Q3 2023 J M Smucker Co Earnings Call- Q&A Session
[music].
Good morning, and welcome to the James Smucker companies Physical 2023 third quarter earnings question and answer session. This conference call is being recorded at all participants or did listen only mode.
Let me yourselves to two questions and reach you if you have additional questions now.
Now turn the conference call over to Umbriel home Vice President Investor Relations. Please go ahead Aaron.
Good morning.
And thank you for joining our physical twenty-two twenty-three third quarter earnings question and answer session. I Hope everyone 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 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.
Participating on this call are Mark Smucker Chair of the Board, President and Chief Executive Officer, and Tucker Marshall Chief Financial Officer.
We will now open the open up the call for questions. Operator, Please Q off the first question.
Certainly the question and answer session will begin at this time, if you're using a speaker phone. Please pick up the handset before pressing any numbers. So did you have a question. Please press star one on your telephone keypad. If you wish to withdraw your question. Please press star Q for operator assistance. Please press stars zero as a reminder, please.
Limit yourself to two questions throwing the Q&A session shook you have additional questions you may read Q and the company will take questions. As time allows our first question today is coming from Peter Yobbo from Bank of America people. Your line is now alive.
Hey, Mark and Tucker good morning, Thanks for taking the question.
Any.
I was wondering if we could just start maybe on the gross margin you know the implied acceleration into the fourth quarter is is pretty meaningful just just a had kind of a full year number I think north of north of 35.5% and four Q and just one I I feel like that's maybe being driven by coffee.
I just wanted to understand kind of one of the drivers of that in the fourth quarter. But then also just as we think about that exit right into 2024, you know if there was any considerations. There is it using that as kind of a base as we get into next year.
Eight are good morning, so as you know in our prepared remarks. This morning, we reaffirmed at approximately 33 and a half per cent gross profit margin for the full fiscal year.
And we have seen sequential improvement in our gross profit margin each of the consecutive or sequential quarters with a fourth quarter being our strongest and yes. You are correct that is largely due to us getting into the coffee best margin of its four quarters in the fourth quarter.
As it relates to the next fiscal year, we have talked a little bit about what the puts and calls are as it relates to margin improvement and I guess, what I would just say as this one is will continue to see the benefits of volume mix going forward.
We will see the benefit of lapping the Jeff peanut butter, a product recall, we will also see a moderation of cost inflation as a benefit along with stabilization and supply chain and manufacturing environments.
Along with benefits coming from our transformation office and then also over time the benefit of the divestiture after addressing stranded overhead.
Got it. Thank thanks Tucker for that and then maybe just as a follow up you know Mark I I guess in in in Cat food in particular, it seems like you would have grown more if not for some of the meow mix supply chain constraints I think that maybe it was was new this quarter. It seems like maybe you are through the worst of that but it was just hoping you could you could address the comments on it.
Prepared remarks, and just what you're seeing with me I'll make kind of go forward. Thanks very much.
Sure Peter.
Yeah, you know as we've been pretty consistent over these past couple of years of talking about the supply chain.
In general are strong ability to manage through some of the disruptions and just acknowledging that they're the supply chain still is a bit fragile and it it varies by quarter or month in terms of where some of that fertility might be.
We have experienced some a supply disruption in our meow mix business, which we are working through you.
In the third quarter as well as the fourth quarter, but we do acknowledges also temporary and then we will work through that and you know we would have expected you to continue with the double digit run rate growth on meow mix that again, just reiterating that it is temporary and over.
The next several months, we should be able to work through that appear in support of what Mark shared you know me I'll make sure. The corner was up 6% as I said, we would have anticipated absent the manufacturing disruption to be up double digits, but I do want to acknowledge that the wet portion of the portfolio continues to perform quite well and grow really.
The disruption right now is on the dry cat food side of the portfolio.
Right. Thank you.
Take the next question is can move from Andrew <unk> from Barclays Your lines and all that.
Great. Thanks, good morning.
Good morning.
I guess to start you know your your full year gross margin Outlooked up 33.5% is still some call at 450 basis points below pre pandemic levels and some of this is clearly the mechanical impact of pricing on gross margin, but perhaps you could quantify maybe some of the key buckets as we think about sort of gross margin recovery moving forward.
Andrew Good morning, while I walk quantify the buckets, what I do want to lay them out for you as we think about gross margin improvement.
Not only have we seen that sequentially in each quarter of this year, but also as we think about next fiscal year and onward.
See the benefits from volume Max within the portfolio.
We see the <unk>.
Lapping of the Jeff peanut butter product recall as a benefit we also see some moderation and cost inflation a stabilization in both our supply chain and manufacturing environments.
Along with benefits coming out of our transformation office and then the benefit of the divestiture after addressing stranded overhead that will all help us continue to support the gross margin restoration.
And then.
You got it too low double digit year over your decreasing EPS for fiscal three two and and obviously results came in better than that with organic sales and gross margin roughly in line with street forecast. It seems the bulk of the upside came from SG&A, what's wrong with a favor ability there at least versus street estimates given it looks like marketing spend for the full year is expected to be on.
Track with your initial estimates thank you.
Andrew.
Third quarter came in about 15 cents better to our expectations.
And largely that was due to base business momentum some cost favorability and some timing of course transferring from the third quarter to the fourth quarter and as you can note in our race of guidance at 10 cents at the mid point, we therefore have shifted five.
Into the fourth quarter.
Got it thank you.
And next question is coming from Ken Goldman from J P. Morgan airline does in our lives.
Hi, Thank you.
You posted a good free cash flow number in the third quarter, you've talked about how fundamentals, where you know came in better than you expected, but you didn't adjust your outlook for free cash flow for the year I was just curious if there's any reason to that if there's any particular reason why maybe that wasn't <unk>.
Raised in it does imply that in the fourth quarter it it'll be the lowest number for smucker.
In any fourthquarter since 2013, so I'm just curious if <unk>, if there's any conservatism in there.
Can we have a commitment to a 1 billion dollar free cash flow target annually and we are below that target fish here largely due to the Jeff peanut butter product recall, but also due to the impact of increased capital expenditures associated with.
Our uncrustables facility. So we are maintaining our capital spending 550 in support of that core grows and as you think about free cash flow. We haven't raised the estimate largely this year due to some additional cash tax payments that have come through this fiscal year and.
In support of some restructuring that we've done along with the chest pain about our product recall.
Got it and then just to build a little bit on the question about SG&A.
Yeah. It implies if I'm doing the math correctly that it'll be a little bit over 400 million in the fourth quarter. It's only been that high one time in the history of the company. So I just wanted to dig a little bit further into what is the if there is something discrete headwind or investment that you're making in the fourth quarter and SG&A they'll drive it up.
Hi, just again using just a rough map that you've provided.
So can direction that you are correct for the fourth quarter implied in really bad.
Buckets, there within their Ah one continued support of marketing across the portfolio.
Two is there some administrative costs and their associated with wage inflation and filled positions and then there's operating support in there which is our continued investment on crossed levels around pre production expenses that are driving that year over year increase in S. D N a.
Thank you.
Thank you. Thank you.
The next question today is coming from Chris grow from Steve pull your line is not alive.
Hi, good morning.
Good morning, I just had a question for you as as we think about this sequential gross margin improvement Tucker <unk> division or divisions that are helping support that so coffees, one where you've had you know some some cost inflation is there pricing cost you know kind of imbalances, taking hold that's gonna support.
<unk> Ah stronger gross margin in the fourth quarter, if you could call the division too.
<unk> good morning.
Sequential improvement in gross profit margin is really across the entirety of the portfolio as.
As we continue to see a bit of stabilization and overall cost inflation as we begin to see the benefits of lapping price increases and as we continue to operate under the general business momentum that his navel eyeing the margin to improve each quarter and really it's coming through most elements are all elements of the portfolio.
Okay. Thank you for that and I just.
One other question there was a note you made in your prepared remarks about 54% of categories, gaining market share and that that's a good number but it's down a bit from where it was and that's a pick on that because it's still showing you still showing really good growth in and market share performance for your big brands, but I guess I wanted to get a sense of how much is their capacity driven limitations.
I'm thinking about business is like you know like Meow mix, where you it's kind of limiting your ability to gain share in those categories. Just so you can give a sense of how much that's kind of limiting the.
The categories getting market share.
Yeah, Chris It's Mark you know where.
Very pleased with their progress this quarter I mean, if you look at every business grew and coffee every brand grew and you know and Pat every brand essentially grew as well and we saw good growth of course, it uncrustables with 38% growth and then.
I'm continuing to gain share <unk> so.
We we tend to target around two thirds of maintaining and growing and so we're really pleased with the performance.
The the number that you referenced is is is largely driven by some of the supply chain challenges and meow mix and and we do feel confident that over time as we've managed to do that we'll get back to where we expect to be.
Okay. Thank you very much for your time.
Thank you.
They can next question is coming from Robert Moscow from Credit Suisse. Your line is in my life.
Hi, just a few small ones when you're thinking about physical 24 Tucker can we assume that all of your segments will have positive volume I mean, I think <unk> peanut butter, it's pretty obvious but.
Are you expecting positive volume in cat food dog snacks or snacks in general and coffee.
And then secondly on free cash flow is.
Possible that free cash flow is above normal in 24, because of a working capital benefit as your coffee costs are falling and then I have a quick follow up.
Robin morning, we.
Where early innings of our planning process for next fiscal year, but as we outlined.
Outlined at Cagney last week, we do expect some follow you mix tailwinds in the portfolio through momentum across the uncrustables portfolio or brand and as we think about other elements of the portfolio with and coffee and within Pat.
Have the opportunity to share more of that on our fourth quarter earnings call here in June .
And as we think about free cash flow as you know we have a $1 billion target or ambition, we may trying to bit low to that free cash flow target because we continue to have accelerated or elevated capital expenditures associated with our ongoing investment for capacity with the Uncrustables brand.
[noise] got it and maybe you've asked to answer this before but the $700 million of cash you'll get from the dog food divestiture do you intend to spend all of that on share repo.
We anticipate using the $700 million to replace the divested earnings per share.
Okay vague, but we can follow up alright, well. Thank you.
The next question is coming from Steve powers from Deutsche Bank. Your line is in my life.
Thanks, and good morning.
More interest to go back to the the three cheaper since <unk> correct me, if I'm wrong, but I think you had said last quarter that you expected the fourth quarter.
<unk> has to be up about 10% year over year.
I think the guy in supplies now kind of a range of 211.
The five since you called out that shifted from three to four two equates to about two per cent of that so I'm just.
You put put those numbers in context.
Cause I I'm struggling to to understand the full drivers of the of the <unk> now now wider range for too.
Acknowledging the five cent ship.
Yeah, I think one of the things that you have to consider as as the supply chain disruption.
Primarily in the pet portfolio associated with him I'll makes brand so that might leave you a little bit short in your model from both the top line and bottom line standpoint.
Okay.
Okay and the other the other question unrelated just on the the Duncan brand, where you you cited creator elasticity that premium segment, maybe just a little bit more commentary around what you what you've seen so far and and how you.
How do you expect that to improve going forward cause the commentary suggest you do expect us to approve but just wanted to hear a little bit here, a little bit more on that.
Sure.
I think just a macro comment first of all Steve is it it validates our our quote bold portfolio strategy.
Participating in all the segment Ivy.
Obviously would there is a little bit of shifting folgers clearly benefited.
This quarter. So it validates the fact that we're playing in all of the segments you know broadly across the values spectrum of the category. So that's definitely a good thing.
The other thing is good is that although that the growth is a bit more modest in the last two quarters. It's the brand steal grew <unk>.
And so which is great news and I think we reference last order just there was just some relative pricing relative price points that we have work to correct and so over the next couple of quarters, we would expect to see the growth on on Duncan continue to.
To accelerate.
Okay. Thank you that's confirming I appreciate it.
Thank you.
Okay. The next question today is coming from Pamela Kaufman from Morgan Stanley Your line isn't alive.
Hi, good morning.
Guess what is your question.
I just have a question on marketing <unk>, Yeah, where have you Scott Scott marketing spend and what are your plans for going forward over time are you still planning to come back to your targets for six and a half to seven per cent of failed or do you think that the current.
As well as between five to six per cent of house are more appropriate.
Sure Pam it's mark So we have continued to invest broadly across our portfolio and supporting all of our brands. There was a step up a bit in the third quarter, because we turned on new.
Advertising on Nutrish, and which has actually been supporting the brand and the growth of that branch. So that's that's been positive and you may also recall that as we've talked about our marketing as a percent of sales we've continued to invest in our brand, but because of inflation that percentage.
Has fluctuated a bit this year and over time, we would anticipate continuing to target say above a six per.
Percent of net sales on our marketing broadly across the entire portfolio.
Thanks, and then.
Pricing and the coffee segment, how old are you thinking about it over the next several quarters given green coffee costs have moderated significantly and when would you consider alright in coffee prices.
Yeah, I guess I would just start by saying that coffee costs have not moderated significantly significantly over the past couple of quarters, we did see a dip.
As you highlight in in.
In spot prices, when we were experiencing some volatility, but as you know, we buying coffee and <unk> coffee physician to make sure that we can achieve our financial plan and so you know the coffee market and particularly in the last several weeks.
Have a rebound and and we've continued to to see if there is some inflation.
And you know more elevated coffee costs so.
As always we will adjust our pricing, whether that's list or using other levers to the extent that our physical physician would dictate. So so I I can't really give you any more than that but we will be responsible and prudent and pass along price.
Changes effectively over the over the coming quarters.
Great. Thank you.
Thank you next question is coming from Cody Ross from you B S. Your line is not a lot.
Hey, good morning, Thank you for taking our questions couple of cloning. So your first one on pet.
Some of your key competitors announced pricing actions effective in February on their pet businesses do you plan to take another round of price this fiscal year as well or will you wait until the asset is sold the post and then similarly do you have any pricing plans in place for the remaining pet food business that you'll retain.
Cody, we we actually have taken pricing for the benefit of our portfolio and that is a forward looking comment as well. So we we have effectively already done our pricing activities and pet <unk>.
I'm sorry, the second part of your question I I I think I missed it could you repeat that.
Yeah I was just asking if you have any pricing plans in place for the remaining of your pet food business or pet business that you'll retain.
And then I have a yeah, I think I already answered that yep.
Yep and then just last question just surrounding your your capital allocation as we look over the past decade, you've turned over a meaningful portion of the business, adding higher performing assets and setting some non-core assets what have you learned from acquisitions over the past decade that you believe will enhance your capital.
Allocation you know going forward and then similarly is there anything you would have done differently. Thank you.
Yeah Cody. Thanks for the question you know over a couple of decades, plus we've been a very acquisitive company and that has really helped increase our stature in the industry and with our customers and we're very proud of the of the two.
Jacory that were on and we've also been very clear in the last several years about portfolio reshape and although there's been some divestitures predominantly in the most recent years that is all in service of executing our strategy and.
Consumer shipped over time, which dictates that our portfolio needed to shift over time and so the decisions that we've made as late really reinforced that our strategy is right and we're focused on the right brands and as we've talked about acquisitions, we still want.
Acquisitions to play an important role in our growth story, but we will make sure that as we think about future acquisitions that were very prudent and responsible and that we go for acquisitions that are going to enhance our existing.
Portfolio or possibly provide them a meaningful physician in a new and growing category in a responsible price.
Thank you and next question is coming from Rob Dickerson from Jeffries. Your line is that a lot.
Great. Thanks, so much might.
Might be two questions for Tucker, So sorry, Mark <unk> you know.
It just kind of looks like pre pandemic.
When I look at your SG&A line normal where you would say.
Did you used to be a little first have waited.
You know I'm, assuming driven some advice seasonality obviously last year. It was lower for obvious reasons. This year you are wrapping more in the back half.
<unk> kind of more steady state I realize a Mexican guy them for next year because it takes you that line you know over the next six quarters or so let's say you know is is that kind of like a return to normal as we see in the back half of 23, and then when you think about 24 that maybe it goes back.
Two a bit more first have waited or you know as we looked at what you've put up in Q3, maybe that's kind of like a decent proxy and run right to think about that I've been the study states. Thanks.
Good morning, I I would envision that the the SG&A expenses are a little bit more level trout fishing.
Fiscal year as you think about forward planning.
Obviously, there's nuances to this fiscal year, but I I think it's fair just for initial modeling assumptions.
Sort of level it out through the fiscal year as you've noticed.
Alright, perfect. Thanks, and then.
Simple question could asked about free cash flow you know what can be applied for two for Capex. So far this year, though through three quarters would also imply kind of a material step up in queue for relative to what reason solid Q3, which is a step up from the first half.
So I just wanted to make sure that that implied step up is right and then maybe if you do the stomach quickly on why there's such a step up but you're finishing certain projects for no cut almost there that should be done by the end of the fiscal year. That's it. Thanks so much.
Yeah, we still see the outlook for capital spend at $550 million for the full fiscal year, and we will have a meaningful spend in the fourth quarter and the predominance of that continues to be the support of the Mccollough, Alabama facility foreign Krossel balls and it's building.
<unk>. Thank you.
Thank you. Thank you.
Okay. The next question today is coming from Alexia Howard from birth Senior line is that a lot.
Good morning, everyone.
Good morning, two quick questions.
You talked about the the <unk> somewhat disrupted this quarter by supply chain challenges do you expect those shat trends that kind of bounce back sharply next quarter or do we have to wait until we lack the the Jeffrey cool just wandering around those trends on the market shack side.
We would expect them to reverse over time, Alexia I think you know as we talked earlier in this particular Q&A session. We're managing through the dry cat supply chain, which is gonna take a few months to manage through and there was a comment in the prepared remarks about fruit <unk>.
Reds and we think that's largely behind us.
Great. Thank you and then just as a follow up just the peanut butter distribution trends I know you've been working to rebuild that market Sharon and distribution is can we expect meaningful improvement over the next few months so.
Yeah, I mean, I'm sure you've been looking very hard to to get it back but is this the kind of run right that were asked at the moment.
Yeah I'd like to thank you <unk> you know we've been really pleased with the return of Jeff to shelves. In fact, we've commented last week. It cagney that all of the skews of <unk> are back on shelf and our share his back north of 40%.
<unk> dollar chair, so really pleased with the execution there.
And we would continue to see improvement over the next quarter or so.
Great. Thank you I'll pass it on.
Thank you.
The next question is coming from <unk> from BNP pair by your line is that life.
Alright, Thanks for the question I realize you're the best thing you're dog food business I was intrigued by that comment about nutrition benefiting from shifts in the category.
Is that primarily in reference to the longer term criminalization trend or are there other shifts Smith that category that you're referring to there.
Max It's Mark you know we've been on a journey with your trash over the last 18 to 24 months in terms of making sure that that brand is healthy.
And it is now we spent a lot of effort trying to optimize it portfolio, making sure the assortment is more narrow and productive.
You know revitalizing some of the packaging and then most recently launching some new advertising as.
As we were preparing that business for sale and so really very pleased with the.
With the progress that we've made there and making sure that we leave that ran as well as the other dog food brands and nine lives in good hands as it as those brands ultimately will transition to post.
Great. Thanks, very much I'll leave it there.
Thank you thank.
Thank you we reached the end of our question and answer session and I'd like to turn the floor back over to management for any further or closing comments.
Thank you Kevin Uhm I would like to just first of all say that it was great seeing any of you are cagney last week and really appreciate your time this morning, and joining us here <unk>.
Really pleased with the quarter and the momentum that we have been able to consistently deliver over the past several and of course all of that is really it should be two are outstanding employees and so just always wanting to take a moment to think our employees for their hard work and dedication to the company and I hope.
All of you have a great day. Thank you.
Thank you that does conclude today's teleconference webcast may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.