amex and 11% from milk bone.
Pet foods segment profit declined 7%, reflecting the lapping of and $8 million legal settlement received in the prior year, excluding the settlement and the prior year segment profit declined, 2%, primarily reflecting lower net pricing and higher costs.
We offset by the favorable volume mix the.
And the increased costs were mostly driven by higher transportation expense.
Turning to the coffee segment net sales increased 12% driven by a 13 percentage point increase from volume mix, partially offset by lower net pricing.
Growth occurred across all brands and formats and the portfolio.
Led by the Dunkin' growth of 19%.
<unk> growth of 7% and cafe bustillo growth of 26%.
Our K Cup portfolio, which is growing nearly twice the category rate continues to be and increasingly important growth driver as.
And as sales increased 27% and accounted for over 30% of the segments net sales.
Coffee segment profit increased 11% driven by the favorable volume mix, partially offset by lower net pricing and higher marketing expense.
And consumer foods net sales increased 6%, excluding the prior year non comparable sales for the divested chriscoe business net sales increased 16%.
Driven by volume mix growth of 10% and a five percentage point impact from higher net pricing, primarily due to a list price increase taken on peanut butter and the second quarter.
Growth was led by the Jif brand, which grew 14% while smucker on <unk> frozen sandwiches grew 21% and smucker fruit spreads grew 15%.
The prior year discontinuation of power ups was a $6 million headwind and the quarter.
Consumer Foods segment profit increased 32%, primarily reflecting the increase from volume mix, a favorable net impact of higher price and costs and lapping of a seven $5 million of equipment write off for Jif power ups and the prior year. These <unk> were partially offset by the non comparable.
Will profit from the divested chriscoe business and increased marketing expense.
Lastly, and.
And international and away from home net sales declined 13%.
Way from home business contracted 27%.
Primarily driven by declines and coffee and portion control products due to the continued impact of COVID-19.
International growth of 9% was primarily driven by increases in Canada across most categories, including baking pet food and snacks peanut butter and fruit spreads.
International away from home segment profit decreased 50%, primarily driven by the reduced volume mix and increased cost partly attributable to the deleveraging of fixed costs and the away from home business.
Third quarter free cash flow was $417 million, which represented a decrease from the prior year due to a less favorable benefit from net working capital requirements increase.
Increased capital expenditures and a decline and net income adjusted for noncash items capital.
Capital expenditures for the quarter were $70 million with the increase over the prior year, primarily related to capacity expansion and four on cross <unk> frozen sandwiches.
During the quarter. The company received total net proceeds from the divested businesses of $569 million inclusive of transaction costs and initial working capital adjustments.
We used $522 million to repurchase four 5 million common shares of which $4 3 million settled and the third quarter for $498 million and the remainder settled at the beginning of the fourth quarter. These repurchases decrease the number of shares outstanding by approximately.
<unk>, 4%.
We finished the quarter with cash and cash equivalents balances at $502 million, we paid down $314 million of debt during the quarter, resulting in a total debt balance of $4 $8 billion base.
Based on a trailing 12 month EBITDA of approximately $1 9 billion.
Our leverage ratio stands at two five times.
We anticipate maintaining a balanced capital deployment model that prioritizes the use of cash towards dividends and debt repayments, while evaluating other strategic uses of cash for future growth and shareholder value creation, including the potential for future share repurchases.
Let me now provide additional color on our revised outlook for fiscal 2021.
The severity and length of the pandemic and related implications continue to create uncertainty and our financial outlook changes and consumer purchasing behavior retailer inventory levels macroeconomic conditions, and any manufacturing or supply chain disruption could materially impact our actual results.
Further we have experienced some weather related disruption and tightening and the supply chain. This month.
And 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 approximately 2% compared to the prior year, which reflects the sales performance through the first three quarters of the fiscal year, and and expected, 10% decline and the fourth quarter.
Elements taken into consideration for the fourth quarter net sales include <unk>.
The lapping of $185 million benefit and the prior year related to the initial consumer stock up purchasing during the beginning of the pandemic.
Lapping sales related to the divested businesses of approximately $124 million.
And continued elevated at home consumption benefit and the us retail coffee and consumer foods segments.
We anticipate full year gross profit margin to approximate 38%. The projected gross margin includes fourth quarter incremental trade spend investments primarily for the pet business.
Timing of fixed cost expenses related to manufacturing absorption.
And increased freight and transportation costs.
SG&A expenses for the full year are projected to increase 3% to 4%, primarily reflecting increased marketing spend and incentive compensation.
Total marketing spend is expected to approximate six 5% or greater of net sales with incremental fourth quarter brand reinvestments across all U S retail businesses, most notably for pet food.
We continue to anticipate net interest expense of $180 million and an adjusted effective tax rate of 24%. We anticipate a full year weighted average share count of $112 6 million, which includes a fourth quarter share count of $109 6 million, reflecting the impact.
<unk> of shares repurchased and the third quarter.
Taking all these factors into consideration, we anticipate full year adjusted EPS to be and the range of $8 70 to $8 90.
At the midpoint of our range fourth quarter adjusted EPS is anticipated to decline around $1 versus the prior year due to decreases in net sales.
Gross profit margin decline incremental marketing investments and the net impact of divestitures and shares repurchased.
Will your free cash flow is anticipated to be approximately $1 1 billion with capital expenditures of $300 million.
Versus prior guidance of $315 million.
In closing, let me reiterate Mark's opening comments, we are pleased with our third quarter results, which show the strength of our brand portfolio and the health of our categories with.
And with continued financial discipline, we are committed to delivering sustainable and consistent long term value for our shareholders.
Thank you for your time.
We'll now open the call to your questions operator, please queue up the first question.
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<unk> zero.
As a reminder, please limit yourself to two questions during the Q&A session.
Do you have additional questions you may re queue and the company will take your questions as time allows.
Please standby for the first question.
The first question today comes from Andrew Lazar with Barclays. Please state your question.
Good morning, everybody.
Andrew.
Quick question about and pet food I think you had mentioned that nutrition dog food sales rose about 4% on the quarter.
And I think at Cagny last week, you had mentioned that your anticipation and youre anticipating getting back to growth and nutrition and the back half of your fiscal 'twenty two.
So I guess I'm, just trying to square those two things basically us as premium dog sort of turning maybe more quickly than you would've thought or were there certain things and this particular quarter that maybe it would be discrete or less sustainable for a couple of quarters until it's it's truly sort of where you want it to be.
Sure Andrew it's Mark.
Yes, nutrition dog food did grow actually 6% in the quarter.
Notably the <unk> the total nutrition brand grew 8%.
And so.
And we're obviously very pleased with that I think what we reported.
Last.
The quarter was the fact that.
Okay.
We were seeing.
The brand's stabilize and this quarter, we think we have pretty good confidence that it is stabilizing.
So let me make a correction the 4% number was specific to dry dog.
Right and then the total brand was 8%.
And I was looking at specifically sort of dry dog, because I know thats. The area, where were you were doing more of the work and had more of the challenges and I think again Cagny I think you'd said by the back half of 'twenty fiscal 'twenty two it would be back to growth. So Andrew I was just trying to get a sense of if that's happening faster or and then you might have initially expected or.
Or if there's anything one off and this quarter related to nutrition growth it doesn't.
Totally sounds like that was the case necessarily that there was something one off and nature, if I'm hearing you right.
No Yeah, I think it's just.
As a function and quite frankly of all the work that we've done on new trash and.
We spent a lot of dollars and marketing and supporting the brand and the.
And the launch of Big life is underway, we've had good sell in for that.
Re architected the brand as well so we really do feel that the actions. We are taking on that brand and are starting to pay off okay. Great. Thank you and then one last quick one would just be.
And was inventory sort of refill.
On a factor at all in the quarter, obviously, and coffee and pet and U S. Consumer clearly consumption was organic sales growth was quite a bit above what most for modeling and in some cases, even above what we've seen and sort of standard data, which is obviously not fully comprehensive fair enough inventory refill was much of a factor.
And any of those segments or not really thank you.
Andrew we believe that our shipments are in line with consumption and as you look across all the channels that we participate and so we don't see anything abnormal for the quarter going forward.
Thanks, everybody.
I was a bit surprised by the by the sequential decline and the gross margins I just want to get a sense of if you could frame the promotional spending increase and that you have some more coming and queue for as well and then also another one where you know divestitures probably drive on on the gross margin as well is that a meaningful and a factor and <unk>.
And that but is there a number that goes with that they that could explain and some of the decline sequentially and the gross margin.
Yeah. So I went and bring you back to our for your guidance of approximately 38% for the four year as it relates to the gross profit margin and you think about the fourth quarter, we are going to be down materially from the gross profit standpoint or margin standpoint, and that's due to us you've noted incremental and <unk>.
They'd spend investments primarily for the pet business that supporting.
The brands and and and the intros and the promotion along with timing of fixed expenses related to manufacturing absorption. We are copying a very strong sales quarter. So we will lose some level of manufacturing absorption along with the continued impact on our away from home business and.
And then as we have shared we are experiencing increased freight and transportation expense and this year due to tight supply chains, but on a longer term basis, where he remained committed to a healthy gross profit margin, you know achieving that 38% or better.
Okay. Thank you for that color.
[laughter].
The next question is from face on Ah we of Deutsche Bank. Please proceed with your question.
Hi, good morning, and so I <unk>.
And it to ask about e-commerce.
Maybe on instead, but I didn't hear much about you know how e-commerce sales to make her name and specifically I wanted to know if you could now that natural balance is not part of the portfolio anymore. If he could give us some color on what the channel break down for the patch business day now.
[noise] between specialty math and e-commerce.
Hi, Good morning. Thanks for the question and this is Mark you know E. Commerce is one of the key components of our growth strategy and.
You know specifically, we talk about being everywhere and that's.
Critical as we think about e-commerce, and so making sure that we're engaging with consumers wherever they shop, you know, we're pretty pleased with the the growth and R E Commerce business and our ability to do that profitably over the last three quarters, we've actually grown and the business.
50% or over 50% and so.
Total ecommerce sales or over 10% for the total company.
Coffee, specifically with up over 70% one of the great things about E. Com is it really does allow us to get closer to our consumer where we can understand it and engage with them. We can make adjustments to our assortments, if we need to on on the fly and it does have.
Hi, R O y.
So it really is a win win win and to win for us to win for our customers as well as our our consumers and we really continue to remain very focused on the click and collect model, which is a very productive channel and we have number one brands there from a digital shelf standpoint, specifically.
<unk> skewing towards coffee peanut butter and pet snacks.
Okay. Thank you for that and are you able to share the channel breakdown for the pet does not so if you have it.
We haven't previously done that and we'd probably hold off on that for now and.
Okay. Okay, alright, thank you, but the E com business and Pat was strong up about 50%.
The next question is from Ken Goldman of J P. Morgan. Please state your question.
Hi, Good morning, everybody I wanted to ask about pricing, you, all and pricing gladish slightly negative.
And it probably will most packaged food companies reported pricing.
And it's already started to accelerate a little bit you know I get your spending a little bit more and trade, especially and pet I'm just curious when like we expect smokers price and all and that price number that you provided to start rise and a little bit more in line with a group so to speak.
Good morning can thanks for the question you know us we always say, there's multiple lovers to manage net pricing and we're always taking a very prudent judicious approach, one which involves partnering with our customers and making sure that we're doing the <unk>.
Right thing bye bye damn as well as for our business.
So when we take you know specific list price change is there you know we're always focused on justifiable increases that are driven by cost increases or in some cases, where the consumer sees value I would point out J F. You know, we we took a a pricing action.
Recently, and and we're pleased that and the last several months the key competitors did follow does that increase.
And so we we feel pretty good about our ability to continue to recover.
Okay. Thank you for that and then from a follow up and.
No. It's not the biggest part of your business, but international and away from home I think the segment margin was down and what was down over 500 basis points sequentially. I realize you still have you know a lot of deleveraging Mary I understand there's a lot of puts and takes but you know what what I'm I'm curious and maybe you said this and I missed it but what was the reason for us.
Kind of sequential decline and operating profit and that segment was there anything unique and this quarter, but that stands up and my go away next quarter.
Yeah, I can what we're experiencing and the international away from operating segment US continued significant and extended decline and the away from home business.
And that's really driven [noise] by the.
Two key elements within that business wanted us coffee and true is is portion control. There is the handheld component of a business and as a result of the.
Lost topline, we are seeing a pretty significant impact too lost manufacturing absorption and other fixed cost absorption as well and you have to recall that it's not only in the manufacturing size. We also have a very big installed equipment base for coffee brewing and so is is we're not putting volume across that it also.
And impact so as we see a return to growth and the top line for the away from home business and the and the segment. Its entirety that will also have a corresponding improvement to the profit based as well.
The next question is from Rob Dickerson of Geoffrey's. Please state your question.
Oh, great. Thanks, so much to question for you Mark HM.
You said and and the prepared remarks.
Yeah, there's all go in and.
And simplicity plush right by the retailers and.
And obviously, there's been a fair amount and see rationalization over the past few years, but it sounds like and terrible was inquired and your comment and it was the retailer's as day.
And continue to simplify and optimize and.
Are looking spilt and bigger brands to to you to protest and secure more shelf I don't know got needs and you have the opportunity increasingly to get more distribution or you know and or if the retailers overall say, hey, us we got to the pandemic as you support your brands as you're more for.
Okay. So fragile, we're willing to partner, which do more right and you're you have scaled browse instead of profitability. So I'm just trying to gauge what you're implying when you said that the retailers are looking to simplify and still work with bigger Brad does that figure brass relative to smaller brands or is that just kind of an ongoing trajectory us.
<unk> and I'll say coming out of Covid, but obviously relative to what we've been seeing over the past nine months and that's it.
Thanks, a lot.
Rob banks and.
You are correct that your interpretation and my prepared remarks were were spot on and we do see death as an ongoing trend you know just as we are looking to.
Simplify and optimize our assortment so our our customers and that does tend to benefit Ah larger mainstream brands. Because is there are fewer the the tail is not as long if you will and in certain categories and because there are getting more and.
Fishing on shelf, there are fewer and there will be fewer or or fewer F. K use and into particular categories and our case, it's notable and coffee and peanut butter would be two of the notable ones, where where we're benefiting from that and and what that means is not only are we staying on shell.
F. But in many cases, we are getting more shelf space and so if we do see that as an ongoing trend for the foreseeable future.
Alright, great. Thank you so much I'll pass on.
The next question is from Robert Moscow of Credit Suisse. Please proceed and what's your question.
Hi, I, Mark I was hoping to get a little more specifics on on what's happening on your cost inflation exposure.
A coffee costs are rising I think the grain costs also will have an impact on.
On the pet food business and is there any way to to get some sequential help here as to what the inflation pick up looks like and you know what.
And will you start, giving us a little more specificity on what's gonna happen to pricing.
Sure. Thanks, you know on coffee, specifically a lot of the the volatility that you're seeing at this point and the year often is driven by some speculation because it is early in the in the year in terms of wind coffee us is planted are harvested and so.
So.
A lot of that volatility we thank us more financially driven so we will watch that I think the headline here is that you know we again have multiple levers on price will continue to to price and and and a responsible way when we can on Pat specifically.
You know, we do have pricing power for example, and snacks and dog food. For example, we we we would follow but I think the good news about the pet industry is that the industry and in total really does have a great track record of recovery and you.
Seeing those levers. So so we do have confidence that regardless of the category or our position there in and we will continue to have the ability to to recover a justifiable cost increases through through the various pricing levers.
Okay, and then maybe a follow up for Tucker Tucker can you go back and and give us a little more Matt Mack behind you're you're 185 million dollar estimate for the the inventories stock up last year like how did you come up with that number and is there any way that that might be conservative.
Yeah, [noise], Rob So what we factor that 185 million is is the impact to our fourth quarter of last fiscal year that was.
Primarily and the back half of the month of March and the balance of our fiscal year and April and what we looked at was the initial stock up by consumers due to the early stages of the pandemic across all of our businesses, particularly and coffee and consumer it did have an element of <unk>.
Back to Pat.
As well that's what we quantified based on where we thought we were going to finish the year 45 days earlier, so to speak and that's our best estimate we've been pretty consistent with that comment both on the completion of our fiscal year and then carrying it through because we knew that at a topline due to that specific component lapping the COVID-19.
Initial surge would be a year over year decline and the fourth quarter for us.
Okay, Alright, thank you and.
Thanks.
The next question is from a trace and English of Goldman Sachs. Please state your question.
Okay, and when he cooks and I'm wondering.
I guess the billing and the last question on I appreciate and fourth quarters, and I've been awhile, uhm and the stock up and.
Still difficult us for a forecast for 39% EPS decline with your comments and cagney able to us, suggesting that you and stuff.
Equally us next year or two affect it with me and sort of cloud us between your current causes.
How do we put those to one of the puts and takes what's his chowder and the media about layoffs and the word structure and it was on Akita terminal or P driver. Okay E T F expectations from us yeah.
Jason and good morning, it feels like there's a couple of parts to that question and so I'm Gonna start and then let mark provide from some incremental comments so as it relates to the fourth quarter and we are anticipating being down and earnings approximately a dollar at the midpoint. This is reflecting.
Ongoing business momentum that we see which we approximate to be about 25 cents.
And it's being offset by the net sales decline due to the lapping of the initial consumer stock up during the pandemic of the prior year of approximately 50 cents.
And then we've noted that there is a divestiture impact across Chriscoe and natural balance of approximately 20 cents and the fourth quarter and that is being offset about six cents from shares repurchased and the third quarter and then we have incremental cost headwinds and two areas. One is the M.
Incremental SG&A expenses of about 35 cents and that's being driven by the marketing Reinvestments that Mark spoke too and then lastly is as you are seeing a year over your gross margin decline and that is approximately 25 cents. So that gets you to where we're down about one dollar without some of the lapping of fact and.
Some of the reinvestment effects Ah that would have had a positive impact to the bottom line, but we did we have made some decisions and we have Ah divested some businesses.
Okay, and then the second and the second question and I think you asked was last week at Cagney, we offered that on a two year stacked basis.
We see a path demonstrating underlying organic growth at the top line.
And adjusted earnings per share there was some questions around what level of earnings per share. We finished F Y $28.76 and so we'd like to think that we could do $8 or 76 censor better and our next fiscal year, but again, it's early innings US we worked through the planning process.
Uhm I'll pause and offer Mark if he has and the other responses to your questions and Jason and at you were a little faint and I thought the last part of your question was about organization.
Yeah, the the media reports of layoffs.
Yeah. So a couple of things you know.
There were a few factors in terms of our decision to realign on corporate support organization to to better support our business and you know.
As you as you well know consumer behavior has evolved rapidly and in recent years and will continue to do so and of course. The divestitures and then are are much greater focus on the growth platforms and priority brand. So if you think about a consumer centric strategy.
<unk>.
And we really want to create a leaner and flatter organization insuring and we align ownership accountability incentives and so forth you know to to the to the financial statements and we do have high confidence is gonna make us more agile so.
Wow there are decisions that do negatively impact our employees. These are very difficult decisions, we take them extremely seriously and we only make them. After very careful consideration. So you know at from time to time, there are moments when we need to ensure the.
Long term health of our business and so this is one of those moments and as you also know we have a very strong continuous improvement mindset and this is one one factor in that process. So just making sure that we treat our employees with the utmost respect.
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For those that would be exiting the organization.
Okay, one more follow up on there was a and working reinvestment I think last year, you spin around 2.5% of sales and advertising uhm with your income growth I imagine that demands for that retail media and somebody he called me best and or growing and how much your husband and now is going towards those platforms Uhm and.
And are you able to from that all your your hefty trade budget or just coming up with incremental money or traditional media just where's the funding for that coming from thank you.
Yeah, Jason.
I understand the question I think what you're seeing you referenced the two and a half saw that I think and your report I think what what you're seeing us just mass media and and that so that would all of us within reflected and that we have not been specific and.
You know the various channels, where we spend marketing and we are as we've been talking about were very committed to that 6.5% to 7%.
M a net sales and target and as we think about the various media channels, we evaluate them all and you know and we think about the you know each of them uniquely in terms of what returns or are they getting and so forth.
We do fundamentally focus on reach for a lot of our brands and we want to reach us many consumers as we can but there is a very strong element of targeting that we'd take there as it relates to some of the media channels that are within retailers and you know we we have participated and knows from the get go they have a very high RLI and.
And have helped improve our market share so it outside of that and mass media, even we have the strongest share voice in and particularly and coffee and peanut butter for example, and so we continue to evaluate all channels and we think that the budget that we have now and going forward.
And will be sufficient to support all of those marketing efforts and channels.
And Jason and the the one thing that I want to support marks comments on US is that a part of our continuous improvement mindset is just making sure that we get the right return on that marketing spend but that any non working marketing dollars are analyzed and either reinvested.
Back into marketing or potentially taken to the bottom line and that is an element of our of our cost.
Improvement programs that we've talked about.
Very good thank you all thanks.
The next question is from Alexia Howard Bernstein. Please state your question.
Good morning, everyone.
Good morning morning.
Great.
About the puts and takes to the outlook on gross margin I think you said and the prepared remarks that you'll hoping to be able to sustain the gross margins, you've obviously seen and night step hop in fiscal 21 to that 38% guiding tooth for the full year, but if we look out.
Operational deleveraging versed isn't that price, saying, maybe some COVID-19 Costco and goodbye and I'm just wondering how you thinking about.
She took the state and that gross margin as we look out into 22.
Thank you.
Yeah, Alexia good morning, I I would share that last fiscal year. We finished with a gross profit margin percentage over 38% I think it was 38.2%. We're currently guiding to be approximately 38% for this fiscal year.
And Big picture, we remain committed to ensuring that we have a healthy gross profit margin today tomorrow and beyond and that that is really supported by our continuous improvement mindset cost management reduction programs and the margin management programs as well.
Is mark talked about US you think about commodities.
Along with any other ingredient or packaging or transportation increases, we would look to offset those first through our <unk>.
Physical by secondly would also be through our hedging and risk management strategies. The next would also the N B R. Continuous improvement mindset as noted and then lastly, pricing where and when justified across our respective businesses and so we acknowledged that we continue to take all of those elements not only to deliver those fiscal year.
But also for next fiscal year and beyond.
I would also say on the manufacturing side, we do have very tight supply chains, and so inventory levels, particularly within our network are a bit below where we might want them and so we continue to work to get those levels up and not only this fiscal year next year fiscal year to meet retail and consumer demand. So I don't expect.
Correct I do expect a hangover and manufacturing absorption I think the question is how big is the hangover and there might be some benefit are upside there. So when you think about manufacturing absorption year over year and then lastly is you know as we continue to reshape the portfolio either through divestiture activity or optimizing skews that will.
Also hopefully and nowhere to a positive benefit as well too gross profit margin and then underlying all of that as you well know we have a very strong consumer centric strategy across a lot of our key growth brands and US we've continued to drive that growth.
It will also support the gross profit margin as well so hopefully that gives you a sense and a big picture level as to how we're thinking about it.
Much appreciated that and then it's quick follow up you mentioned Cagney presentation that was at stuff and increased in purchases of home coffee Brewers over the course of the last year.
How much does that affect the overall.
Single says business I mean, obviously doesn't established base, but that sounds like it could be a fairly nice bump for the next few years and I'm just wondering how how you're thinking about the potential growth and that.
Part of the coffee segment.
Thanks, and like to add to Mark hard to quantify but clearly a benefit and.
You know just the fact that these consumer habits around coffee around breakfast and lunch have have changed and evolved we do think that there is a high degree of stickiness, our confidence and that has increased over time and just.
The dynamics that I mentioned and R and the prepared remarks and.
And whether specific to coffee or or otherwise are really going to benefit us going forward post pandemic K Cup, specifically have grown about two times a category and so if you look at our coffee category, if you've taken to consider.
And consideration K Cup plus the rest of the Duncan and Bustillo business us about half of our coffee business right. There. So clearly great growth feel good about the segments were in playing and the right segments and very well positioned for the future.
Great. Thank you very much I'll pass it on.
Oh, and now I'll turn on the conference back to management to conclude.
Ah. Thank you all for for dialing in today and listening we really appreciate it and we're very pleased with our results and and the prospects for our business going forward I hope that we left you with confidence and are key priorities around commercial excellence streamlining a carpet cause.
Infrastructure clearly the actions we've taken on reshaping our portfolio and then really wanting to ensure that we released.
Uhm unleash our organization to win so wanted to take a moment to think our employees is always and each of you for tuning and today have a great weekend.
Ladies and gentlemen, this concludes our conference call for today. Thank you for participating and have a nice day.
All parties may now disconnect.
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