Q4 2023 The J.M. Smucker Co Earnings Call
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Good morning, and welcome to the Jam Smucker Company's fiscal 2023 fourth quarter earnings question and answer session. This conference call is being recorded in OptisPins' turn-in list in only mode. Please lemme yourselves to two questions and re-cute your additional questions.
I'll not turn the conference call over to Admiral Homm, Vice President and Investor Relations. Please go ahead, sir.
Good morning, and thank you for joining our fiscal 2020-24th quarter earnings question and answer 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 assumption and estimates and actual results may differ materially due to risks and uncertainties. Additionally, we use non-GAP 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 up the call for questions.
Thank you. 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. 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 let me answer two questions during the Q&A session. Should you have additional questions, you may recue, and the company will take questions as time allows. And that star one to be placed into question Q. Our first question is coming from Andrew Lizar from Barclays, your line is now live. Great. Thanks so much. Good morning, everybody. Good morning, Andrew. Maybe to start off by our math, if we adjust your fiscal 24 guidance for the GIF recall and stranded cost impacts, we come up with underlying EPS growth of about 3% or so at the midpoint. I guess for your expectation for 9% comparable sales, growth and gross margin expansion and such, just trying to get a sense of what might be holding back.
underline EPS growth in 24 or whether there's understandably some conservatism built in given this still dynamic operating environment overall. O.K
Andrew, good morning. As you mentioned, we have 9% top line comparable growth.
That is really underlying 4% organic business growth along with 3% associated with the JIF peanut butter product recall and also 3% associated with requirements under a co-manufacturing agreement associated with the recent pet divestiture.
Then you mentioned your expectation for volume growth in every segment in fiscal 24. If we exclude the benefit, just getting back from the JIF recall and some of the contract manufacturing that you talked about, would it still be the case that you would expect volume growth in every segment in 24? Correct. Great. Thank you so much. Thank you.
Hey guys, good morning. Thanks for taking the questions. Morning. Thank you guys for the bridges on slide seven and eight. Maybe we could just circle back on Andrew's question around volume.
Again, if you strip out JIF and PET, and maybe you can discuss a little bit around the Koman agreement on PET, the rest of the portfolio, I think, really only needs to grow volumes low single digits. It would seem like you could get there on Uncrustables alone, so just wanted to unpack that a little bit and see how you're thinking about maybe just that organic piece within the orgs that have died on volume. We're definitely seeing the benefits of the expansion of Uncrustables and the organic growth, as you've mentioned.
You're also seeing some volume growth in the coffee portfolio, and then you're seeing continued momentum in the pet business as well.
And then, as it relates to the Jif peanut butter product recall, I think we've talked about that enough, so I won't spend much time there, but I will acknowledge that we do have requirements under the Co manufacturing agreement associated with the pet divestiture, which is largely reallocating volume between the plants that we retained and the plants that we sold associated with those pet brands that will most mostly take place in this fiscal year.
There will be some additional co-manufacturing volume that will transition into FY24, but the predominance is really in this fiscal year is rationalize or reallocate the supply chain and manufacturing network.
Okay, just think about it. I think you meant engine Vistula 25. Correct.
Got it, got it, okay. No, that's helpful. And then I'm slide eight with the earnings bridge. It looks like your assumptions around cost or I guess COGS inflation may actually be slightly deflationary and I'm sure there's some do unpack there, but just looking at the implied, I guess, on SDNA.
It still seems like that would be relatively prudent or conservative, just given the amount of sales that went out the door with the divestiture. What's it going to take to get that worked down lower faster, just as we bridge the model? Thanks, guys.
As it relates to the cost of products goods sold, we're seeing some rate-based favorability in our overall COPS environment, but nothing material to suggest anything from a deflationary standpoint. We still live in an inflationary environment and all of its implications.
As it relates to SD&A, on a year-over-year basis, we are seeing the benefit of the divestiture, so down five, but we are making some material investments across our platform in the form of pre-production expenses associated with the McCalla Alabama facility. We are also seeing some investments in marketing.
We are also seeing some investments in liquid coffee. We will continue to address stranded overhead in this fiscal year as it relates to the 60 cents that we acknowledged at our guidance bridge. Great. Thank you. Next question today is coming from Ken Goldman from JP Morgan. Your line is now live. Hi. Thank you. I wanted to ask a couple of things about stranded costs. How do you save taxes? He says it's his house.
Is there a way for us to kind of think about what the gross stranded costs are versus just the net? And second what's the best way to think about and maybe this goes back to Peter's question about how to sort of Eliminate some of the SD&A over time But what's the best way to think about the ultimate sort of net headwind on a run rate basis? You know once the TSA has passed once your trend
operating income impact associated to this fiscal year. And really what is occurring is that net impact is total stranded overhead minus TSA or transition services agreement income and reimbursement for certain services and activities.
That's resulting in that $60 or approximately $87 million at operating income. We will look to address this in fiscal year 24. We will see some lingering impacts into fiscal 25. We're not in a position to comment on that as we work through these agreements along with benefits coming out of our.
transformation office to address stranded overhead. But in the long run, to your long run point, we look to address all stranded overhead costs associated with this divestiture.
Okay, thank you for that. And then just a follow up, you know, on that 60 cent figure, whatever the gross number is obviously it's higher than that. I think many of us were looking for a little bit of a lower gross stranded cost figure. I think just based on maybe what we've seen or heard about in previous divestitures.
Is this is there something unique that would lead to a a Stranded cost figure that's this high or maybe you know many of us including me We're just kind of miss modeling that as we think about you know what a typical stranded cost situation might be
You know, Ken, there's a couple of considerations. I don't think there's anything unique here. You know, stranded overhead costs do exist after you divest 20% of your top line. We completed that divestiture at the end of this fiscal year. We do have requirements over the next this fiscal year and into fiscal year 25 to support these transition services.
This question is coming from Steve Powers from Deutsche Bank. Your line is now live.
Thanks everybody. We'll begin up on the 60 cents just to be clear.
We start to address about 60 cents in the year. So I guess as we think about your guidance, you know, is that in bed?
start to address that $0.60 in the year. So I guess as we think about your guidance, does that embed $0.60?
or some number less than that. Just how do I think about the progress you aim to make in the fiscal year?
relative to the static 60 cents you called out, you know, in the guidance range. So, good morning Steve, the 60 cents reflects our best to estimate for the impact to this fiscal year that is embedded in our guidance range.
And we will work to relieve that over time and to address it as we move beyond this fiscal year, but is our best estimate as I've noted and it is reflected on our guidance range. Okay, so 60 cents reflects.
the efforts you plan to make to you know, make progress against those costs in the year and there will be 60 cents residual into next year. Okay, great. Thank you for that. And then the other question I just maybe you could help us with the the 20% organic growth.
or the net sales growth call for the first quarter. I think that's a good number more than many were modeling consensus overall. Maybe the moving parts in there, how much is the JIF contribution, how much is underlying, how much is otherwise. That would be helpful. Thank you. Yes, so as you think about that, what you're
and aspects like uncrossed bulls among others.
Okay, is there any, is there any way to bucket that or quantify that last bit? Just the the underlying assumption in the first quarter versus the the comparison and the and the gif or
Okay, is there any, is there any way to bucket that or quantify that last bit? Just the underlying assumption in the first quarter versus the comparison and the, and the GIF or, or, what are we prefer not to?
With respect to Jeff, I mean, we've called out that it's a three-point impact to this fiscal year. It was a two-point impact to prior fiscal year, and the predominance of that hit us in the first quarter. So I think that would be your largest driver in your model.
Yeah, okay. Thank you for that. I appreciate it.
Your next question is coming from Matt Smith from Steve Puyter. Your line is now live.
Hi, good morning. I wanted to ask about the level of promotional activity and innovation you anticipate in fiscal 24. We saw a reduction in the number of people who are in the workforce.
And more specifically promotional activity over the past couple of years across the industry.
You've said you expect a low single-digit contribution from pricing and most of that to carry over benefit. So do you expect a stronger carry over benefit and that's offset by a resumption of a more normal promotional environment?
Matt, it's Mark. Generally speaking, the promotional environment is very similar to pre-pandemic.
In other words, we, competitors are behaving pretty much as expected and rationally. Our customer relationships, you know, as we think about promotions and trade spend as one of the levers to affect price and drive.
both sales and volume, we are not seeing anything out of the ordinary, nor are we seeing elevated trade as it relates to historical, keeping in mind that different categories behave differently at different times based on their
based on the underlying commodity costs or what have you, but fundamentally we don't see anything abnormal in the promotional environment.
Thanks for that, Mark. And maybe if I could just follow up on the savings from the transformation office. Could you talk about the sources of savings? You expect some benefit to gross margin and FDA over time. And is there a phasing component to the offset of stranded overhead when we think about the phasing of profit growth through fiscal 24?
So we are seeing the benefits from our transformation office due to the success of our team and employees who have begun working through the eight work streams and setting up the various initiatives. And as we've called out today, at EPS level, underlying organic earnings per share growth approximates mid single digits or about 5%.
and advancing initiatives to address stranded overhead during this fiscal year and into next fiscal year as well. And that's how we're seeing the benefits from the transformation office today.
Thank you Tucker, I'll leave it there and pass it on. Back to next question is coming from Cody Ross from UBS. Your line is now live.
Good morning. Thank you for taking our questions. I just want to go back to the 1Q organic sales guide for it to be up about 20%. Can you give more color here? How does that break down between price and volume? And then any commentary by segment would be helpful because this is much higher than both hour and the street's expectation.
So we're calling out top line growth year over year from a comparable basis of 9%. And again, that breaks down 4% underlying base business growth, organic, 3% Jif peanut butter product recall and 3% associated with requirements of the co manufacturing agreement.
When we think about the impact, what you're really seeing is about seven points or high single digits of volume mix benefit and about three points of pricing benefit as well to support that nine percent comparable growth.
And that's for the foyer. I my question. Correct. Correct. That's on a that's on a foyer basis. Correct.
And then we called out we called out that 1st quarter being up.
20 and that's and that's largely driven by Predominantly driven by volume mix which is associated with the business momentum along with the Jeff peanut butter product recall and has a component of mid single digit plus and price
Got it. Thank you for that. And then I just want to switch over to a question on coffee here. Can you provide the mix of a rabica versus robusta coffee and your coffee segment? And in that context, spot price for a robusta coffee is up nearly 20%. Philosophically.
How do you balance protecting profit dollars and maintaining market share? Do you expect to lean into promotions more going forward or will you try to recover margin? Thank you.
Hey Cody, it's Mark. Thanks for the question. You know, I would just remind the group that when we think about our coffee business, we are managing that business for the long term. And as we think about our hedge position and our physical cost as we convert our hedge position into physical coffee.
We plan and hedge.
to meet our financial plan. So, just acknowledging that the coffee...
Market has been generally volatile. We have seen sequential improvement in our coffee costs, which should continue through this fiscal year.
But we do manage for the, you know, when we think about the cost, we do try to manage for the full year. And our coffee business continues to be extremely healthy in all three of our brands. So we've seen even, you know, premium coffee with Dunkin, which is 100 percent Arabica.
returning to growth as we've adjusted and seen pricing, relative price gaps come back in line to more normalized rates. Folgers continues its strong growth trajectory from a net sales perspective and then Bustelo.
is the fastest growing brand in the category. So really pleased with the coffee performance. We haven't and aren't willing to talk specifically about the split between Robusta and Arabica. But we do again manage for the long term and are very confident in our ability to do so over the course of this.
So there's been investor concern about the current dynamics between retailers and suppliers, and that retailers may be adopting a harsher stance around pricing. Do you think that this is fair? And how would you characterize the current rapport between suppliers and retailers? And is anything changing on the margin? Yeah, you know, Pam, our experience with our retailers, we have outstanding relationships with our retail customers. And as we've navigated through over the past year, we've been able to get through the process of getting through the process. So we've been able to get through the process of getting through the process of getting through
course of the next, you know, the last couple years and multiple pricing.
changes, we have been able to do so effectively and work with them to really pass along those cost increases in a prudent and justified way. Our categories are the cost of the cost
you know, very resilient. We have a relatively low incidence of private label in the categories that we participate and for that reason they continue to be very important to our retail customers. But again, when we think about any type of negotiations with them, we want to approach
Thank you. And just a follow-up question on your input cost outlook for fiscal 24. What's your overall expectation for cost inflation? And can you talk about your commodity cost coverage? And then related to that, just your outlook for gross margin cadence over the course of the year.
follow-up question on your input cost outlook for fiscal 24. What's your overall expectation for cost inflation? And can you talk about your commodity cost coverage? And then related to that, just your outlook for growth margin cadence over the course of the year. Yeah, so pamphled.
From a big picture standpoint, we are not seeing material inflation or material deflation. We've seen some rate-based improvement in aspects of our cost profile, but largely in whole on a year-over-year basis.
from an overall inflationary rate base, we're pretty consistent. You know, as you think about the flow of margins, you know, over the balance of the fiscal year, or excuse me, over this fiscal year, we will see margin improvement year over year on a total company basis. And we will likely begin to see some margin improvement.
Hey guys, sorry to call in a couple different phone lines. Okay, a few different questions still on the docket here. Let's pick up where we just left off. Margin expansion through the year. Based on the very low profitability of the pet divestment, it looks like you should pick up a few under basis points of margin right there. Matter of fact, the entirety of your gross margin expansion for next year looks like it should be built just simply on that mixed dynamic.
a low margin co-manufacturing agreement which is required for us to support the transition. And it will also have some of the impact associated with stranded overhead. So we will see both margin and segment profit improvement.
But we won't realize the full benefits until we work through both the stranded overhead and the co-manufacturing agreements. Okay, and I'm surprised to see you including Co-Man in organic rather than netting against divestments. How long do those TSMs last? When should we expect that to therefore turn into an organic sales headwind?
So, we have called it out specifically. We acknowledge that on a comparable basis, Euroburger growth for this fiscal year would be 9%. Embedded in that is 4% underlying organic business growth, which does not include the co-manufacturing agreement. We then called out approximately 3% associated with the Jif peanut butter product recall.
and about 3% associated with the co-manufacturing agreement. As I said previously, we expect the predominance of that volume to begin falling off at the end of this fiscal year, because much of it relates to us reallocating volume and brands to facilities that we've divested. And so we'll continue to work through that this fiscal year. Okay, and then sticking on Pat.
You've decided capacity constraints in CAP. It looks like your capacity constraints, panel and comparison to the industry at large. And Mars, who seems to have suffered the worst, appears to be back on much more firm footing, reflecting what we're seeing in Nielsen, and I think their growth is at 42% or something last quad week. This looks like a problem for you in terms of your ability to sustain a line.
through pockets and supply disruption. This is no different and it is one of them and our demand for meow mix is outstripping supply at the moment. We actually have already begun plans in place. We're investing in both infrastructure and labor to make sure that we're in the right place.
supply demand relationship. And these dynamics are you referring to the big search for seeing a competitive activity or your... I guess I'm confused because I'm asking about competitive activity in there. It's what are the dynamics that you're referring to?
I'm just referring to our own internal dynamics to make sure that we're bolstering supply to meet the demand that we're seeing on theomics.
Okay, okay, thank you. Thank you. Thank you. The next question is a follow up from Peter Cowbell from Bank of America. Your line is now live. Hey guys, thanks for taking the follow up. Just one quick one. Do you use comment on the post shares, you know, like you have a decent chunk, obviously, that I don't think is any kind of blackout period. So just like what the plan is, what the timeline looks like. Thanks very much.
Peter, as a clarification, we did in both March and May complete a repurchase of 4.7 million shares with the cash proceeds that we received at closing in support of replacing the domestic EPS in support of our FY24 guidance.
And as you mentioned, we do have about 5.4 million shares of post-common stock. And we will over time look to exit those shares on an orderly basis that ensures that we ascribe the value that we deserve against those shares. And so we will continue to look through that during our fiscal year.
None of the benefits associated with any contemplated monetization would be embedded in our guidance range at this time, and we would only invent it at that time once we completed any monetization. But again, I think the important takeaway here is, is that we'll do this on an orderly basis to ensure that we maximize the value of our position opposed.
Great, thanks. Thank you. I will now turn the conference call back to management to conclude. Thank you and thank you all for tuning in this morning. Just wanted to reiterate how pleased we are with our performance of the last fourth quarter in the full fiscal year. The bottom line is our strategy.
which we've done an outstanding job of implementing and executing, has allowed us to achieve these results. 13 quarters of exceeding expectations, so we're really proud of that. Obviously, you know, the portfolio reshape can be participating in very resilient categories.
and doing what we say we're going to do, investing in our brand and executing with excellence have really supported our success.
And all of that comes back ultimately to our employees who are phenomenal and have really put in the work to get it done. And so we are committed to continuing the momentum and providing a solid and consistent shareholder return.
Thank you all for your support. Thank you for listening, and I hope you all have a great rest of your day. Thank you everyone. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.