Q1 2023 J M Smucker Co Earnings Call

Good morning, Good morning, and welcome to the J M. Smucker company's fiscal 2023 first quarter earnings question and answer session. This conference is being recorded and all participants are in a listen only mode. Please limit yourselves to two questions and re queue. If you have additional questions I will now turn the conference call over to Aaron.

I'm Vice President of Investor Relations. Please go ahead Sir.

Thank you Kevin Good morning, and thank you for joining our fiscal 2023 first quarter earnings question and answer session I.

I hope everyone has had a chance to review our results as detailed in this morning's press release and management's prepared remarks, which are available on our corporate website at J M Smucker dotcom.

We'll 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 incur.

Bridge you to read the full disclosure concerning forward looking statements and details on our non-GAAP measures in this morning's press release.

Participating on this call are Mark Smucker Chair of the Board, President and Chief Executive Officer, and Tucker Marshall Chief Financial Officer, we.

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 youre 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.

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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 comes from Andrew Lazar from Barclays. Your line is now live.

Great Good morning.

Thank you for the question.

Good morning, Andrew Good morning, you mentioned, some favorability in the commodity side for the full year versus our expectations. When you provided guidance last quarter and you know the.

The fact that you were able to raise the low end of your full year gross margin guidance. As a result suggest that some of the benefit is expected to flow through maybe in contrast to.

What is kind of a prevailing concern among investors in the overall food space.

Margin recovery, it will essentially be promoted away under pressure from customers and others. So I was hoping you could talk a little bit about your view on your margin progression that's costs rollover and if you still expect.

A 15% benefit from price for the full year. Thanks, so much.

Andrew Good morning, we are continuing to experience cost inflation that is having a mid to high teens impact on our cost of products goods sold.

That is not a change from what we said in our initial outlook for this fiscal year.

There are two areas that we continue to SaaS. One is the <unk> impact is coming in better than anticipated. So that has supported our margin uplift from the bottom end of the range and two as we continue to manage costs within our overall infrastructure to the extent we are able to in this environment.

As you've noted we still anticipate 15 points of pricing for the full fiscal year. There is not a material change to that from our original guidance and again, what we're carrying in from fiscal 'twenty. Two is about mid single digits and actions that we've taken for the full benefit of fiscal 'twenty.

Three is high single digits as well on the pricing front.

Got it. Thank you and then just I guess as a quick follow up I noticed in the in the prepared remarks, you mentioned when it's in the in the pet food space.

That's sort of the concept of value.

A number of times.

I guess I just wanted to get a sense from you on sort of what youre seeing on that front and maybe maybe in past times of sort of macroeconomic and congrats on the consumer what you've seen with respect to any any trade down in pet I guess I was under the impression that the growth obviously in the higher end.

It was still pretty strong and consumers tend not to mess around with their pet food that often so any thoughts any commentary would be helpful. Thank you.

Yeah sure Andrew it's Mark.

When you think about just taking a real quick step back on our total portfolio. We participate of course in all segments of our categories and that incur.

Includes the entire value spectrum, if you will.

And Pat is is no different and so if you think about.

Milk bone and how meltdown has outpaced that pet snack.

Segment, particularly in this last quarter and actually gained share that has driven both by some of the premium is Asian, the innovation that we've launched but also just by base Millstone, which is quite frankly, a very affordable.

Nash option for pets, and likewise with Meow mix.

Having also taken the number one spot in cat also.

<unk> the value equation for many consumers. So I think strategically we want to continue to play across that spectrum in our category and make sure that we're providing consumers.

With with options.

Thank you. Our next question is coming from Ken Goldman from Jpmorgan. Your line is now live.

Hi, This is <unk> on for Ken Good morning.

Good morning, good morning, so.

Good morning, I wanted to ask about.

So could you provide a little bit more color on why you think your expectation aircrafts for the year and then in the prepared remarks, he talked about the program.

And what are you seeing that gives you confidence that well and how much of that is driven by competitor actions versus things that are in your control.

Our marketing and promotional spending thank you.

Yeah.

No, it's mark I'll start and Tucker may add but first of all we're very pleased with our coffee performance again. It goes back to the comments I just made around Andrew's question and you know we lead so we did lead in taking price.

And that helped drive our dollar growth in our dollar shares continue to be very strong across the coffee category.

And although we did anticipate some elasticity in.

In the quarter that those were largely as expected.

As we're now seeing our competitors follow in pricing and so as we move forward. We would continue to monitor very closely consumer behavior, but we're encouraged by the fact that over 70% of cups consumed theres still consumed at home. So we still feel very good.

Our our total coffee business and we will continue to invest in it.

Also noted the reinvestment in folgers with.

Our new advertising campaign to reinvigorate that brand as well so.

All signs are continuing to support the business and and drive balanced growth.

Yeah.

Thank you. Our next question is coming from Peter Galbo from Bank of America. Your line is now live.

Hey, guys. Good morning, Thank you for taking the questions.

Morning.

Mark maybe maybe just to follow up on Andrew's question around Pet food you know I know you gave some comments on both treats and cat food.

It seems like dog actually had a pretty pretty solid quarter, I think up 18%.

So if you can just comment there I know you haven't put in the full.

Brand refresh on nutrition at this point, but.

Just what you saw in dogs, specifically in the quarter in terms of trade down and what you were expecting kind of over the balance of the year there. Thanks.

Sure Peter Thanks, a lot so in dog food I think what Youre seeing is obviously a very good quarter overall on dog food and that does include new trash and Kibbles 'n bits and part of that is really our efforts to stabilize our dogs.

Portfolio, which we've talked that our priorities are first and foremost snacks and cat, but then stabilizing dog food has been a priority that includes optimizing the our offerings and making sure that we have a narrower but clearer set of.

Of offerings for the consumer so a lot of that is now in market.

There has also been a lot of supply disruptions.

Across the entire dog food industry and that is not unique to smucker.

And part of our results there have been benefiting from some of that supply disruption.

In terms of how we've been able to manage through and ensure that we're meeting demand.

Got it that's helpful. Thanks, Marc and then Tucker just I've gotten a couple of questions on this this morning, but.

Just wanted to understand the moving pieces on on Jeff.

There was a pretty meaningful insurance recovery in the quarter I believe that was contemplated already in the prior 90% guide that you had given.

But just wanted to clarify that and then just on the move from from I guess 90 cents to <unk>. It seems like things have come back faster.

I think there were 65% impact in the first quarter or so maybe a little bit still into <unk>, but just.

Anything else you can help us to understand on the second quarter as it relates to <unk> and then maybe just the quarter overall thanks.

Yeah, absolutely. So as you know we came into the fiscal year with a 90 impact associated with the jif peanut butter recall.

That estimate is now 80.

We did have the opportunity to come back faster both from a manufacturing standpoint, and then beginning to refill the shells.

At the respective retailers and so we were able to see benefit which enabled us to reduce from 90 to 80.

To your point, we did contemplate in the estimate be anticipated insurance recovery.

Folks may be reading the income statement classification of where that recovery resides but it was always contemplated in the estimate to your point, we had a 65 impact in Q1. Therefore, we have about 15 cents left to go in Q2, and a little bit into Q3, but again nothing material.

Beyond the first quarter.

Thank you. Your next question is coming from Chris Growe from Stifel. Your line is now live.

Hi, good morning.

Good morning.

Hi.

I just wanted to follow up quickly on that Ah just discussion and just to be clear on the first quarter or do you have insurance recovery. This is incorporated into the into that 65 figure and is there more insurance recovery to come throughout the year. So make sure we get a sense of how that's going to play out in the coming quarters.

Chris.

65, <unk> impact in the quarter did have the anticipated insurance recovery. There is still a 15 exposure in Q2 and Q3.

Okay, No further insurance recovery, especially you know that sort of thing.

Correct, we have factored in.

Believe is the appropriate factor for the insurance recovery and our total 80 estimate.

Again, the predominance of that came through in Q1, and I just acknowledged that the impact.

It was against the 65.

Okay that makes sense. Thank you and then I just had a question on <unk>.

Thank you you have that you do expect the growth to pick up throughout the quarter you spoke to improve as we go through the year.

In fact, it's picked up quite quite dramatically do you have the kind of supply chain challenges there mostly out of the way and from here. It's just a matter of continuing to grow with the brand would grow and then I know you have longmont capacity coming on later online later this year.

So that would help accelerate the growth even further than what we're seeing today.

Chris It's Mark Yes, we're still very bullish on <unk> and everything related to it in terms of production remains on track we are finishing the longmont expansion.

The Denver facility and.

Well underway and construction.

The Mccullough, which is Alabama facility and so all of that now remember <unk> is not going to come online for a couple of years, but all of the.

Efficiency improvements that we've seen in Kentucky as well as longmont are going to support us meeting demand. So although we are not quite meeting demand in other words supply is not quite caught up with demand all of the work on production is intended to do so over time.

And we do expect that we have again significant runway and the ability to get that brand to $1 billion over time.

Thank you. Our next question is coming from Robert Moskow from Credit Suisse. Your line is now live.

Hey.

A couple of questions.

I wanted to make sure I understand the assumptions for profit growth for the rest of the year from what I can tell you're assuming kind of flattish operating profit.

Maybe even down a little bit for the next few quarters.

And I just want make sure I'm doing the math right.

Is that true.

But.

Especially given first quarter. It looks like your profit would have been well ahead of last year X the Jeff Jeff recall.

And then a quick follow up.

Rob Good morning.

Brought the guidance range at the midpoint up 35.

About 10 cents of that is coming from volume mix.

About <unk> of that is coming from cost of products sold but embedded in that first 25 is the <unk> <unk> benefit from the jiff estimate going from 90 to 80.

And then you've got about 10 cents of SG&A that comprises your 35.

In terms of the flows as you think about for the rest of the year, maybe we can follow up with that offline and help you with your flows but that is how we're seeing the earnings construction from going from 805 at midpoint to currently 840, and then I would just lastly acknowledged that as we continue to see.

See the patch momentum.

Continue through the balance of the year as we continue to see consumer momentum inclusive of Jeffrey recovery and the international away from home momentum and then thats being partially offset by coffee topline momentum. So just to give you a sense of how we're thinking about both bottom line and top line.

Okay, and maybe more specific then in the retail consumer foods segment.

Profit was down about.

$65 million versus year ago, but the 90 of that was the jif recall so.

This division's profit well ahead tracking well ahead of a year ago ex the recall and therefore should we assume.

Higher.

<unk>.

Commensurate with that in this division for the rest of the year.

Yes, the profit growth should pick up on a sequential basis in the second third and fourth quarters as it gets beyond the first quarter impact associated with the Jif peanut butter recall.

Thank you. Our next question is coming from Jason English from Goldman Sachs. Your line is now live.

Hey, good morning folks.

Good questions Hey, Barry So since you last reported you guys filed your K and.

And there it revealed that your advertising spend was down around 21% last year.

Given that you are over delivering so far why not take some of the over delivery and reinvest back into advertising.

Yes, why don't I start just with our assumption around marketing spend for the fiscal year. So we did experience some SG&A favorability in the first quarter associated with marketing. However, we remain committed to spending the dollars that we planned at the beginning of the year and are still maintaining.

Our guidance of five 5% of net sales spend against our brands.

We believe it is important for the ongoing reinvestment and growth of those brands and overall health and profitability of the company.

Hey, Jason It's Mark I would just reinforce that we are committed to spending the dollars and.

Some of the dollars they are going to flow through later in the year.

And just keep in mind that because pricing is up.

And inflation has driven up top line to some degree that would slightly mute the dollars as a percent of net sales, but rest assured that our commitment to continue to invest in our brands.

<unk> is solid and the efficiencies in other words, the bang for our box. It we're getting by getting more efficient on some of our marketing spend is also helping.

<unk> delivered good results against brand investment.

Okay, Okay and back to the question on coffee and why you expect volume to get better I don't think I was I didn't mark away from feeling like add a lot of clarity on the answer there.

So ask a more direct question is it because you expect competitors to follow therefore closing the price gaps and if that's the answer are you seeing it happen already or is it because you are expecting to maybe further ran some promotions.

And those price gaps.

And if so what's the timing and cadence of that.

It's more the former it's more of the fact that we are seeing competitors follow.

<unk>.

We manage price through a number of levers that you are well aware of whether that's trade and whatnot. So we have of course, our normal promotions planned through the holiday period.

Those will continue to support the brand, but we do expect competitors to continue to follow our lead.

Thank you. Our next question is coming from Pamela Kaufman from Morgan Stanley . Your line is now.

Hi, good morning.

Morning.

I just had a question on pricing and whether you've implemented all of your planned pricing actions for the year in the market or is there going to.

The further pricing that comes through.

So and which categories will there be incremental pricing.

Okay.

Pam we generally have implemented a majority of our pricing, but we still are in an inflationary environment. So it remains to be seen if.

I would never use the word finished and youll recall that when we do move price. We have consists been consistent and moving price both up and down depending on our delivered cost obviously its been more up in the last year or so.

But we do believe that we've taken a majority of it and we'll watch carefully as we consider whether or not there may be further pricing required in the coming quarters.

And Pam I would just acknowledge that our guidance reflects the pricing actions that we took in the spring timeframe and support of recovering the cost inflation in order to deliver our fiscal year.

Okay. Thanks, that's helpful and.

And then my second question is just an update on your M&A strategy I haven't given your comments earlier this year about interest in potential acquisition.

Where does this stand have you been evaluating any potential acquisition, then can you remind us what the criteria and if that's changed at all.

Sure the criteria hasn't changed.

Im happy to refresh.

Our collective memory on that.

The short answer to your question is always have lines in the water constantly evaluating opportunities that come across our desk.

But again, we want to invest in businesses and do it in a prudent way that that will generate a good return.

So clearly that is one of our key priorities and as we've articulated over the last several quarters. We are interested in.

Acquisitions that would add to our existing portfolio in our existing categories that would potentially round out our portfolio and coffee potentially our portfolio in pet snacks would be of interest.

We.

Could be interested in more significant or meaningful acquisitions as well.

To the extent that we're looking at newer categories are categories that we don't participate in.

<unk> tried to be clear that.

We would not enter a new category and less we had the ability to acquire a meaningful or leadership position in those categories. So it's quite simply meaningful leadership positions or rounding out our existing portfolio.

Thank you next question is coming from Cody Ross from UBS. Your line is ally.

Hi, there. Thank you for taking our questions.

Good morning.

A little bit on pet pet has seen a nice acceleration here organic sales in the mid teens did you have any benefit from inventory replenishment in the quarter stemming from your supply chain headwinds and can you discuss what youre seeing from a market share perspective. Thanks.

The answer to the first question is no.

And.

The second part of your question I'm, sorry, Cody was around market share.

<unk>.

We've seen good share growth clearly milk bone.

And meow mix, our again, our areas of focus very pleased with the results there.

At a full share point on milk bone and continued share growth on meow mix. So really pleased again with the way our investments are are playing out in those two segments and then we spoke earlier just about dog food and our efforts there to stabilize that business.

Thank you for that that's helpful. And then I just wanted to go back to when I talk for his comments earlier about your revised EPS Guide you mentioned that SG&A is adding about 10 cents to your higher EPS outlook can you just provide more details about what's different today in your SG&A outlook versus prior.

So Cody was consistent as our reinvestment in the business of maintaining five 5% of marketing spend as a percentage of net sales. So there's no change there.

What we're seeing in SG&A is just some favorability on the discretionary side that came through in the first quarter and how we want to continue that trend or trajectory through the balance of the year.

Thank you. Our next question is coming from Alexia Howard from Bernstein. Your line is now live.

Good morning, everyone.

Good morning.

Okay. So can I ask about retailer inventory levels, we've seen.

Varying comments from different companies about whether the retailers have been holding safety stock and it needs to be run down or Conversely, if it.

Service levels have been low there may be a need to run it off why do you guys sit across the portfolio and is there a need to add.

Retailer inventory levels to shift over the next.

A couple of quarters.

Alexia, we really have not seen anything out of the ordinary on inventory levels on our businesses. So for us it's pretty much business as usual.

Great. Thank you very much and then in the prepared remarks, I think you made a comment that.

Obviously, the consumer environment is evolving.

Could you just hit the high notes of what the key consumer shifts that you're.

Working your way through all right now and I'll pass it on thank you.

Yes.

Been a lot in the press and the media just around consumer sentiment.

And being a little bit more cautious.

We've seen a bit of that I think if you look at our categories. They tend to be more resilient than.

The broader center of store categories, and so we have benefited from that similarly, theres been some discussions around private label and this notion of trading down my response to that would be twofold number one.

Again, this notion of making sure we're offering.

Brands across the entire spectrum of value.

And although you have seen some private label share growth.

That is pretty normal in these times and it is not back to pre pandemic levels. So although there is a little bit of there is some shifting in the categories I would just point to the fact that our categories are resilient and we will continue to invest in our brands.

Thank you. Our next question is coming from Scott, Michigan from our five capital. Your line is now live.

Thanks, guys. Thanks for taking my question I actually wanted to clarify some of the comments around the pet food area. So I think it was mentioned before that.

There were some out of stock issues I guess thats with competitors is that what I'm, taking because I think you guys said, you're fine on the inventory perspective.

And people haven't been replenishing.

I get that correct.

What I said earlier, Scott was that there had been broad.

Supply chain challenges in the pet.

Space largely because pet.

Pet products are formulated food, which have a lot of inputs of lot of ingredient and that makes the supply chain a bit more complicated and so that has affected the industry broadly, but where we are very pleased is our ability to have having managed through a lot of those challenges and are allowed.

And just speaking for ourselves to stay on shelf and in supply.

Okay, that's actually.

That's a good clarification, so I appreciate it.

Wanted to ask something a little bit long long range, and we have been talking to some of the distributors about.

What's going to happen here is maybe inflation cools off.

As you guys think out next year the year after.

How do you how do you guys think about that and how your business would look if we got a retrenchment that way I think it's going to happen, but if it did work.

Thanks.

Well.

First of all it's hard to say.

A little relief would be great.

But.

My answer to that question, Scott would simply be that we have been always prudent and disciplined about when we take cost up and we would similar similarly be very prudent and disciplined if we had to.

Lower prices over time, but at this point because it's still volatile there is a lot of unknowns in the marketplace.

We can't really provide any more color than that.

Scott I would also add that we remain committed to the profitability and margin profile of our brands and business and so as we continue to navigate this inflationary environment as we continue to move forward. We will continue to reinvest in those brands on behalf of our business and we'll continue to think through.

What ongoing continuous improvement our productivity programs will also mean to the long term health and strategy of the company.

Thank you. Our next question is coming from Rebecca.

Morgan Morningstar. Your line is now live.

Great. Good morning, the questions. So my first question has to do with.

Coffee margins I think that they were down about 350 basis points.

Sure.

Quite a bit more than I expected, obviously I know that there is some volume issues there.

Also mentioned that you are investing.

And folgers marketing, so I'm just kind of wondering as we look at the year.

You know and even if volumes.

Start to perform better there.

We still expect those margins to be lower year on year, given the increases in marketing.

So the coffee story is one of cost inflation that has needed to be recovered on a dollar for dollar basis.

And this first quarter is our largest cost component of our cost basket. So that is really what is driving the year over year margin pressure, but as we move sequentially through the balance of the fiscal year, we would anticipate that our coffee margins improve.

But getting them back to the historical 30 plus percent level will still take us some time as we navigate this inflationary environment.

Okay, Great. Thank you and then my second question is about dog food.

You had mentioned either in the press release or the prepared comments that you think that food is well positioned for evolving.

Sumer.

Yeah.

I believe what you're referring to there.

Given in place then you could see some consumers trading down from the premium and Super premium to more of the mid tier first of all is that what you're referring to.

If so are you seeing that yet or is that something that you anticipate you could be thank you.

Rebecca Theres, a little bit of that Theres, a little bit of trading down.

Again going back to my earlier comments about making sure we're providing value to the consumer.

The benefit to our dog food business. This quarter is again around the fact that we've done a lot of work to stabilize the business.

Make sure that we're managing through the supply constrained and we have benefited.

In that regard because we've done a good job of managing through some of the supply issues and then thirdly, there is a bit of the.

Trading into into our brands.

Okay, great. Thank you.

Thank you we've reached end of our question and answer session I will now turn the call back to management to conclude.

Well I want to thank everyone for your time, joining us this morning and.

As always our results were made possible by our outstanding team our employees and I really want to just thank them for their discipline and hard work and dedication to our company and our brands.

And we hope to see many of you in Boston at the Barclays Global Consumer Staples conference in a couple of weeks and.

There will be a live webcast of our presentation on September six at $2 15, and you can ask that access that from our Investor Relations website have a great day.

Everyone. This concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.