Q2 2023 J M Smucker Co Earnings Call- Q&A Session
Speaker 1: you know, our brands specifically. And so, you know, as again, price gaps in the premium coffee space have continued to close. And so we would expect over the subsequent quarters to continue to see growth for our Dunkin business as well as our single serve business. Okay. And just to follow up, you know, you've said actually, I think for several months that you are prepared for an environment where coffee costs fall and you're taking more steps in advance to prepare for it. Can you be more specific as to maybe something you're doing differently this time so that the flow through is more seamless? Well, the first thing that we've, you know, tried to remind everyone is that we haven't seen record coffee costs like we saw, you know, a decade or so ago. And so the environment as we've managed through it has been, you know, the playbook has remained the same. We continue to execute against those same activities that we always would, whether that's, you know, being very prudent about passing through the pricing, being, you know, thinking about promotional activity in a normalized way. So in other words, not out of the ordinary. And then very importantly, and maybe most significantly continuing to invest in our brands, even in a period of inflation. And so just, you know, always taking the approach, Rob, of balancing pricing, volume mix.
Speaker 1: and the ways in which we support our brands, both with the consumer and customer, we've got to continue to take a balanced approach, and that has served us well, and we believe it will continue to do so. Thank you. Next question today is coming from Chris Grove from Steve Boyer Line is now live.
Speaker 1: the ways in which we support our brands both with the consumer and customer, we've got to continue to take a balanced approach and that has served us well and we believe it will continue to do so. Thank you. Next question today is coming from Chris Grove from Steve Foy. Your line is now live. Hi, good morning.
Speaker 2: Good morning. I just had a question for you first on a follow-up from an earlier question on inflation. Is there any nuance to how much inflation you realize in the second quarter? Is that pretty well in line with what you expect for the year? If I could just add to that, is pricing offsetting cost inflation on a dollar basis in the second quarter? Have you gotten to that point yet? Chris, what we would say is that the second quarter did have a higher level of inflation primarily due to the impact of green coffee.
Speaker 2: Good morning. I just had a question for you first on a follow-up from an earlier question on inflation. Is there any nuance to how much inflation you realize in the second quarter? Is that pretty well in line with what you expect for the year? If I could just add to that, is pricing offsetting cost inflation on a dollar basis in the second quarter? Have you gotten to that point yet? Chris, what we would say is that the second quarter did have a higher level of inflation primarily due to the impact of green coffee. We in the green coffee space, we have a higher level of inflation.
Speaker 2: recovered on a dollar-for-dollar basis that cost inflation and we put the predominance of our pricing actions in place prior to the beginning of our fiscal year so that we believe that we are recovering our inflation as we come through the fiscal year. And that comment then Tucker was more than just coffee overall for the company you have pricing in place to offset inflation is that correct?
Speaker 2: Correct. Okay. And just one follow-up question if I could, I think about the gross margin and you talked about in a couple areas of your business where you have higher manufacturing costs, I think you mentioned it in coffee and consumer. Is that sort of ongoing supply chain, you know, challenges that every company is seeing, perhaps lower volume as well. I'm guessing, what I'd like to get to, if I could, would be what degree you're seeing a gross margin drag today from these supply chain challenges. Like how much can the gross margin...
Speaker 2: of supply chain environment. And it also acknowledges that the volume mix profile of the business has evolved, particularly as you sell more pet food. And so as a result of that, that's all comprised within the gross profit margin guidance. But as we move forward and when we begin to experience the come together for Market ne a
Speaker 2: cost moderation or even deflation, when we see stability in supply chains, and as we continue to advance the strategy of the company, particularly on the growth front, but also as we bring along continuous improvement programs such as our transformation office, those will all continue to support the margin profile of the company over time. Thank you. Next question is coming from Steve Powers from Deutsche Bankerline. Is that live? Yes, thanks. You may have sort of just addressed this, but I just wanted to clarify, because you cited volume mix as coming in better just related to your higher top line and dollar-based profit outlook on the year, but you also have cited that same volume mix as the primary reason for full-year gross margin moving to the lower end of the prior range, just given that inflation and pricing seem largely unchanged on the year. So could you just unpack that a bit more? Is that the mix shift to pet food that you just mentioned, just so we understand the move lower to 33.5% gross margin on the year alongside the better top line? I think the 33.5% reflects our best outlook for the back half of the fiscal year and therefore the full fiscal year, acknowledging that as we took up our top line, we took into account the portfolio and the growth across pet and consumer, and that's all embedded in our 27-cent uplift due to volume mix.
Speaker 2: And again, that's being partially offset by some business investments through SD&A. Okay, thank you. Thank you. Next question is coming from Jason English from Goldman Sachs. Your line is now live. Hey, good morning, folks. Thanks for slotting me in. A couple of quick questions. You mentioned your confidence and your ability to hold coffee prices until you see the deflation. Assuming that's a couple of quarters from now.
Speaker 2: Are you happy with where price gaps are today or for you to be able to hold for that long, do you need to see competitors continue to raise prices and close the gaps from where they are?
Speaker 1: Jason, for the most part, we've seen the gaps close, as I mentioned in an earlier question, on premium, we're seeing those gaps close now over these last several weeks, and we think that will continue to be the case. And again, a little bit of that shift in the premium space has been indicative of the entire segment as opposed to maybe just our brand. So…
Speaker 1: we think that those competitive gaps will come back in line, as have the gaps have closed meaningfully in the mainstream space as well. So just continuing to leverage the entire value spectrum of our portfolio will continue to bode well for us.
Speaker 2: Okay, so just to paraphrase real quick to make sure understood you've seen the gaps close, but you need you expect to see them to close further. So you do you do need further conversions.
Well, no, I think on the premium, no, and in most segments we have seen and in premium they have largely closed to the extent that we would...
we would expect the competitive dynamics to normalize.
Got it. And quickly on PET, there's about one and a half billion dollars worth of capacity coming online in the US in PET next year. How do you expect that to impact the competitive environment?
First, what I would highlight is that there have been, as you know, some supply chain challenges across PET in general, and that's an industry comment. We have continued to fare very well throughout that dynamic. Our focus has been on optimizing our portfolio.
focusing primarily, as you know, on pet snacks and cat food. And the optimization in particular in our dog food portfolio has performed very well and has allowed us to capture value there, as well as experience some stabilization and some moderate growth in the dog food space. So again, you know, at the end of the day, we've got to remain focused on snacks and pet because that's where we have the ability to continue to lead.
then executing the playbook that we've previously talked in our dog food portfolio is yielding fruit.
Okay, all right. Thanks a lot guys. I'll pass it on.
As a reminder that star one to be placed into question queue our next question is coming from Cody Ross from UBS Your line is now live
Good morning, folks. Thank you for taking our question. Tucker, I just want to go back to one of the responses you gave earlier, just around the 12-cent EPS impact from SD&A expenses. I believe that's a shift. Can you just unpack that a little bit more? What is shifting from 2Q to 3Q, and can you just perhaps quantify it a little bit for us? Thank you.
Cody.
Cody the 12th
Impact to the
27 cent top line improvement due to volume mix is largely due to new.
additional business investments that we are making. An example of that would be in support of our transformation office.
And then I would also acknowledge that a portion of our 21 cent over delivery in the 2nd quarter was due to timing of. And some of that will now transition into the 3rd quarter. So you will have a portion. Of the incremental 12 cent investment in the 3rd quarter. A portion in your 4th quarter, and then you will have timing from the 2nd quarter of already previously planned fall into your 3rd. And then you will have timing from the 3rd quarter.
That's helpful. Thank you. And then just real quick, I want to pivot back to your pet segment. You grew 14% organically, which is quite substantial, but it trailed Nielsen in the quarter by roughly four points based on our calculations and your growth decelerated on a three-year stack basis. What is causing the mismatch between consumption and shipments today? Thank you.
Well, again, let me just start, Cody, with pet snacks. We grew in our pet snacks business at two times the category rate and gained a meaningful amount of share. So, where our strategy hinges first and foremost on pet snacks, we're very pleased with our performance and that is a comment that is relative to both our core...
biscuit business as well as the innovations that we've launched against our snacks primarily in the premium space and you can't deny the growth on meow mix of you know significant growth 19 of the last 20 quarters so where we have focused
and really executed our strategy.
the portfolio is performing exactly as we would have expected and in many cases had exceeded our expectations.
Thank you. Next question is coming from Max Kumpert from BNP powered by Exane. Your line is now live. You are now live.
Hey, thanks for the question. With price increases, can you hit the shelf and the consumer continuing to feel more of an impact from the economic environment? Are you starting to see more significant signs of price elasticities or trade down emerging in any categories? And if so, are there any similarities that these categories share?
Max, this is Mark. I would start by highlighting that our categories are very advantaged.
Particularly in the fact that we under index in those categories as relative to private label. And so some of the return or share growth that you've seen in private label is attributable to the fact that those brands had many supply chain challenges during the pandemic and that supply chain has gotten a bit better for some of the store brands and has allowed them to recapture some of the share that they had lost in the pandemic. But overall our categories remain extremely strong.
Our brands remain strong and the fact that we provide the consumers with a number of different options across the value spectrum, consumers will continue to be able to find brands in our portfolio that meet their budget and deliver ultimately value for them. So we continue to remain very confident in our strategy and our ability to meet consumers' needs across that spectrum.
Thanks, and one follow up. You recently reduced the skew count of year smoker's fruit spreads by 30% in order to position the business for improved profit, opportunities for growth, and continued category leadership. You mentioned in your prepared remarks that velocities are up 40%. Can you discuss what other impacts you've seen from this adjustment so far?
Well, first I'd actually like to thank you for highlighting that. That is obviously our namesake business. It's not our, of course, it's not our largest business, but over the years we've had a very significant proliferation of SKUs and as we looked at that business and got much more strategic about it, realized that we stand to benefit from a significant optimization of the portfolio and...
Basically, what you said came true is that we reduced our SKU count and we saw significant flow back into core items which has benefited both top and bottom line. And again, it ultimately comes back to a strategy of being focused.
Thank you. We reach into our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Well, first of all, I'd like to thank everyone for taking the time on a holiday week, early on a Monday morning for being with us. Just really appreciative of the fact that we've had another very strong quarter and that's a tribute to our employees who at the end of the day are responsible for our results and execute tirelessly every day and with a lot of passion. So I really want to thank them for the great results.
Then we really look forward to seeing all of you on our investor day, which is Wednesday December 14th in New York So for any additional details you can reach out to Aaron. We wish all of you a very happy Thanksgiving and a great holiday week. Have a great day.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time. Have a wonderful day. We thank you for your participation today.