Q3 2022 J M Smucker Co Earnings Call Q&A Session
Krish and I pass it on thank you. Thank you.
Thank you. Our next question today is coming from Chris Growe from Stifel. Your line is now live.
Hi, good morning.
Morning, Good morning, I just had a question for you on the Pet Division and it is the division, where we saw pricing accelerated pretty nicely and while volume was down the.
Profit performance weakened in the margins move down to the low teens. So I know that Tucker you mentioned, some incremental inflation coming through in the fourth quarter I just wanted to get a sense of does that margin gets will get worse before it gets better I guess I'm ultimately get into kind of the timing of pricing coming through.
And how that can help offset the incremental inflation in the fourth quarter.
So Pat has experienced.
Most of our businesses have experienced throughout the year persistent and ongoing cost inflation and they have taken multiple rounds of pricing to recover that inflation and so what we are experiencing are two dynamics now the timing of pricing against cost recovery or cost inflation.
And secondly, incremental costs that are coming into both the third and fourth quarters that we will also have to recover as well. So we would envision that Pat will still can see it can continue to see some down margin.
But over time as pricing catches up to the inflation and we continue to advance productivity that will support the business.
Okay. Thank you.
Just was curious.
On the on the coffee division a bit of a similar question, but and that's a division where you have historically been pretty well hedged there obviously a significant inflation in the input costs I was wanted to get a sense of you've had.
Strong volume performance in that division has that caused you to maybe run through hedges more quickly and then is that also one where we should see that sequentially increasing rate of inflation in the fourth quarter, given what we're seeing in the spot market.
Chris we don't disclose our hedging positions, but what I offered earlier on the call was that we have experience green coffee inflation throughout our entire fiscal year, we have taken pricing actions to recover on a dollar for dollar basis that inflation and that our most significant step up in green coffee.
Cost.
Occurs in the fourth quarter this quarter and will continue onward, and we will continue to address that inflation.
Okay.
Thank you for that.
Thank you. Our next question is coming from Steve powers from Deutsche Bank. Your line is now live.
Hey, thanks.
Sticking on the inflation topic.
Of the.
The incremental cost that you're expecting in the fourth quarter could you just.
Parse out.
Is that is that incremental raw materials and packaging costs or is that.
Other costs related to supply chain challenges and what the mix of that incremental inflation is.
So on our fourth quarter, what is new news from our previous guidance is that we continue to see additional inflation.
Similarly in the ingredient transportation packaging and manufacturing side that is predominantly impacting our pet portfolio in Q4.
Okay.
Okay.
And then the.
In terms of elasticity assumptions embedded in the fourth quarter can you.
Elaborate a little bit on.
The anticipated elasticities that you baked in is that based on.
Observe trends to date or are you anticipating incremental elasticities.
More pricing.
Layered on.
Steve It's Marc let me just start with a general statement, which is as we have all year.
We have adjusted our pricing to to recover dollar for dollar cost in that and it does include some productivity initiatives as well and so recent pricing actions are no different than that would even include pricing actions that we've taken even in the last few weeks.
So the goal of course is to maintain the momentum of our brands, including investment and offset the inflation in terms of elasticity.
We have enjoyed better than historical elasticity, and but we've been very prudent as we forecast forward.
To make sure that we're building into our forecast what we think are realistic elasticity and so there could be a bit of moderation, but we want to make sure.
And make sure that our investors know that we are taking a prudent approach to how we're forecasting the business and I guess the last question.
The last comment I would make just on AR.
From an inflation standpoint, as the whole industry and all industries for that matter are experiencing this but.
Even within our industry just to remind ourselves that the tide does rise all boats.
And since it is pretty ubiquitous across every single category.
What that does do it does keep the playing field fairly level.
Yes, Okay. Thank you and just to play that back though so your.
Your what you've baked in as anticipated as more informed by kind of historical elasticities as opposed to what you've enjoyed most recently is that a fair statement.
Steve what we have done is we have built our forecast on recovering the cost inflation and the timing of covering that cost inflation through pricing actions.
Putting our best estimate for the impact of price elasticity of demand, we've done that consistently throughout our fiscal year and as we've taken additional waves of pricing throughout our fiscal year.
What Mark has acknowledged is that those elasticities have performed better than historical.
And we would acknowledge that we will continue to monitor as we move through our fourth quarter and into our next fiscal year.
And then I would also acknowledge to a previous question that we are still calling for underlying organic topline growth year over year or four 5%, which is consistent coming out of our second quarter and currently on this call.
Okay very good. Thank you so much thank you.
Thank you. Your next question today is coming from Robert Moskow from Credit Suisse. Your line is now live.
Hi, Thanks.
I'm just curious about.
The whole philosophy on providing quarterly guidance I'm looking at your past quarterly guidance in the last five or six quarters and.
It seems like.
<unk> been beating it very consistently and to a very large degree.
And so I wanted to know whats going right I guess on these quarterly cadences over the especially over the last two like what surprised you positively.
Like for example for third quarter I could've sworn that that there was going to be a mismatch in coffee in third quarter that was the expectation.
Did that turn out better than you thought.
And then going forward do you think in this volatile environment quarterly guidance is still possible to give.
Rob Good morning.
We are committed to providing.
The visibility and transparency needed on an annual basis for our long term topline and bottom line guidance and we will continue that path or Avenue forward.
You are correct as we have come through the elements of our global Pandemics inclusive of a disruptive and uncertain supply chain and cost inflation.
We have given a sense of direction for the upcoming quarters, primarily to make sure that we were in lockstep with how we were going to deliver our fiscal year are delivering against that annual guidance.
The second quarter was really favorable momentum that was coming through the business that resulted in topline and bottomline that exceeded expectations as we've come into our third quarter really the topline and Bottomline have performed in line with expectations. We delivered ahead.
Primarily due to favorability in SG&A expenses inclusive of marketing some of that SG&A resets back into our fourth quarter, which we have acknowledged.
Our fourth quarter is really coming and from a top line perspective, as we anticipated from a guidance standpoint.
After you isolate the effect of the two divestitures. So we really believe that we have our arms around how were thinking about guidance on an annual basis and delivering each quarter. And then lastly is is if you really pull up kind of the 30000 feet. You can see that our business is performing from a share perspective, Mark has talked about our commercial.
Operational excellence in order to deliver the business in this environment. So.
That's how we're thinking about delivering the year.
Okay I appreciate it.
Follow up question, though.
Most people would argue that inflation continues to rise from here that we're not done with inflation and supply chain disruption probably will continue as well given that.
You and the whole industry is really playing catch up is it fair to say that maybe the first half of fiscal 'twenty three will still be a catch up period.
In this dynamic.
Rob what I would acknowledge is that we will continue to navigate an inflationary environment and a disruptive supply chain as we move forward.
But what we need to do is continue to take the necessary actions to ensure stability within the supply chain to ensure that we are recovering the cost inflation either through pricing actions or productivity savings.
And thinking about advancing the ongoing momentum of our business inclusive of at home consumption and the growth or return to growth of our away from home business and then underpinning all of that we will continue to make strategic investments in the business to support.
Our coffee pet and consumer portfolios.
Hey, Rob it's Mark I would just add one comment about the supply chain and telcos right. We expect the disruption to continue.
On a positive way.
We have made great strides in managing what we can control.
And I've highlighted on the previous couple of calls how how our execution has been excellent and our people have its attribute to our people that they've been able to.
Stay focused on the day to day, and the execution and notably one area that we have made some improvement is in labor So labor being an area that we can control of late we've actually made some headway there and there are going to be things just to acknowledge something will be out of our control.
But the fact that we've made improvements in staffing as well as expanding our supplier base over the last many months has definitely allowed us to manage our supply chain better.
Yeah.
Okay. Thank you.
Thanks.
Thank you next question is coming from Peter Galbo from Bank of America. Your line is now live.
Hey, guys. Good morning, Thanks for taking the questions good morning.
Tucker I just wanted to follow up actually on Rob's question.
About the fourth quarter, and maybe more of a clarification.
If we just take kind of the inputs you've given us <unk> you end up more towards the high end of the revised range or at the very high end of the revised range and just I wanted to make sure if that math checked out or what would cause you to deviate from that just given what you've given what we know from you at this point.
We feel very comfortable delivering the midpoint of our revised guidance range, which is around $8 50.
Since we have found ourselves into the final quarter, you can acknowledge that that $8 50 translates into $1 85, approximately for the fourth quarter, we feel comfortable where that sits today, knowing both the puts and calls to deliver our fiscal year. So that is how I would probably answer.
To your question I don't know if thats helpful.
But that's where we stand.
Okay.
And the one other thing I just wanted to clarify I think last week at <unk>.
Cagny you'd kind of mentioned.
<unk> return or a share buyback would kind of help offset some of the dilution.
From earnings and that wasn't in this morning's release or in any of the prepared comments just post some of these divestitures wanted to see if that was still part of our plan in <unk> and going into next year. Thanks very much.
Sure. So we remain committed to our balanced capital deployment model with a strong balance sheet and we do have excess cash on the balance sheet, along with strong short term borrowings.
And we will evaluate how we deploy that capital here in the near term and over the long term to ensure that we replace those divested earnings.
Yeah.
Yeah.
Thank you. Our next question is coming from Jason English from Goldman Sachs. Your line is now live.
Hey, good morning folks thanks Roxanne.
Couple of quick questions, you mentioned that so far and the coffee segment, you've been able to match. The dollar for dollar increase in commodities with a dollar for dollar increase in price.
Will that also hold true as we step up on cost inflation in the fourth quarter or will there be a bit of a lag there.
We we have timed our dollar for dollar green coffee inflation against pricing actions in the fourth quarter.
Okay. That's helpful.
Now stepping.
Stepping up to a higher level than this would call for a substantial increase in price contribution in the fourth quarter.
Yet your implicit guidance is for somewhere around 5% organic sales growth, which is certainly lower than we were out and lower than where consensus was.
Whereas the offset are you seeing more volume erosion and anticipating more volume erosion or as our expectation of a sizable sequential step up in price misplaced.
What we would envision in our fourth quarter is as we're taking into account the pricing actions that we've taken throughout our fiscal year and the impact to Q4.
We have.
Also acknowledged the underlying momentum of the business and we have accounted for the impact of price elasticity of demand by taking material pricing against material inflation.
Okay. Okay. Thank you I'll leave it there.
Thank you. Our next question is coming from Pamela Kaufman from Morgan Stanley . Your line is now live.
Hi, good morning, good morning.
I wanted to follow up on the write down on new dress and just ask more broadly if there are any learnings or things that you would do differently in the future when it comes to M&A or in managing your existing brands based on the experience you've had with this brand.
Yes, Pam I would say that.
<unk>.
We recognize that the category has changed a lot.
Since we acquired that brand and acknowledged that our our strength is really in pet snacks and cat food.
And notably we actually did take a number one position in dry cat food in the last 12 week period with Meow mix. So just have we learned absolutely right and I think anticipating how that the dog food category has gone and the fact that we are not in one of the law.
Leaders in the job dog food.
Segment of the category speaks to the fact that again, our portfolio reshape, making sure that we're spending our dollars and resources against the areas, where we're going to see the most growth.
And we will remain committed to stabilizing.
New trash and our dog food portfolio, but clearly.
Our strength lies within pet snacks and cat food.
Okay. Thanks, that's helpful.
And then can you talk about the outlook for future price increases do you anticipate needing to raise prices further.
Although demand elasticity has been better than expected can you discuss how retailer receptivity to further pricing looks and if you would expect any pushback.
Sure and it's part of his answers is the same answer I gave a little bit earlier, but just.
We can't anticipate what other pricing may come.
I would acknowledge that we've talked a lot about coffee.
And I would just highlight that coffee prices coffee commodity costs are not at record highs.
So we have seen higher cost at.
One small data point.
But the comment really is is that we have been very diligent and prudent in adjusting our prices throughout the year.
For inflation and we have been very.
Prudent in how we have taken those and really just following inflation and making sure that our price increases are truly justified from a cost standpoint.
And so we have been very successful in doing that the intent is to recover costs and all of the pricing actions even the most recent one.
Are no different and so really we have to remain focused on maintaining the great top line momentum, we've got including investing in our brand while we're offsetting the cost increases so that will remain our focus.
And and the receptivity has been.
Good everything as I mentioned earlier, everybody is experiencing that and so retailers.
Are willing to work with us to find the best path forward and ensure that we're passing on justified our cost increases.
Got it thank you.
Thank you we've reached end of our question and answer session I would like to turn the floor back over for any further or closing comments.
Well I just want to say, thank you to all of you who tuned in our investors our analysts our employees who have made these results possible their tremendous commitment to our business and.
Really just hope everyone has a great week.
Thank you for listening.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.