Q4 2022 J M Smucker Co Earnings Call- Q&A Session
[music].
Good morning, and welcome to the J M Smucker company's fiscal 2022 fourth quarter earnings question and answer session.
This conference is being recorded and all participants are in a listen only mode. Please limit yourself to two questions and re queue. If you have additional questions I'll now turn the conference over to Aaron <unk>, Vice President Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining our fiscal 2022 fourth quarter earnings question and answer session.
I hope everyone has had a chance to review our results as detailed in this morning's press release and management's pre recorded remarks, which are available on our corporate website at J M Smucker dotcom.
We will also post an audio replay of this call at the conclusion of this morning's Q&A session.
During today's call we may 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. Additionally, we use non-GAAP results to evaluate performance internally I encourage you to read the full disclosure.
Concerning forward looking statements and details on our non-GAAP measures in this morning's press release available today on this call are Mark Smucker, President and Chief Executive Officer, and Tucker Marshall Chief Financial Officer, We will now open up the call for questions. Operator, please queue up the first question.
Thank you the question and answer session will begin at this time, if you're using a speakerphone. Please pick up the handset before pressing any numbers should you have a question. Please press star one on your telephone if you wish to withdraw your question. Please press star two for operator assistance. Please press Star Zero as a reminder, please limit yourself to.
Two questions during the Q&A session should you have additional questions you may re queue and the company will take questions. As time allows please standby for the first question. Our first question today is coming from Andrew Lazar from Barclays. Your line is now live.
Great. Thanks, very much good morning, everybody.
Good morning.
I thought it was the first food company to give guidance for the upcoming fiscal year that in light of recent industry chatter regarding consumer behavior and retailer commentary I thought it might make sense to start with with having to address this building investor notion that the pricing window has all of a sudden effectively closed for the.
The industry as a whole, which is a particularly important topic given your expectation for mid to high teens inflation is still to come in fiscal 'twenty three.
Andrew It's mark Thanks for the question.
I guess I would just respond directly first of all by saying that.
We don't believe that there is.
Window right and.
It is our responsibility to always manage our costs, which we do on an ongoing basis to ensure that.
Where.
Thinking about cost productivity and when we do need to take pricing, we will do that.
And that will not change.
So we will continue to partner with our customers as we've talked about in the past.
And be very prudent and judicious, we're obviously cognizant of the pressure that is on consumers.
But as you know we have a responsibility to our shareholders.
To protect our dollar profit and.
We are confidence that not only have we been able to do that that we will be judicious and prudent going forward and use all of the levers.
At our disposal to do so so.
We will continue to manage through it I know that we've.
We've experienced a significant amount of inflation and Tucker can provide more detail, but a majority of our cost increases have have successfully been price for at this time.
Thank you for that.
Second just quickly on <unk> is clearly expected to continue to drive significant growth going forward and obviously, you've got the incremental capacity additions that you're working on as well, but maybe you could discuss the sort of the trends in volume, which have just accelerated of late in the scanner data I don't know whether thats, just more capacity related or what have you, but any context around that I think would be really helpful.
Thanks, so much.
Sure of course.
Well first of all demand continues to exceed supply.
And so we're continuing to manufacture as many sandwiches as we can we actually made over a billion sandwiches.
Our fiscal year, which was of course a record.
And we did see.
A little bit of a deceleration in the fourth quarter, largely just because we had some supply constraints related to supply and labor, which we have resolved and so we do expect to return this quarter to double digit growth and then as the completion.
The second phase of our Longmont investment.
Finish we would expect to see some additional acceleration.
<unk> sales in the back half so Bottomline brand is super healthy, it's going to continue to grow the demand and supply dynamic is as we've discussed and we continue to make meaningful investments in capacity to support that so we do believe it will become a 1 billion dollar brands.
Okay. Thank you so much.
Thank you thank.
Thank you. Your next question is coming from Ken Goldman from Jpmorgan. Your line is now live.
Hi, Thank you.
I wanted to follow up on the question about retailers in the price environment by asking about your.
Your competitors in the price environment, we're starting to see in some categories I don't think necessarily than yours, but maybe a little bit in coffee that certain vendors are certain producers are raising prices and others are too, but maybe not to the same degree at least what we can see in scanner data. So are there any indications you're seeing.
That weather inspired by.
Retailers are weather inspired by their own decision, making any of your competitors are.
Being a little more.
<unk> conservative and taking some of the pricing that maybe you think is necessary.
Ken I think it's really difficult to answer that question specifically.
We obviously keep a close watch on our on our retail customers as well as our competitors I would say the general comment is that we have seen competitors across our Canada category take price.
In many cases, we have led those prices and price increases in some cases, we have followed.
But I think the headline really here is that really the tide raises all boats. So as we're all experiencing similar cost pressures and again Thats a general statement I do believe that.
We all are responding in a relatively similar manner to those cost increases so the inflation tends to be broad based across categories.
Thank you for that and then for my follow up one of the questions. We're hearing this morning as is weather.
Smokers guide.
Guidance for organic sales growth next year as aggressive right I think it came in a little bit maybe a lot higher than what some people were looking for so I'm just curious.
Clearly, you've I think talked about how you've taken a lot of pricing you feel that I feel really good about that you've also guided to elasticity picking up a little bit but mark are there any are there any things you can tell.
Tell investors about.
Why they should feel comfortable that elasticity won't be much worse than what you expect or maybe that retailers won't really lean in on you and your competitors, maybe just start promoting more I. Just think people are a little bit looking at this guidance and thinking alright, maybe aspirational to some extent I was just curious for your thoughts on that.
Ken This is Tucker I'll begin and then hand, it to Mark to talk about some of the business considerations that you just asked but.
When you think about the growth year over year on a reported basis, we're saying we're up 4%.
When you isolate the divestiture impact that occurred in FY 'twenty two that provides two percentage points of growth, which gets you to 6% and then as you isolate the Jeffrey call for FY 'twenty. Three that then takes you to 8% underlying growth year over year at 8% comprises 15% pricing.
Offset by 7% volume mix, which was primarily due to price elasticity of demand.
When you think about the 15% year over year pricing that is pricing actions that we took in FY 'twenty, two that will fully materialize or benefit or lap into FY 'twenty three and we did take early spring pricing for the benefit of our full fiscal year of FY 'twenty three in that.
15%.
Pause and see if mark has anything else to add on the businesses.
Yes.
A couple of headlines can.
Just to respond directly.
We do have a lot of confidence in our portfolio and I think when you look at the results, particularly this quarter.
86% of our portfolio are growing or maintaining share that does not that's just.
It doesn't just happen.
It really is a combination of fantastic investment in our business execution by our employees and the execution of our strategy by which we have.
<unk> refined our portfolio as you know and so all of those factors have contributed to the fantastic results.
And so.
We just think that we believe that our strategy is truly working and then more specifically on elasticity even in the quarter, we did see elasticity.
Coming in better than expected that trend has continued as you've heard US talk we do we are modeling going forward some elasticity.
But at the end of the day, because we've been able to execute our strategy, we have and refine our portfolio. We really are in categories that are pretty resilient.
And our offerings across those categories are.
Focus on a variety of value propositions in playing in multiple segments. So we just feel that we're very well positioned in this environment and just will continue to execute our strategy.
Great. Thank you. Thank you both.
Thank you. Thank you. Our next question today is coming from the wrong Grande from.
Your line is now live.
Hey, good morning, everyone.
Good morning, good morning.
Actually I would start by digging a bit more in Ken's question about the guidance because that's the key question I receive is went from investors. So.
You already kind of.
How much you expect.
Gross foreign Christopher only in the first quarter in the back half of the year. So maybe could you give a bit more color into what you expect.
Sigma or India.
In the pet food segment, because we would be super helpful. Thank you.
Okay.
Okay.
Yes.
Yeah.
Hello.
Yes.
Pulling together some data for your answer Laura. Thank you okay. Thank you.
So I think as we think about.
We are anticipating topline growth for coffee throughout the year again that is primarily driven by pricing as a result of covering material cost inflation. As you think about the growth profile, we would anticipate that coffee continue its profitability growth at the bottom line year over.
Year from a dollar standpoint.
And we would anticipate that margins improve as.
As we move through the fiscal year, but the first quarter margins would likely be the lowest.
And we will.
More likely than not get back to that 30% level, we will be short of that for the fiscal year.
As we think about our patent portfolio, we are anticipating top line grew.
For pet once you isolate the impact of the divestitures year over year.
Top line growth for Pat then does translate into bottom line growth through the first three quarters, Pat will lap a pretty strong fourth quarter as you saw in the results today again, the story within Pat as pricing actions taken to cover material cost inflation. So hopefully that gives you a context of how we're thinking about the direction.
Of both coffee and Pat and then Marc outlined the fact that on cross the rules on a full year basis grew 19% for this past fiscal year, and we would anticipate double digit growth of the <unk> brand in each of our four quarters in FY 'twenty three.
Okay, Thanks, and maybe a bit on pet food you said you will you would've great nutrition.
Of the year.
Should we think about.
A strong marketing push for nutrition, well at the end of the year and potentially even some upside on that front door because.
Because it's still about a third of its more than a third of your pet food business.
Laura.
Nutrition had a really good quarter and it was up 14% so.
Some of the actions that we have been taking are starting to help stabilize that brand. So we're encouraged by that.
A couple of the of the areas of focus for us on nutrition.
We are supporting some of our faster growing segments like wet dog and dog snacks, and then as we I think we mentioned there in the prepared remarks about how we are going to optimize the nutritional aspects of the formula and we will be kicking in some new advertising in the back half of the year. So.
Our efforts on nutrition continue.
As we've shared it is it is a.
A long term process, but we do.
We're satisfied with the results so far and we're going to continue to push to ensure that we stabilize that brand.
Thanks.
And maybe if I may last.
Last question completely different from now on you haven't discussed about these this morning.
One of the feedback we received from investors I'm actually since Cagny.
Although it was negatively perceived was super luxury we're going to do a larger crew.
As shown in the non core business.
So that was not very well perceived by investors. So.
I know you came back in some meetings.
Uh huh.
And tried to murder rates. Your what you are saying about this but maybe for clarification could you. Please rich rich your position on that front. Thank you.
Yes sure. Thanks for the question, we have had a lot of questions about that and what we wanted to ensure that we are clarifying is we're still very interested in acquisitions and we want to be an acquisitive company, we want to be prudent about.
The dollars that we would invest in acquisitions. So they definitely are an important part of our strategy and we do consider transformational bolt on or emerging acquisitions as.
As we think about our current portfolio, we are interested in rounding out our portfolio.
You think about coffee.
There are opportunities to continue to round out our portfolio there.
If you think about pet snacks is an area of interest.
As well as snacking and their frozen handheld business of course is very strong. So if there were unique assets in the frozen space all of those would potentially be of interest I think the real really the only shift that we were trying to community.
Kate with all of our investors was.
We would not meaningfully enter a new category, unless we were able to acquire a meaningful or leadership position in a new category in other words, we would not enter a new category by acquiring a small or emerging brand.
We feel that our.
Our skill set is in managing leading positions and so we would not be looking to enter new categories with a small brand it would have to be a growing category and the option to acquire some meaningful share.
Share of that category, so again, focusing on our existing category, our existing businesses rounding them out pet snacks coffee and <unk> frozen handheld are all of interest.
Perfect. Thank you very much I pass it on thank you.
Thank you. Our next question is coming from Robert Moskow from Credit Suisse. Your line is now live.
Hey.
I guess a couple of questions.
One is when I tease out the impact of the Jiff recall I think what I'm getting here is kind of flattish.
EBIT maybe.
Maybe even down a little bit.
And I guess my first question is in the context of organic growth being up 8%. How did you think about the flow through of that like did you just think like okay. We're just going to offset price dollar for dollar or are you taking into account a lot of uncertainty still in the market supply chain disruption.
And then I had a question on share repurchase you're free cash flow guide is pretty low for fiscal 'twenty three.
What are your what's your attitude towards buying back stock here.
Do you have firepower to do it.
Especially given the.
The transitory nature of the jiff recall.
So Rob let me breakdown.
The earnings component first and then I can address free cash flow and capital deployment secondly, so.
After you isolate the 90.
Unfavorable impact from the Jif peanut butter product recall that would put you at about $8 95.
And again, that's slightly up to where we finished the year with just acknowledged that we did have a very strong finish to the fourth quarter.
When you think about the benefit of pricing actions that either came through FY 'twenty two.
And we'll also lap into FY 'twenty three along with the additional pricing actions that we've taken in early spring for the full year benefit of FY 'twenty three.
Along with the benefit of shares repurchased.
FY 'twenty two.
That is being offset almost by year over year cost inflation.
Our estimate of price elasticity or down volume mix.
And our SG&A increase year over year, which is in support of investments back into the business and just compensation year over year, Ben It basically says that you have about a 7% difference from where we guided versus where we finished last year and we think this is a prudent approach it.
This point in time with respect to guidance. After you isolate the impact of the peanut butter recall a couple of other points that I would highlight as we are making significant investments to continue the across the board growth.
That is about a 55 impact embedded in our guidance range.
There is $30 million of preproduction that we called out in SG&A and Theres, another approximately $48 million to $50 million of incremental fixed overhead as we complete phase III Longmont and as we began the initial phases of Mccullough, Alabama.
Then to your second question as it relates to free cash flow free cash flow guide is $500 million. There are a few items affecting it just for your awareness one is the incremental investment for on cross the bowls. The completion again in longmont in the beginning phases of Mccall up then we also do have the <unk>.
Impact is affecting free cash flow I estimate that to be about $100 million.
And we are making in the first quarter $80 million of cash contributions into our pension funds.
Well, we remain committed to a balanced capital deployment model reinvesting in the business returning cash to shareholders. We will look at the dividends for the future because we want to continue to increase that dividend as we have done and we will consider strategic reinvestments, but we will also keep our eyes open.
Seeing a share repurchases are appropriate as we think about delivering long term shareholder value. So hopefully that rounds out your two questions.
Okay. Thank you.
Thank you. Thank you. Our next question today is coming from Jason English from Goldman Sachs. Your line is now live.
Hey, good morning folks Thanks for Slotting me Ann Good morning, Jason.
And congrats on the solid pet numbers, so it's great to see the broad based growth.
Within the portfolio.
I do want to come back to.
Yeah, you're welcome I wanted to come back to the <unk> side real quick and just make sure I understood what's going on there it looks like.
Based on what we're seeing scanner data, there's there's 20 points or more of price going through that business.
So for sales to be down in retail it would suggest that youre seeing volume declines, so 20 or more percent and youre still expecting if you are only coming back to low doubles next quarter or this quarter that we're currently in and Youre still expecting volume declines to persist.
Right.
It seems like a big number in terms of volume like what are the what are the contributing factors to that.
Jason in our fourth quarter, we experienced some supply chain challenges that actually started in the beginning of our end of our third quarter.
Impact on production, primarily due to labor and some other sort of.
Fundamental sort of inputs into the into the product we have since addressed those and are successfully backup to the run rates that we would expect and anticipate.
And as a result of that we just sort of manage through volume in our fourth quarter and we did finished the full year up 19% and topline we do anticipate that going into next fiscal year. We will continue to see double digit growth for the brand in each of our four quarters of next fiscal year.
<unk> that is just the continued momentum of the business, it's bringing on additional capacity and then I would acknowledge that across those arent immune to the cost environment and so we've had to take pricing against an across the board as well just as we've had to do across our broader portfolio, but we're very confident against that brand due to the points that.
Mark made earlier about demand outstripping the current capacity and we continue to bring capacity online to meet demand, yes, I would just add Jason that we want to convey to all of you and our investors that you should have no concerns whatsoever about <unk> volume was up 7% on a full.
And on a full year.
And.
We do expect continued volume growth in the next year based on everything we've said so it really was a temporary hiccup and given the demand and supply.
The offset we do expect that brand to continue to grow dollars double digit over the over this next year for sure.
Okay.
And then.
I appreciate that thank you for the answer.
Coming back to the price and cost dynamics.
15% price big number.
<unk> is like $1 2 billion of incremental price and I think in your press release.
I know in your press release, you said mid to high teens cost of cost of goods sold inflation that implies like a $50 to $900 million ish of Cogs inflation.
It's not usual I guess to see companies price above the absolute penny impact dollar impact of Cogs inflation.
So two questions one of that $1 2 billion, how much has already been locked in how much you still going to have to go to retailers to negotiate for them.
And what gives you confidence that you'll be able to take price on a penny profit basis, so far above the cost impact.
Jason Let me start with the pricing dynamics that Youre referencing one we do have 15% benefit to our top line year over year as a result of pricing.
A portion of that 15% is due to actions that we took in FY 'twenty two that did not provide a full year benefit. So I think you have to be careful isolating the 15% to our mid to high teens call out in our prepared remarks.
The second comment that I would.
Offer us is that we did take pricing in early spring for the full year benefit of FY 'twenty three that is inclusive in that 15%.
And then underlying our philosophy has been to recover dollar for dollar cost inflation.
To make sure that we're passing along just the appropriate cost increases that we're seeing and so therefore, we do feel as though we are recovering that impact year over year and over the last two years.
Okay.
<unk>, how much is still pending.
Our guidance reflects that 15% reflects what we have.
Taken in excuse me have taken in the early spring and so we feel as though at this point in time, we are set for the fiscal year got it so everything like that <unk> locked in or has been agreed upon with retailers.
There is not like another round that you have to go through and sell in correct.
We believe that our 15% acknowledges the cost inflation and the conversations that we've had with retailers to date, we will continue to monitor our cost basket as we move forward and address any incremental increases to the extent they occur or <unk> happen.
Understood understood. Thank you so much.
Okay.
Thank you. Your 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 if I could just actually ask a follow up on Jason's question there.
With the 15% pricing number.
I mean should we also assume then that your.
Relatively locked on the cost of goods side as well like are you are you secured on raw materials and price kind of for the year at least to this point or is there more kind of still to price out for the year.
Our current guidance reflects our current cost picture.
The component that we are able to hedge or otherwise control against and also the variable portion and so it's our best look at this point in time.
Absent any material changes in the overall markets or product or supply availability.
Okay, Peter I would just I just wanted to reemphasize.
That as we think about again taking price.
We want to we want to be very judicious in how we do that and so our goal is not.
Not necessarily to over recover we do have to pull all levers we have to manage.
<unk> and cost and so.
To my earlier comments, a little while ago about being sensitive to what the consumer is experiencing and then partnering with our customers to make sure that while we are passing along as is justified.
Got it Okay, and then if I could just ask maybe a two parter on the on the recall.
Just the timeline of maybe when you expect the plant.
To be kind of back up and whether or not the guidance.
It all assumes that you're fully regained distribution by the end of the year and then as a second part to that is there any crossover of of jiff product going into unprofitable does that concern to think about at all or is it a separate kind of supply chain. Thanks.
Sure. So as you know we initiated a voluntary recall on select GF products.
Consumer safety of course is utmost importance to us.
We care very much about our end consumer and we continue working with the FDA to ensure that the Lexington facility is up and running as safely and as quickly as possible.
<unk> Memphis facility was not affected by the recall and has continued to produce just products.
Our new Bethlehem facility, which produces specialty peanut butter is does not manufacture any jeff products and.
And is not also not affected by the recall.
The all of the peanut butter that goes to <unk> is produced in Memphis, and so we have continued to produce that powder and send it to our two facilities for <unk>.
Got it thanks, Thanks, Mark and just sorry, Tucker does the guidance assume full fully regaining distribution by the end of the year on Jeff.
So as we called out in our press release. This morning, we think there is a 90 cent impact that is our current and best estimate.
About half of that impact is due to customer returns, which will come through primarily in our first quarter and the other half of that impact is what we're referring to as manufacturing downtime, which will primarily primarily impact us in the first quarter as well and as we continue to learn more we will continue to update you and others.
Got it thanks very much guys.
Thank you.
Thank you. Our next question today is coming from Pamela Kaufman from Morgan Stanley . Your line is now live.
Hi, good morning.
Morning.
We're starting to see an uptick in consumer trade down in some categories in the scanner data.
Generally how are you thinking about consumer propensity to trade down in your categories and how are you managing this risk and then on the flip side are there any areas of your portfolio going you could see a benefit if consumers look for savings or trade down.
Pamela.
The answer to your second question is unprofitable, so where we have seen zero elasticity right and so consumers have continued to.
By <unk>, we would continue that we would expect that to continue as well.
And we have not seen really any meaningful trade down in our categories.
We are very much accustomed to competing across.
The entire value spectrum.
Our categories are resilient as I mentioned earlier tend to be a bit less discretionary.
And as an at home consumption remains elevated we would expect that we would.
We would continue to grow our brands and I think the results and our share performance in the quarter sort of put an exclamation mark on that.
Got it thanks.
And then just a follow up question on your inflation outlook can you talk about what your current inputs input cost coverage is for fiscal 'twenty three.
Because your costs are covered for the year and where do you have exposure.
And what I would offer is that we believe that we are experiencing mid to high teens cost inflation across our cost basket, which is primarily commodity ingredients.
Packaging and transportation and manufacturing.
And what we don't disclose as our coverage position throughout our fiscal year.
But it is our best look and best estimate of our cost structure at this point in time, and we'll continue to manage and monitor the inflation and overall supply chain disruption over time.
Got it thank you.
Thank you. Our next question is coming from Cody Ross from UBS. Your line is now live.
Hi, Good morning folks. Thank you for taking our question I wanted to go back to your 15% price guidance, 7% volume decline.
That is a bit better not a bit a lot better than history.
Walk us through your thought process behind that how that should trend throughout the year and as we get to the fourth quarter do you expect it to be back towards more normalized levels. Thank you.
So the 15% year over year impact associated with pricing again as a component of FY 'twenty two lapping into FY 'twenty, three and again as a component of recent pricing actions. We've taken for the full benefit of FY 'twenty three again, our philosophy on <unk>.
<unk> has been solely to recover input cost inflation on a dollar for dollar basis. We believe that is prudent and last fiscal year in this fiscal year too.
Forecast the impact of price elasticity of demand.
In FY 'twenty, two they have come in a little bit better than anticipated or under historical trends, but we do think there will be a greater pressure in FY 'twenty three and Thats, 7% really is a composition of what we are anticipating some price elasticity of demand, but it also have some underlying momentum behind it too as well.
Which is from our <unk> brand that we anticipate demonstrating sort of.
Mid single digits to high single digit volume growth year over year, and a continued return to growth from our away from home business.
So it is our best look right now kind of a volume impact year over year Cody.
And we will continue to manage and monitor and update as we move forward in the subsequent quarters.
Great. Thank you for that and just a follow up question.
When it comes to me.
<unk> in your prepared remarks comment how you will see additional pricing to them.
And quakes from warrants.
Of what some of the big retailers out there upset.
Vestas concerns can you just help us gain some confidence as to.
How would you expect to and why you're so confident you can have additional rounds of pricing this year.
Thank you.
Well couple of things, maybe a little bit.
Repetition is we have generally taken a majority of the pricing across our portfolio, thus far in anticipation of.
Our cost that we would incur this fiscal year.
There may be additional pricing actions that are required depending on.
<unk> costs and inputs and so forth.
And our confidence derives from the fact that we continue to have very strong relationships with our retail customers and that we really approach.
Any meaningful cost increases very judiciously, and really work to partner with our customers and have very open dialogue as we move forward. So again. This is this is part of our business, it's our job and we want to manage through it in the most part.
Positive way.
Way possible so.
We remain confident.
Alright, thank you.
Thank you.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Well I want to thank all of you for joining today.
We clearly have executed against our strategy and are very pleased with our results and so our outlook reflects that as well.
But these results are really <unk>.
Possible because of our team and our fantastic employees. So wanted to just acknowledge and recognize the tremendous work.
And Theres a lot of it to be very honest that all of our folks have been doing but just wanted to take a moment to acknowledge our employees and thank them for delivering.
Such a strong year. Thank you very much.
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.