Q1 2024 J M Smucker Co Earnings Call
Good morning, and welcome to the J M Smucker company's fiscal 'twenty 'twenty four first quarter earnings Conference question and answer session. This conference call is being recorded and all participants are in listen only mode.
Please limit yourselves to two questions and re queue. If you have additional questions I'll now turn the conference call over to Umbro Holmes Vice President of Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining our fiscal 2024 first 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.
Additionally, we use non-GAAP results to evaluate performance internally I encourage you to read.
The full disclosure concerning 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.
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As a reminder, please limit yourselves 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 once again Thats star one to be placed in the question queue. Our first question is coming from Andrew <unk> from Barclays. Your line is that life.
Thanks, so much good morning, everybody.
Morning.
I guess just to start off Mark on the last earnings call. I think you mentioned that if we strip out jif contract manufacturing and divestiture impacts company expected about 4% organic sales growth three points of which were expected to be volume on sort of a truly underlying basis for the full year and I'm curious if this is Brad.
D, where you still see it today and if so you know maybe why the company is not necessarily seeing the same sort of volume weakness the industry seems to be dealing with currently and as other sort of peer companies have discussed.
Andrew Good morning. This is Tucker you are correct.
As you begin to break down our 9% comparable growth guidance.
That 4% does have three points.
Volume mix growth largely driven by across the walls coffee milk bone and meow mix.
And then the one point of pricing as you have noted.
Yeah, Andrew it's mark Thanks for the question.
As you look at our categories. We are in the right categories, which are resilient one.
And as we continue to share our story you know we've gotten way more focused.
We participate in categories that are growing and we participate across the rent and those categories.
All the while still investing in our brands. So we actually had as you saw a very good quarter of sales and volume growth and we expect.
The momentum to continue.
You know as we continue to invest as we continue to execute with excellence.
And I can cite multiple areas I mean, just peanut butter as an example of an affordable protein are continuing to grow getting back into its number one share position.
Milk bone is an example, where you have got products that span value to premium really meeting the consumer where where they need and then lastly of course not least in <unk> continues to be a strong growth engine for the company. So just very pleased with the results this quarter and our outlook for the future got.
Got it. Thank you for that and then just lastly, pet sales growth was a bit below what we'd modeled I guess I'm curious how does it compare to your expectations and if sales were a bit slower.
What's driving the weakness and was it contract manufacturing related or something else. Thank you.
Andrew we continue to see positive momentum in our patent portfolio and any shortfall to expectations for the quarter would be attributable to the co manufacturing agreement and as we noted on our prepared remarks, we have revised our outlook for co manufacturing for the full year to be $160 million.
Which is a $25 million decline than what we expected coming into the year and that would have been the driver for the quarter got it and just the decline is is what would drive the decline in the comment and the comex itself. Thank you yeah.
Yeah, It would be what coast holdings would need from their production standpoint, as we support relocating our products between manufacturing facility and supporting volumes. So would just be what their expectation is and their network.
Thank you.
Thank you next question is coming from Peter Galbo from Bank of America. Your line is now live.
Hey, good morning, guys.
Yeah.
Maybe we could just just start I think theres a bit of confusion this morning.
Just around your reported comparable sales growth number Tucker Mark of 21% and then I believe on.
Slide four of the supplement it shall was closer to 16.
So I just wanted to be able to bridge that for folks in and maybe Tucker. If you could just help I think in the press release, you actually have the GAAP to non-GAAP reconciliation at the 'twenty. One so if we can talk through those.
As well as just where that that.
It comes in relative to what your expectations were I think for the quarter of the plus 20% that you would put out last quarter. Thanks.
Peter Good morning.
We delivered our quarter in line with our expectations and let me break this down for you on a reported basis, we were down 4%.
And as you isolate the impact of the pet food divestiture on a comparable sales basis, we would be up 21%.
Embedded in that 21%.
It is 11 points of Jeff growth or restoration, primarily due to lapping the peanut butter recall.
The second component would be.
Required co manufacturing agreement or growth of three points.
That leaves base business growth of six five points for the quarter.
Within that six five points, we saw approximately two and a half from a volume mix standpoint, and four points from net pricing.
Okay and just on the 16, sorry, that's on slide four Tucker just again between that versus the 21 that you printed just trying to understand the delta.
Yes, it's it's the math associated with the divestiture impact on a reported basis year over year got.
Got it okay.
That's helpful and then Mark I think in your prepared comments.
You spoke a bit about.
Reacceleration or planned reacceleration in unprofitable as growth from the quarter can you just kind of speak through the cadence of some of that over the course of the year and maybe just what we might be seeing from attract standpoint versus untracked as you push into some other channels like Canada.
Yes sure.
Peter.
First of all we're really pleased with the <unk> growth keep in mind that we had we're lapping a really strong Q1 last year as well as <unk>.
We had a very strong prior quarter.
Happened as a result of us really getting completely off allocation. So.
The momentum on unprofitable is actually really strong and we expect growth to.
Continue to be around that 20 ish percent for the for the full year and what's driving it is of course.
Some expansion into.
New channels I mean, Canada is so far very very relatively small, but great customer acceptance there. Some other expansion into away from home, but I think probably most notably is the fact that we have just a lot of runway on household penetration if you look and in my prepared.
Mark's just talking about.
You know peanut butter, and jams and jellies being reacts the household penetration of unprofitable. So there's plenty of runway there.
And we're turning on advertising and other in store Activations Theyre really for the first time I'm going to start.
Driving demand and pulling through.
The network. So just very positive on <unk> and expect to hit around $800 million for the year in sales.
Great. Thanks, very much guys.
Thank you next question is coming from Ken Goldman from JP Morgan. Your line is now live.
Hi, Thank you.
Just following up on your commentary that for.
For the second quarter like for like sales should be up mid single digits and EPS up low single just as we think about modeling the quarter are there any unusual tailwind or headwinds to consider I guess, how do we think about the specific cadence of your contract sales on pet in the quarter are there any lingering benefit from lapping the jif recall.
That may bleed into <unk> I, just wanted to get a sense of.
Anything we should think about just as we're modeling.
Nicely as we can.
And good morning.
As you think about the second quarter, just reinforcing mid single digit top line and that's squarely in the mid single digits.
Low single digit Bottomline.
The first component that I would just acknowledges that we did have a 16 over delivery in the first quarter, which was largely SG&A driven so the predominance of those expenses will begin to come back in the second quarter and then throughout the remainder of the fiscal year.
And then as you think through the balance of the portfolio continued momentum of.
Spreads with some jeffrey coverage coming into the second quarter momentum on cross the bowls.
The coffee category will continue to perform.
And then in the Pat <unk>.
<unk>.
The co manufacturing sales you probably could just make a little bit more equally across.
The second and third quarters with a slight slowdown in the fourth.
Got it that's helpful. Thank you and then.
Just to follow up on your comment about SG&A you previously guided I think to roughly even expense on that line item each quarter. This year, obviously <unk> came in light.
As we think about the next few quarters should each of them be roughly the same I guess, it's around $3 $55 million implied are there what we might there be a little bit more lumpiness, sometimes so.
And Im just verifying but.
I think your assumption is fair around the 355 over the next three quarters.
And should we just model that an evenly barring any other information.
Correct.
Thanks Tucker.
Youre welcome.
Thank you. Your next question is coming from Matt Smith from Stifel. Your line is now live.
Hi, good morning.
Morning, I wanted to ask about the pricing and inflation dynamic in U S. Consumer foods I believe you said that on an underlying basis pricing continued to lag inflation. So can you talk about the outlook there and when do you expect.
That dynamic to inflect and you're pricing to more than offset current inflation.
Yes.
Thank Matt.
Matt we are seeing pricing.
That inflation in our consumer foods business, I think generally across our entire business.
Pricing is relatively stable, we would consider ourselves still in an inflationary environment. We have had some shock.
Sharpening our price points on coffee and pass some of that through to customers and consumers and so that will help coffee in our in our future quarters as well, but generally speaking, whether it's consumer or the business in total we have recovered inflation.
Okay.
And then you mentioned coffee.
Lower coffee prices passing on to the consumer or are there other areas of the business, maybe not directly commodity related where youre seeing competitors.
Already lowering their pricing.
Not necessarily related to the underlying commodity things getting a little more competitive perhaps.
Yeah.
A pretty short answer is generally no we have we have not seen.
Significant deflation across the industry.
Okay. Thanks for that I'll pass it on.
Thank you.
Thank you next question is coming from Pamela Kaufman from Morgan Stanley . Your line is now live.
Hi, good morning.
Morning.
Just wanted to dig into the coffee outlook a bit more can you talk about your strategy for our coffee pricing this year given the favorability in coffee costs.
I had to think about the outlook for promotions versus potential list price changes and.
I guess generally what are your expectations for segment growth and how should we think about pricing versus volumes for the balance of the year.
Dan maybe I'll start tanker probably has a comment here.
We did see some a little bit of relief in the commodity and that's what drove us to sharpen our price points in.
A few of our our our coffee brands that had really took place in this month.
So that will start to impact and help the business going forward.
Just a reminder, that as we manage price, we really tried to be prudent.
We do feel that it's important to pass along those increases and decreases but we do do that with multiple levers sometime this list list price, sometimes it is trade or just getting a little bit more surgical on.
On pricing and that's really what we've done here and so we do expect assay to support the coffee business going forward.
But beyond what I shared we don't we probably cannot speculate on any future movements at this time.
Great. Thank you and then just on the.
Pet segment can you talk a bit about what youre seeing.
Consumer behavior in the pet category, we've heard from some of your competitors that consumers are.
<unk>, increasing demand elasticity in some trade down impact, particularly when it comes to treating obviously milk bone sales were still strong in the quarter. So just curious what youre seeing in the dynamics in the category.
Sure I mean, what I can speak to is largely <unk>.
Snacks, specifically dog snacks, we did have a strong quarter on milk bone and did see some good growth there.
Part of the reason that we continue to have good growth is as I've said before the brand plays in that entire range of value from premium to more value oriented or mainstream products. We have seen a little bit of a shift to more of this you know that.
The standard milk bone biscuit, if you will our premium offerings continued to do well, but there may have been just a little bit of a shift there and then with.
As we've improved our supply chain on meow mix and gotten the original blend item back into sort of the number one volume position that also would speak to the fact that our mainstream consumers are continuing to buying that product. So we feel very good about where our total patent portfolio plays at this point.
Thank you.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Rob Dickerson from Jefferies. Your line is now live.
Great. Thanks, so much.
Tucker.
Just first question for you.
In the prepared remarks, you talk about the derivative instruments for the per shares that are being divested that sounds like that cash flow comes in Q3, and it seems like kind of where youre leverages now with your incremental cash coming in I mean, you could potentially be.
Two times net.
Or lower maybe by the end of the fiscal year.
That's by far the lowest you've been in like almost 10 years I think so I'm, just curious kind of how you're thinking.
About potential incremental capital deployment and I realize you to buy back stock increase the dividend, but once youre hitting two times or less seems like there could be.
Incremental appetite, let's say four.
Acquisition, So I'm, just curious how youre thinking about that thanks.
Rob It's mark.
Yes, we feel very good about our balance sheet right now and obviously this has been our intent all along as you know we have over the last couple of years have been really focused in terms of refining our portfolio does not mean that we're not interested in acquisitions, we remain very interested.
And as you know the industry.
As a whole has been somewhat client on the M&A front, but it's not for lack of investigating and looking keeping lines in the water and so.
We hope that M&A will continue our acquisitions, specifically will continue to play in.
An important part of our growth story over time.
Alright Super ill pass it on thanks, so much mark.
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 warning.
Thats on a strong start to the year.
Okay.
Couple of questions for you.
So the SG&A favorability it looks like it was really corporate expense related.
Drove it and why shouldn't we take that to the bank and assume it's going to be lower for the remainder of the year.
Jason we saw some favorability within SG&A.
On the marketing line of some of our distribution and operation support lines and then also within our traditional corporate functions of administrative support.
And really what we have made the decision to do is to continue to support our brands. So we have some incremental marketing that we're contemplating.
In the next three quarters and also some of the expenses were timing related and so those are coming back in the second quarter. So we are not seeing SG&A favorability at this point in our fiscal year, despite having seen it in our first quarter.
So I assume the timing was that corporate line because distributions distribution marketing that looks like it's timing right because youre holding the full year.
Incorporate what was the timing benefit this quarter because it was chunky.
Corporate was much slower than we expected.
Yes, just had to do with various corporate items around.
Accruals and incentives.
Timing of spend through various projects so on and so forth.
Okay.
That's helpful. Thank you and then turning back to some of the segments looking at coffee.
Price was weaker than we expected and it sounds like it's going to get even a little more it sounds like it's going to turn deflationary based on the comments you made around the investment just this month a is that right.
B do you expect this segment to still post organic growth if prices deflating.
Given theres really no volume growth in the industry actually looks like it's contracting.
And sorry, three part question.
In light of the price investments should we view a return to the low thirties EBIT margins is out of reach for this year.
So Jason maybe breaking this down.
On a year over year basis cost should be flat to slightly down just due to deflation in the underlying green coffee, we are expecting a level of volume momentum for the portfolio on a year over year basis.
We do see gross profit margin improvement year over year as you have noted.
And from a segment profit standpoint, we are spending back some of that gross profit improvement in the form of marketing and investments in liquid coffee and sustainability and so we would expect the segment profit margin to sort of be in the high twenty's.
Helpful. Thank you so much I'll pass it on thank you.
For Ya.
Thank you. Your next question today is coming from Max <unk> from BNP Paribas. Your line is now live.
Hey, Thanks for the question.
Regard to gross margin you'd pick up your full year guidance. It sounds like it was due to incremental cost favorability.
I was wondering if you could give us any color on some of the drivers of that capability, you're seeing what the sources of the change were and how that might impact your <unk>.
Sumption throughout and cadence for next.
Next three quarters as well thank you.
Max Good morning, as you noted we came into our fiscal year with a gross profit margin guidance of 36, 5% to 37%.
We have now guided to a 37% outlook for the balance of the year. So on average we've come up about 25 basis points that gave us conviction in doing that was just seeing some cost favorability with and total cost of goods sold and areas, where you have a level of commodities you have a level of transportation.
And you may have some in the manufacturing and distribution environment, but it's not significant it's just some level of cost improvement as.
As we think about the outlook for the balance of the year that gross profit margin will improve in each of the next three quarters.
In order to get you to the.
37% outlook for the full year and it'll be pretty consistent over Q2, three and four.
Thanks, and turning back to the commentary on trades out and we've also been hearing.
Some chatter about this dynamic and see it.
And the data as well I'm curious what you think is driving this increased value seeking behavior and how long you think it can persist.
Matt It's Mark I won't speculate on how long.
I do think.
<unk>.
As we have refined our our portfolio to.
Fit our strategy, obviously pet snacks is really our crown jewel, there and I answered it a little bit of that question earlier.
Keep in mind that net.
We all as pet owners feed our pets.
Obviously pet food pet.
Snacks are.
A little bit more discretionary, but nonetheless keep in mind that consumers oftentimes treat their pets better than their children and so we do believe that the pet snacks in our particularly our dog snacks portfolio will continue to perform as we continue to meet the needs of consumers wherever.
They may be at from value to premium so we really feel good about where our portfolio is positioned there.
Thank you I'll leave it there.
Thank you next question is coming from Steve powers from Deutsche Bank. Your line is now live.
Yes, Hey, good morning. Thank you just a question on as it relates to free cash flow.
Given that you've you've raised your outlook 25 25.
You know.
Implies.
I mean, if that's if that is a cash EPS increase so I would just I would expect a little bit of flow through maybe $25 million or so to free cash flow that we don't seem to be seeing so maybe just talk about about what's driving that thank you.
Dave we are seeing.
Some incremental cash taxes, as we had a strong finish to our last fiscal year and as we continue to look through certain activities through this fiscal year.
And that has really been the driver of the change of why we didnt write excuse me raise our free cash flow guidance.
Okay. Okay very good thank you.
Thank you next question is coming from Robert Moskow from TD Cowen. Your line is now live.
Robert perhaps your phone is on mute Robert.
However, if you can hear US can you hear me better now sorry about that ahead.
Can you hear me better.
Yes, Rob welcome back Okay.
Slow start for sure.
[laughter].
In the in the prepared remarks, you said that Meow mix continues the demand continues to exceed your capacity.
And youre beginning to replenish inventory.
What's the plan for improving your capacity for Meow mix, you say in the second quarter that you it looks like youre going to youre going to grow above consumption in the second quarter.
What are you doing at the plants to to stretch your capacity to make that happen.
Rob It's mark.
Already in process of course on those efforts.
All around productivity and making sure that.
The plants themselves are operating at their highest capacity theres some nominal capital investments to make sure that the equipment is running as fast as it can.
And so it's really it's fundamentally around those types of things and we do expect the improvement to continue through the second quarter and support the demand.
Okay.
Any unusual impact in the back half of the year will this would be an easy comparison in the back half or will it be kind of like normal ship to consumption.
It should be normal.
Okay, great. Thank you.
Thank you.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
Thank you. Thank you all for your time today for joining the call we.
Really pleased with the positive start to our fiscal year and of course as we always say our results were really made possible by our outstanding employees I'd like to just take a moment to thank them for their hard work and dedication to the company.
We hope that many of you will be able to join us in Boston at the Barclays Conference next week.
And live wet webcast of our presentation on September 5th at 12 45.
Can also be accessed from our Investor Relations website. So I hope to see you all there in person or virtually thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.