Q1 2020 Earnings Call
This conference is being recorded and all participants are in a listen only mode at the request of the company. We will open the conference up for questions and answers. After the prepared remarks, please limit yourself to two questions during the Q and a session and re queue. If you have additional questions I will now turn the conference over to Aaron Broholm, Vice President Investor Relations.
Please go ahead Sir.
Good morning, and thank you for joining us for fiscal 2021st quarter earnings Conference call. After this brief introduction Mark Smucker, President and CEO will give an overview of the quarter's results and an update on our strategic priority.
Mark Belgya, Vice chair and CFO will then provide detailed analysis of the financial results and our fiscal 2020 outlook acuity session will follow the prepared remarks during today's call. We will make forward looking statements that reflect the company's 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 I encourage you to read the full disclosure concerning forward looking statements in this mornings press release.
Which is located on our corporate web site.
At J.M. Smucker dotcom.
Additionally, please note the company uses non-GAAP results to evaluate performance internally as detailed in the press release.
We have posted a supplementary slide deck summarizing the quarterly results and fiscal 2020 full year outlook. The slides can be accessed on our website and will be archived there along with a replay of this call. If you have additional questions. After todays call. Please contact me I will now turn the call over to Mark Smucker.
Thank you Aaron.
Good morning, everyone and thank you for joining us.
Let me begin by providing comments on our first quarter results, which were below our expectation.
Given the momentum we generated in the past few quarters demand relative to our expectations in this first quarter is unacceptable.
Particularly as it relates to our topline sales.
Our team is already executing on plans to a draft recent performance, which include improving the consumer value proposition at shelf.
The continued launch of new advertising across multiple brands.
And driving awareness and trial in premium dog food.
Underpinning all of these actions focused on accelerating the execution of our strategic growth imperatives.
Which is the key to unlocking the growth potential of all our brands.
Deliver on our commitment and increase shareholder value.
Including.
One reprioritizing Reprioritization company wide initiatives.
Two a reduction or elimination of certain discretionary expenses.
And thirdly.
The evaluation of planned marketing programs with an increased focus on maximizing return on investment.
Let me provide additional details on first quarter results.
Organic sales.
Organic net sales decreased 4% compared to the prior year, which was below our expectations primarily as the result of three factors first.
The timing of shipments primarily in coffee and peanut butter second.
The deflation in the coffee and peanut butter category.
And thirdly increased competitive activity in the premium dog food category.
Our adjusted EPS declined 11% compared to the prior year.
The reduction was driven by lower net sales and resulting SDN a de leverage.
Which was only partially offset by gross margin expansion with improved mix in pet food, resulting from the decline of private label sales.
With respect to the shortfall in U.S. retail coffee, we are confident that this was a temporary dynamic.
While we expected a sales deceleration from the fourth quarter the decline was greater than anticipated.
This was partially due to timing of distribution gains across all formats.
That have shifted to the second quarter.
As part of this change.
We gained incremental shelf space going forward across all formats.
We are already seeing momentum build in the second quarter and continue to expect top and bottom line growth for the coffee segment this fiscal year.
Our category leadership position remained strong.
Along with the number one folgers brand Dunkin' became the number three brand in retail sales during the quarter.
And continues to outpace category growth.
In addition, we own four of the top five brands growing household penetration in the coffee category in our K Cup portfolio is outpacing category growth by approximately two times in the latest for 12 and 52 week period.
We also recently launched.
Innovation with Dunkin' signature series.
18, 50 single origin, and Folgers knew our products that will contribute to top line growth as the year progresses.
Since retailer acceptance is consistent with our projections.
In consumer foods, a net sales decline in peanut butter was primarily attributable to a list price decline taken in the fourth quarter.
Certain retailers also reduced inventory following a 15% increase in the company's peanut butter shipments in the prior quarter.
And a key promotion was shifted to the second quarter.
Well, we did see a volume benefit from taking a price decline it was lower than anticipated.
We maintain in nearly 50 volume and dollar market share for the category.
And consumer takeaway for our peanut butter offerings performed better than other branded competitors and the overall category during the quarter as higher velocity has increased following our pricing actions.
[noise] in pet food, while we anticipated comparable sales to be down slightly.
Sales were below expectations down 4%.
Momentum for the majority of our patent brands continues to be masked by the decline in our private label business.
And the natural balance brand in the pet specialty channel.
The shortfall to expectations resulted from underperformance of new Trish dog food.
As a result, and greater than anticipated impact from a premium competitors aggressive pricing actions.
We are taking targeted actions to re accelerate new tranche dog food growth, which include improving the consumer value proposition that shell to increase.
To drive increased trial and loyalty.
And launching new advertising to increase awareness.
While we anticipate continued softness for the nutrition brand in the second quarter, we remain confident in the strength of the brand as a key growth driver for the balance of the fiscal year.
Including the launch of new innovation platforms.
For the remainder of the fiscal year, we expect new tranche to grow mid to high single digit.
We are actively defending our position and remain confident in the long term growth potential of our pet business.
There were areas, where we made solid progress this quarter with key brands delivering growth in both shipments and consumption.
Cat food and continue to deliver strong sales growth.
Driven by an 8% increase for meow mix as well as growth for nine lines and new Trish.
Our dog snacks platform also grew.
Led by sales increases for the pepperoni, new Trish and milk bone brand.
Heck innovation delivered over 20 $20 million net sales during the quarter.
And we also continue to project a $100 million in annualized sales from new products launched by the end of the year.
Turning to the progress.
Made against our long term growth imperatives, we continue to execute and build momentum with our three consumer centric growth imperatives to lead and the best categories build brands consumers love and be everywhere.
I'll share a couple of examples from the quarter and how we are leading in the best categories.
[laughter] snacking remains a key focus area with our total snacking portfolio generating net sales growth of 7% during the quarter, mostly driven by unprofitable sandwiches, which grew 11%.
We are now shipping Uncrustables products produced at the recently completed Longmont facility.
The volume shipping from this plant is currently small as we execute the startup process.
As planned we will expand capacity throughout the year to support a significant increase in sales during the second half of the year.
We remain on track to grow this business to over $500 million in net sales within the next few years.
Compared to approximately 300 million in fiscal 2019.
In addition, the GS powerhouse platform has helped increase household penetration for the Jif brand by over 2 million households over the past year as a result of our new on trend snack offerings.
While growth slowed this quarter with lapping of initial sell in last year, we remain confident in the growth opportunities for the Gen Snacking platform.
We recently launched a new line extensions and expect to expand distribution as the year progresses.
Turning to our strategic imperative of building brands consumers love.
Last fiscal year, we began implementing our new power of one and marketing model.
Which includes a new structure within our marketing teams. In addition to consolidating work with a new agency.
Although we are at the very beginning of this new brand support hitting the market. We are excited about the brand refresh underway and recently launched new advertising for the Jeff and Smuckers brand.
We will continue to launch new campaigns across nine of our key brands in the upcoming months.
These new breakthrough campaigns are bold strengthen our brands relevance in today's culture.
And set a new bar for CPG creative effectiveness, which we fully expect to support topline growth.
We remain committed to our investment in marketing and innovation.
And we continue to project marketing spend to be in the range of 6.5% to 7% of net sales for the year.
This commitment to support our brands and new product is critical to accomplishing our financial goals.
And increasing shareholder value.
Our third growth imperative is to be everywhere, we understand the consumer shop and interact brand on demand and multi channel, therefore, we need to be where ever consumers shop and available anytime.
Within the E Commerce channel, we compete in categories that are well suited to a subscription model.
Particularly pet food and coffee.
In the first quarter, our sales to pure play ecommerce retailers were up over 30%, while enforcing price discipline to protect pricing architecture and the equity of our brand.
The E Commerce channel now accounts for nearly 5% of total us retail sales, which is pacing in line with our goal to reach 5% by the end of the fiscal year.
The focus of our away from home business has always been on offering branded products that consumers desire while outside of the home.
During the first quarter, we increased our market share in three of our four strategic categories liquid coffee brews, French portion control offerings and peanut butter portion control offerings.
Our share of market and each of these categories is well over 50% and more than twice the number two competitor.
In the roast and ground coffee category, we will further strengthen our position by launching 18, 50, coffee, which complements the retail eighteenfifty business, which was the number one launch in the coffee category last year.
In the frozen handheld category, we are excited about being able to expand our uncrustables business within additional away from home outlet.
Before turning it over to Mark here, a few thoughts we hope you take away from my comments.
We are quickly adapting to competitive and market dynamics to deliver results and represents the strength of our organization.
We operate in strong categories that are aligned with current consumer trends.
We are making good progress on our consumer focused framework and three gross impaired is designed to deliver on our long term financial growth priorities and increase shareholder value.
We remain confident in our strategy, our strong portfolio of brands and the new brand support that will together and drive results.
And we firmly believe we are moving forward with the right approach and are taking decisive actions to provide improved results for the remainder of the fiscal year.
Finally.
As always I want to acknowledge our dedicated employees, we thank them for what they have done and what they will do to drive the business moving forward.
I will now turn the call over to Mark Belgya.
Thank you Mark and good morning, everyone.
First quarter net sales decreased 6%, which included an incremental 25 million dollar contribution from the Ainsworth acquisition.
And $73 million of lost sales related to the divested U.S. baking business included in the prior year results.
Excluding the non comparable results sales declined 4% in the first quarter unfavorable volume mix, primarily for private label pet food and coffee had a three percentage point impact on net sales and lower net price realization, primarily for coffee and peanut butter reduced sales by 1%.
Adjusted gross profit decreased $30 million from the prior year or 4%.
Excluding the Noncomparable Wayne's work in U.S. baking business gross profit was down 3%, primarily reflecting the decline in volume mix.
Favorable costs were mostly offset by lower net pricing and lower commodity costs for coffee and peanut butter were pass through to consumers.
Adjusted operating income declined $26 million compared to the prior year, reflecting the decline in gross profit.
Marketing expenses decreased $7 million and was 7.5% of net sales.
$5 million of incremental expenses were incurred relating to the startup of the new Uncrustables facility, partially offsetting the decrease in marketing.
Below operating income interest expense decreased $4 million driven by a lower debt balances, resulting from repayments made over the prior 12 months.
The adjusted effective income tax rate was slightly higher than guidance at 25.2% in the quarter.
Factoring all of this in first quarter adjusted earnings per share was $1.58 compared to $1.78 in 2018, a decrease of 11%.
Let me now turn to segment results beginning with pet food.
Net sales were comparable to the prior year.
Excluding the two week stub period for haynesworth sales decreased by 4%.
Sales of private label products were a 4% headwind to the quarter, which included the planned discontinuation of certain business.
The natural balance brand declined 12% and what the other significant factor driving the decrease.
Meow mix and nine lives drove solid casket growth a pup peroni led within pet snacks, along with growth for both nutrition and milk bone treat.
Pet food segment profit increased 20% compared to the prior year, excluding the non comparable period related to the Haynesworth acquisition segment profit increased 16%.
Which included lapping the $11 million unfavorable fair value accounting adjustment in the prior year.
The realization of acquisition synergies and favorable net price realization, partially offset by higher input costs and lower volume mix also impacted profitability.
Turning to the coffee segment net sales decreased 5% compared to the prior year.
The decrease was primarily due to lower net price realization driven by increased trade Stan has lower commodity prices are being passed through to our consumers lower volume mix for the Folgers brand also contributed to the sales decline.
Dunkin' coffee net sales were comparable to the prior year with the gap between our sales and 4% growth in Dunkin' coffee consumption trends during the quarter being driven by timing of shipments in our fourth quarter was up mid teens over the prior year.
Coffee segment profit decreased 13%, primarily reflecting decline in volume mix and the net impact of lower pricing in green coffee costs.
In consumer foods, net sales decreased 17%, reflecting the divested U.S. baking business comparable net sales decreased 3% driven by lower net sales for Jeff.
Primarily due to the list price decline effective this past March.
The decline in Jeff was partially offset by the Smuckers brand, which grew in both the uncrustables and fruit spreads categories.
Excluding the prior year profits from the bested U.S. baking business segment profit declined 8% due to expenses associated with the construction of the new Uncrustables facility and the net impact of price and cost.
And lastly in international away from home segment, net sales declined 7% compared to the prior year.
Volume mix accounted for a three percentage point decline, most notably for Folgers.
Lower net price realization reduced sales by two percentage points and unfavorable foreign currency exchange was $2 million.
Segment profit decreased 26% due to the impact of lower volume mix and unfavorable price cost relationships.
Expenses related to the long long start up an incremental tariffs.
First quarter free cash flow was $149 million, which represented a $7 million increase over the prior year, reflecting a $28 million reduction in capital expenditures, partially offset by decreased cash from operating activities.
Capex for the quarter was $73 million, representing 4.1% of net sales.
The company continued its intention of deleveraging by paying down $130 million of net debt in the quarter, bringing net debt.
Repayments to more than $900 million in the past 12 months.
We finished the quarter with a total debt balance of just under $5.8 billion.
Based on trailing 12 month EBITDA of approximately $1.6 billion, our leverage ratio was reduced to 3.6 times.
Let me now provide additional color on our revised outlook for fiscal 2020.
Reported net sales are now anticipated to be flat to down 1% compared to the prior year, which includes a $106 million the baking sales in the prior year $33 million of which were in the second quarter and the incremental $25 million gains were sales recognized in the first quarter of this year.
On an organic basis net sales are expected to be flat to up 1%.
Private label Pet food is expected to be a 40 to 50 million dollar headwind for the full year with the majority of the remaining impact occurring in Q2 and to a lesser extent in Q3 changes from our previous guidance reflect one the first quarter sales Miss versus our expectations second increased competitive activity in premium pet food and third a continued deflationary environment in coffee and peanut butter.
Furthermore, we expect sales to improve sequentially each quarter with the third and fourth quarters delivering growth over the comparable prior period.
The capacity provided by the Longmont production facility is expected to accelerate growth for Uncrustables sandwiches in the third and fourth quarters.
Second quarter net sales are expected to be down versus the prior year, primarily impacted by the divested baking business and declines in private label pets.
We expect gross profit margin for the year to be approximately 38.5%.
Overall commodity cost projections remain lower driven by green coffee and peanuts, which have already been reflected in lower pricing.
In addition continued synergy and cost savings benefiting both Cogs and SDMA will be offset by increased manufacturing expenses, including startup costs associated with the new Uncrustables facility.
In addition, as Mark stated we are aggressively pursuing cost management over the remainder of the year to deliver earnings growth. Despite the decrease in our sales guidance.
As a result, SDMA expenses are now projected to decrease slightly compared to the prior year versus our prior estimate of an increase.
Below operating income were planning $200 million to $210 million and interest expense in fiscal 2020, and a tax rate of approximately 24.5% to 25%.
Taking all these factors into consideration, we expect adjusted EPS in the range of $8.35 to $8.55.
Similar to the cadence in net sales the earnings per share growth is also expected to be realized in the back half of the year as the same headwinds impacting sales in the first half are also impacting profits as a reminder, the company realized a 27 million dollar gain on divestiture in the second quarter last year that was mostly offset by a higher effective tax rate.
We continue to project full year free cash flow to range from $875 million to $925 million with Capex between 300 and $320 million. We will continue to prioritize cash for debt reduction and expect to repay an additional $400 million by year end, taking our leverage down to just above three times at the end of the fiscal year.
In closing, let me reiterate Mark's opening comments that while first quarter results were below expectations. The team is focused on critical actions to achieve our near term and long term financial targets.
We remain steadfast that the actions we are taking to transform our company, while maintaining financial discipline will deliver deliver long term value to our shareholders.
Thank you for your time this morning, and we will now open the call up to your questions. Operator, if you would please queue up the first question.
Thank you. The question answer session will begin at this time, if you are using a speakerphone. Please pick up the handset before pressing any numbers should you have a question. Please press star and then one on your telephone if you wish to withdraw your question. Please press algae for operator assistance. Please press Star and then zero as a reminder, please limit yourself to two questions. During the Q and a session should you have any additional questions you may requeue and the company will take questions. As time allows please standby for the first question.
Our first question will come from Andrew let start with Barclays. Please state your question.
Good morning, everybody good morning.
Hi, there okay. So just two questions for me one would be Mark I was hoping you could.
Just maybe get into a little more detail around I think your comment was.
Reprioritizing.
Companywide initiatives and I was hoping to get a little more clarity on what you meant by that and then specifically in pet it would be.
With respect to some of the competitiveness in the in the premium space do you view this more as.
Maybe somewhat transitory around just competitive launches in premium that you sort of need to to weather, albeit with some additional spend versus you know is there some maybe structural change in what has typically been very rational.
Environment impact, particularly in premium pet, but you feel like that that's in in.
Yes concern around that changing more structurally or again more temporal something that you've got to weather, albeit with some additional spend so hopefully that's clear. Thank you.
Andrew Thanks, This is mark Smucker.
So yes on on Reprioritizing company initiatives I would just say that that is really about.
Taking a very detailed look and a lot of the actions and things that we're doing as a company and really prioritizing those initiatives, which truly are going to drive the business and where they are now I won't get into specifics aware there are actions or projects that are not specifically driving that business, we may stop or postpone some or many of those activities.
As it relates to Pat.
Your first.
Conclusion is correct.
Yes, let me just walk through a little bit more detail. Because this is obviously the most important question that we could get today and it is one that we clearly have to address and are addressing.
I guess I would start by saying that we did not fully anticipate how broad and aggressive some of the pricing actions would be on trial sizes in premium dog food. This is specific to premium dog food and relatively specific to trial sizes. We had not seen this level of aggressive pricing in previous other interactions in other channels.
And we viewed this trial size dynamic as temporary and and somewhat unsustainable. So that would go to your question about we don't view this as a structural change.
Clearly created a temporary misalignment kind of in terms of the value proposition and led to some of our consumers Trialing ultra premium product, but we do continue to believe there are consumers remain largely distinct.
And I would just like to assure you and our investors that we are taking aggressive steps to ensure we are positioned properly in the market marketplace across several levers prices one.
Obviously customer in merchandising support would be another and then I mentioned brand support in the in the prepared remarks, and we would expect progress to be steady for new Trish I'm, particularly obviously, we're still talking about dog food in the back half.
And we would again expect mid to high single digit growth for the remainder of the year.
You know all of that said we are we disappointed in the results this quarter yes.
But two things I would just like to Hammer home. One is brought more broadly our pricing action that we had taken has stopped and so we have been pleased with where we obviously took a broader pricing action across the portfolio that stock.
And then there are many other parts of the pet portfolio, which are doing very well so that gives us confidence in you know the portfolio as a whole, but clearly we have to address this more immediate issue, okay, Andrew Marc belt to just to tag on to the first question.
Obviously, the refocus if you will on prioritization is to address and drive to matters that are most affecting the business, but it just also underscores the comfort. It was in my scripted comments, where we will see a reduction in interest DNA. So not only is it resulting an emphasis on the key areas that we need to go after but it is going to have a cost reduction and that again, allowing us to to stay.
You don't hit our guidance with recognized that our planned sales are down a bit.
And as you said that wouldn't incorporate a reduction in marketing spend I think you did mention that.
It's a little bit I, yes. Thank you for raising that because I think it's an important note I will give a lot of credit to our teams. We've looked at this at the most detailed level and the intent was not to just dollars. It really was to identify opportunities that can maximize return and in those events that just were not going to achieve we're just took a hard line and either postponed or cancelled. So while there will be a reduction in marketing, we still very comfortable with all our new creative that we've been talking about for months will be coming on air over the next several weeks.
In support of our innovation, so we're comfortable with it but it will but it will be lower.
Thanks, and see you next week. Thank you.
Thank you. Our next question will come from the line of Bryan Spillane with Bank of America Merrill Lynch. Please state your question.
Hey, good morning, everyone.
Hi, So just two for me one.
I guess as we're thinking about the the implied improvement in revenues Thats.
Better than the guidance for the back of the year could you just break down maybe in broad strokes how much of it do you expect to come from the incremental the innovation the new products and how much of it comes from or is dependent upon an improvement in the in the base.
Yes, it will come from both I won't get into specifics between those two specific buckets, but it will come and so if you just think about what we have talked about in the last couple of quarters as well as our Investor day in at Cagney and we've really have focused on portfolio. We've also talked about our growth brands are based brand. So we see growth coming in both our growth brands in our in our our core brands. So in our base brands, we see it coming from new Trish as as it.
As we address some of the issues that Mark discovered we also see uncrustables being a contributor particularly in the back half of the year with our plant in Longmont, Colorado coming on board, we will see volume gains there to allow us to to increase sales. We also see our coffee brands, particularly Dunkin' and boost Stello will drive growth that it will see that the core or the I'm sorry, the growth rate and then in the core we're going to see our coffee business turned around in the back half.
Well so it is a combination across those both areas.
Okay. That's helpful. And then maybe just a follow up to answer his question.
About the.
The resources.
I think if we go back to the Investor Day, maybe I guess it was last year talked about one of the things that had happened at smokers in the past was maybe not sticking with things long enough.
And so I guess is your kind of thinking about resource allocation and which projects you are going to stay within not are you looking at it maybe differently than you had in the past just to guard against making sure that you are not.
Sort of cutting something prematurely.
Brian its mark Smucker. Thanks for the question you are correct.
We.
I used the phrase stick to our guns. So that is precisely what we need to do as it relates to supporting the brands I talked about the advertising campaigns that are just beginning.
So we're just now beginning to see the fruits of our labor on on the marketing and there you know across nine or 10 brands I think I said nine in the prepared remarks are coming.
Over the next couple of quarters and so we've got to maintain that's why obviously the level of commitment to the marketing spend and then also making sure that we continue to support.
The innovation in the marketplace. So that that is true across not just to the 18 50, and just powerup, but innovation and Pat although it started a little late we've we've been pleased with the results we've seen.
Customer picked up in line with our expectations. So it is the manner in large degree of continuing to be consistent and continuing to support those those innovations for.
Now an extended period to make sure that they gain traction in a foothold there. Brian . This is mark I would just add that a little bit as an add on to my last comment to Andrew is that on the marketing side. You know we went through and we identify what we felt was a reasonable reduction in areas, but but the intent was to make sure that we maintain the dollar support from marketing that was necessary to support that innovation pipeline. So.
If you look at what we have done historically over the last couple of years and what we're going to do even more this year around the cost reductions is while we're clearly trying to identify opportunities to help deliver the guidance in light of the lower sales volume. We also the organization recognizes the importance of sticking to our guns and providing the financial support to do that so it's sort of an all in to get that cost structure, such that we can continue to protect that innovation.
Okay. That's great. That's helpful. Thank you.
Thank you. Our next question will come from Robert Moskow with Credit Suisse. Please state your question.
Hi, Thanks.
I guess my question is about coffee margins last year, I think you had a nice pickup.
Your margins because coffee commodity costs were down and you lowered price, but pure folgers profits grew and the process. This year I guess I'm a little unclear like what the expectation is coffee commodity costs are still falling a lot.
Sure you are off to a slow start in first quarter, but that you're saying the rest of the year.
You will have growth so should we expect your pure.
Your margins to be flat in this dynamic or are you would have to give up a little bit more than you normally would thanks.
Rob its mark Smucker I'll start.
We would expect them to be relatively consistent with last year.
As you know coffee costs are at 30 year lows and they've been a 30 year lows for some time.
They may continue to be and very low prices. So we have continued to use.
The lever of trade to make sure that we're our competitive position is strong, but we do not see any significant change in both the performance of coffee, we do expect it to come back.
And we are actually already seeing some momentum in the category across.
The all the segments.
And then margins will be more or less consistent with last year.
Hey, Rob it's Mark, Yes, I fluid market, saying you know obviously the 20, Paul 20% we have for the quarter is below where we typically look and where we will see the pickup over the back three quarters will come just from continued lower costs as a key driver and then just getting the volume back quite candidly will help and then that brings to it obviously things like favorable overhead absorption. So there are some drivers that will help turn around what you saw in first quarter to get back to sort of last year's numbers.
And you said that one of the drivers was just that there were some new product launches that were delayed specifically into second quarter can you help us quantify like what's the what's the gap was between first and second in that.
Yes, Hey, Rob this is mark again, it wasn't necessarily new items. It was just we anticipate.
Increased distributions that it will be more of a second quarter and go forward as opposed to the first quarter. So it is not necessarily just innovation. It has also some base business across the brands.
And wire retailers, increasing your distribution.
Coffee.
Wow.
Frankly, because several of our our lines in items are performing very well I think in the prepared remarks, I mentioned, how well our K Cup offerings are doing so we are seeing some expanded distribution in K Cup as well as in our in our premium coffee sat as well and in some cases that may be at the expense of competitors, but generally speaking because our customers have seen good performance. They are in several cases, taking on some expanded points of distribution.
Okay Alright. Thank you. Thank you.
Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley . Please state your question.
Hi, Good morning, I, just wanted to follow up on your top line outlook.
Volumes came in softer during the quarter.
How much of the reduction to your top line outlook is driven by changes to your expectation for volumes versus plans to invest more in price.
And previously you expected organic growth across.
Pat on coffee, just it looks that growth across all three segments. This year.
So this is this is mark let me just start so if you look at let me just take a step back in towards say were the top line, what drove Q1 and sort of what we expect from volume mix over the remainder of the year. So.
For the reasons that Mark and I outlined, particularly the timing of the shipments so notably coffee and peanut butter that were were really strong in Q4, so thats that grow our vault volume mix of some in Q1 so.
The things you have to remember too as you probably know this when we have that volume impact with particularly those two categories as are highly profitable and high dollar value items. So we get sort of a double whammy in that the vol mix as we look forward.
We still expect to see volume increase volume mix growth because because of the fact of the matter is there is going to be innovation coming across the various categories across various brands as well.
So that so that will drive.
I don't know if will really get into the specifics on each segment, but again, we said organic growth should be positive for the year and it is going to be a combination as I said earlier it will be our growth brands. So again, new Trish Duncan Uncrustables and as you know that some innovation Thats, obviously capacity coming on board last month, and then for some of the things that Mark just spoke to for example on the K Cups and other copiers were going to see growth. There. So it is sort of the same story I'd say that the biggest change from maybe what we said back in June is that the impact of the strong fourth quarter probably drove.
Had a bigger impact on shipments than than we would have to have assumed in Q1.
Hey, Thanks, just to follow up on it.
Can you elaborate on your plans.
Celebrating growth and the brand and last quarter you talked about.
Launches shifting into the first quarter.
It does occur as you had expected.
Pam I didn't hear the last part of the second part of your question.
So you asked me to elaborate on new trash and what else.
And then last quarter, you talked about some of your white space launches shifting into the first quarter did this happen as you expected.
Yeah and tree in Cat trades, we did see some shifting of timing, but again as I mentioned earlier on the on the innovation piece, we have seen good customer acceptance. It is.
Some of the customers reset their shelves later than initially expected so that drove some of the timing, but so far what we've seen it in line with our projections, we've been pleased with the innovation pick up in general.
And then as it relates to new trash I won't get into specifics other than to say and just reiterate that again the dynamic in the in the premium.
Pat Dog Dog food category was actually a couple of competitors that was not only one competitor.
That you know there was some aggressive pricing obviously, we will respond to that as I mentioned, we will.
Make sure that our pricing, particularly on those trial sizes and other items is where it needs to be to compete and then we will continue to support.
The brand both at a customer level and.
As well as from a consumer support in terms of brand support and advertising.
Okay. Thank you.
Thank you. Our next question will come from the line of Jason English of Goldman Sachs. Please state your question.
Hey, good morning folks I think you for thanks for sneaking me Jim.
Hey, guys couple questions I guess.
To start with and do you have an approximation of how much of a drag on organic sales was the.
Inventory destock at retail related to Folgers and Jeff this quarter.
Yes, Hey, Jason its Mark Belgium.
I guess I would just without giving specifics I would just say that it was a primary driver of the overall vol mix for the company. We said the 4%, 3% that was vol mix and.
A fair portion of it was related to that.
Okay.
So as I think about the remainder of the year you gave us some commentary in the second quarter. It sounds like the growth recovery is really back half weighted.
And to get to your guide I County, like 2% to 4% organic sales growth and I'm, obviously going to have to comp the over shipment in the fourth quarter. So on an underlying basis that that two to four is probably closer to three to five.
Hey, it's it seems like.
A really big number for vol mix, particularly in consideration of the environment overall.
If you could touch maybe a little bit more on what gives you confidence there and also give us some context of the amount of flexibility do you have within your earnings algorithm to still deliver on earnings if that that type of growth Doesnt actually transpire.
So let me start with your second question first so as I said earlier.
The team has been an incredible amount of time over the last several weeks identifying these opportunities and we recognize that our investors and our in our followers.
Questioned the ability to hit the earnings in the event that we cannot drive the sales performance that we're estimating so I would I would suffice to say that we have.
Weve looked beyond just covering.
Some of the costs that are necessary and anticipate.
That the top line.
If it delivers even fall a little short that we feel that the guidance range is achievable.
In terms of the sales you're right. It is definitely a back half loaded forecast and I guess as I think I mentioned earlier, it really is coming through a number of areas, but if you just look across the portfolio. We are going to see significant improvement in our growth brands and cues, particularly Q3 and four but over the back nine months.
And that is going to be driven by new Trish and we feel with the actions that the teams have taken and are taking we will we will reverse the first quarter performance. We also feel that the.
The Dunkin' into Bustelo again, some of these distribution gains as well as some innovation are going to benefit and.
And one of the things that actually will help by going away is this private label, which had a big impact on Q1, which is $26 million. We've got another 20 plus million coming primarily in Q2 that pretty much goes away in Q3 and completely goes away in Q4. So that's a big drag that we don't have as well. So that's the primary areas that we see I think the programs we have in place and again I know that you guys. We havent gone on air with except for Jeff and Smuckers, our new advertising, but we really believe that will be a driver of volume growth in the back half as well.
Okay and on your Oh, sorry go ahead Mark.
Hi, Jason if I may just add a couple of comments from a historical perspective, just on this kind of late just before I do that on the private label piece. Some of that was planned exit and Pat we will expect to replace some of that.
More than likely in the fourth quarter. So there there is lag. So Mark's comments were right in terms of the specifics of that being one of the factors I guess, what I would just like to frame in his.
Clearly as the CEO of this company delivering on our commitments to our shareholders is a foundational priority and so we clearly we won't do our initial guidance on the top line, but we will do.
Whatever is within our power to ensure that we deliver earnings growth.
And.
We as we've said before we're in the business for the long term.
Progress is not linear and it can be lumpy this quarter as an example.
Lumpiness and.
It is we have been in previous years, many times with a back half loaded plan and so that is not new and for those of you that have covered us for a while you've experienced that in many different years I guess I would point to you clearly don't measure a success on a single quarter, but I would point to if you look back historically in fiscal 17, our business was declining at 3% in 18, it was declining around 1% and last year, we were flat.
And this year, we intend to deliver.
Some positive growth. So if you look at that annual trend clearly we are moving in the right direction.
And then that obviously the the goal and our entire company is focused on making sure that we can deliver and deliver the guidance that we set forth.
Thank you very much.
Thank you and our next question will come from Jon Bock of Wells Fargo. Please state your question.
Good morning, Thanks for the question.
Hi, Jim.
Just wanted to stick with the pet business, because there's a lot of discussion around competition in premium around Rachael Ray and some of the newer entrants maybe there is some substitution risk maybe there is not but if we focus more on the mainstream portfolio I think the consensus there is the growth is coming from trade up.
And we've seen the impact the gravy train kibbles pricing is down 20% over the past three years. So when you model the business going forward. How are you comfortable with the relevance of the Kibbles franchise.
And defending the mass part of the portfolio from here.
So I've talked on previous calls Mark Smucker I talked on previous calls about the Brett.
The category and how there is a very broad.
Pricing set from ultra premium all the way down to value and.
Fundamentally there is a similarly broad set of consumers that are looking for.
All different need state.
So our portfolio is very broad as well we believe it clearly meet many of those needs state, but really supporting those brands and continuing to drive.
Our marketing investment against those is clearly going to have.
A strong impact.
I would point to the fact that.
Chemicals, you referenced Kibbles is a relatively small piece of the portfolio Meow mix is another example of a brand that is a mainstream brand, but it grew at 8% this year this quarter. So.
Fixed about 65 ish percent of dog.
Purchases is roughly in the premium and our portfolio is is in the premium space. So our portfolio does skew a little premium and so again, regardless of which segment, we're talking about premium or value. It's all about.
Communicating with the consumer getting price right. It shall supporting the brands that shell and making sure that our advertising in speaking to to the consumer it's intended to.
Thank you Mark.
Thank you.
And our next question will come from Chris Growe with Stifel. Please state your question.
Hi, Good morning, Hi, Chris Hi, I, just had two questions for you if I could I wanted to ask first in terms of your sense of the inventory adjustments that occurred this quarter do you expect those to stop from here or even reverse this level I want to understand how that fits into your volume growth outlook for the year and emits any inventory changes.
I. This is mark Smucker I would just say there will probably be some some reversal in coffee.
We are seeing that and.
Probably some in peanut butter I don't think we've quantified that you know as we've said before occasionally.
Customers do make inventory adjustment you can't predict that.
And this was this was one of those instances.
We continue to be encouraged by.
You know the trends, particularly on coffee, we have seen some nice pick up as I mentioned on peanut butter, and particularly versus other brand.
And then again one thing we Didnt know in coffee is the Dunkin' canister, we've had a lot of questions about that in the past and that product is doing extremely well and it's highly incremental much more incremental than we expected. So we are not cannibalizing ourselves as much as as we had originally expected it's actually supporting category growth as well. So all of this and continuing to give us confidence and again the inventory thing. It is sort of we deal with it when it happens and this was one of those instances.
Okay and then just another follow up question on the on the Pet Division, we talked about some.
A delay in some of the new product launches into fiscal 20 of those occurring dollars you expect to kind of spread across the year you talked about some new trust products come in second half of the year sort of get a sense of that.
Oh, that's progressing if you will throughout fiscal 2000.
Yes, you are correct that there.
Was.
You know some deals like as I mentioned before some delayed shelf reset which caused customers to take them later than we expected again, the milk bone long lasting two items are doing very well.
And so again I know, we are seeing the right level of pickup.
Meeting our projections.
A little later than expected, but it's going well and there are other new product launches that are coming throughout the remainder of the year. So it's not.
It's not all in yet if you will.
Okay. Thank you.
Thank you and our next question will come from Alexia Howard with Bernstein. Your line is now open.
Good morning, everyone.
Good morning.
Hi, So just one question for me.
Yes guidance change for the year it fell.
On the usual.
Guiding down.
Modestly so early in the year I think it's about a one tops.
The guidance for fiscal 20, I'm, just curious about your thinking going there why do.
Now, particularly given the uncertainty around the competitive dynamics the retailer environments and so on one on exploring the guidance range.
So very narrow it thank you and I'll pass it on.
Alexia, it's mark Smucker.
As the CEO I remain very committed to being transparent with our investors and given what we know this quarter, we despite being disappointed in the guide down we felt that it was the right thing to do.
And making just making sure that we're having transparent and focused conversation about about our results and what we truly believe we can deliver.
So it is my obviously imperative to continue to ensure that we're providing that level of transparency.
Going forward. So it's this is where we feel comfortable.
Great. Thank you very much I'll pass it on thank you.
Thank you and our next question will come from the line of Scott Mushkin with Wolfe Research. Please state your question.
Hey, guys. Thanks for thanks for taking my questions. So I guess in listening to what you guys have been saying in the optimism in the back half of the year.
Thanks, a lot last week in a lot of different stores subs and a kroger for a couple of hours and it just seems like the competition in some of your categories I guess I wouldn't be as encouraged you look at skippy.
The other advertising and they've been doing a lot of efforts at stores.
Look at the pet category, and we Didnt notice like nutrition, although.
While the competition coming in there and then our coffee clearly nestle's is doing an incredible job with Starbucks and creating some challenges in that category. So I guess.
I guess the question is is that why and I know you have plans in place, but why do you think competition specifically against you is going to maybe add is there any signs of that.
Well I don't think it's going to add I mean, we're we've been competing for 122 years and it's not so that's a fair comment what I would say is again, where we are in three amazing categories that are all essentially snack Pat and coffee growing faster than center store in aggregates are in good categories. Most importantly, we have leading brands and in many cases number one brands that are really flagship brands within each category or within segments of category and so that clearly gives us a competitive strength in and gives us the permission to compete.
And obviously to lead in many cases with price.
As we've done.
Now I would point to as well even in Pat as you had new entrants come in and despite being somewhat disappointed with our results in premium Doug.
We actually retain more points of distribution and other competitors did in when those new entrants came in so again pointing to the fact that that being a leader having strong brands will allow us to continue to compete effectively but it is you know there is a lot of competition and we just have to continue to be disciplined do the right things for our brand support them through marketing and make sure that our pricing architecture is fair and supports the equity of those brands.
Great and then my follow up question actually goes to the marketing side.
As we we seemed to say, we see marketing maybe picking up you guys are going to cut back a little bit on it. So just given wondering if you could give us a specific example of like marketing that you're going to like pull away that you think is ineffective and would you actually be better off reallocating that to other things that you are you believe are more effective.
So I would.
Okay. So.
First of all we are committed to doing marketing on all of the nine brands that we discussed you should have seen.
Both new advertising on chip and smucker in the market on in the marketplace and we feel very good about those in the ability of those to drive.
Top line.
Where you would see that we will be pulling back is less so on media, it's really on challenging ourselves on non working marketing dollars to make sure that those span are truly necessary and so where we can drive efficiencies out. It's in those areas that are willing call non working marketing dollars.
But supporting the brands and stuff that you would see going to consumers. That's what we're committed to making sure is out in the public domain and that we're reaching our consumers. So those areas we need to protect.
Hi, guys I appreciate it thanks for your thoughtful answers. Thank you Scott. Thank you. Our next question will come from the line Rebecca Schuman with Morningstar. Please state your question.
Good morning, I was actually about to ask a very similar question that was just asked.
Now that we're about a year into the step up in marketing spend and.
And along the same lines I was wondering.
You did mention that since you are pulling back on some marketing.
I just was wondering if you have.
Kind of looked at this and say, especially for some of your brands that are facing some secular headwinds.
Are we may be better off.
Instead of managing.
These brands for growth just trying to to maximize cash flows and if there's any changes.
There.
We're trying to stay focused.
Obviously on the brands that we have recall that we recently made significant realignment to our portfolio by divesting the baking business. So we're very comfortable with the brands that we have and they all need support at some need more support than others and so they're not all created equal, but because of where we are we are focused on these three categories and need to continue to support.
These brands the type of marketing can differ so you may see for example are you may possibly have seen a brand like cafe bustelo.
We do a lot of experience in marketing, we do pop up cafes, we had a coffee shop in Houston for about.
Oh I think it was about three months and so those those types of marketing are different so it's not always on air television advertising, but there will be a lot more of that.
Earlier in your question you mentioned that you know were I don't know about a year end.
Well, yes, we're a year into restructuring our marketing functions, but we're at the very beginning.
Launching.
New creative work on all of these brands so the way in which we are communicating with consumer making these brand relevant in today's culture, that's what's changing and you only begun to see the beginnings of that so look for a lot more of that over the next call it six months or so.
Okay, great. Thank you that's very helpful. My second question is actually on R&D investments and.
So if I take a look at the percentage of the sales you've got in the last.
Few years from new brands I think it was about 7% and.
2018, and then it fell to 5% in 2019, I know you're expecting a big step up in that this year.
But if I look at what smucker span.
On R&D at about 70 to 80 basis points of sales it is lower than your peers.
And I'm wondering if that is something that you've thought about maybe stepping up the R&D level of R&D investment as well as we have done with the marketing. Thank you.
So Rebecca this is mark Belgya, we obviously as we go through our long range planning and our budgeting on an annual basis, we always give consideration to making sure that we're appropriately supporting R&D.
And we'll continue to see opportunities, but right now we feel the spend and the talent that we have that is excellent and I think just based upon some of the innovation. We brought to market is probably the best evidence of that.
In terms of the reference to I think what you were saying was basically sales that.
Have come from new products, which we would define as over the last three years, you know that number peaks and valleys a little bit. If you think about a few years ago. When we launched Dunkin' Donuts K Cup. The year that followed that had a bigger hit than than a normalized year. So you've got to watch that a little bit. We think that is our innovation that particular platform innovation, we spoke to over the last year continues to flow into the market you will see that percentage of total sales represented by new products will increase maybe to more of the levels that that you're a custom but I just put a little cautionary tale out there depending if you just take an absolute change I guess.
Rebecca This is mark Smucker I would just add that.
Some of the development of new products, if you will falls under our innovation team. So there are some costs that are that are in that space.
In fact, we actually.
My leadership team has a meeting later today to actually review innovation. It is.
Further out two to three years out and so that is something that we do as a team we involve marketing and R&D and everybody's in the room. So we feel good about our process. We know we have significant R&D facilities here on site and Orville pilot plans for Pat and coffee and some of our consumer foods businesses. So.
We're pretty I think we feel that we're in a good place in the process that we have in place is very disciplined and it's working.
Okay, great. Thank you.
Thank you. This concludes our question and answer session for today, So now I'd like to hand, the conference over to Mark Smucker to conclude the call.
So again, thank you all for listening in today.
We appreciate you taking the time given the fact that this quarter clearly we had a hiccup, we just want to reinforce our commitment to doing what's right remind the group that we really we really do manage our business year over year and if you look at our annual performance. It has steadily improved over the last few years and despite being.
Disappointed with this quarter, we still feel very strongly that our strategy is right as we've seen evidence that it's working in multiple areas of our business and just remaining.
Committed to being transparent with you all and appreciate the support and the time that you spent with US today. Thank you.
Ladies and gentlemen, this concludes our conference call today.
Thank you for participating and have a nice day all parties may now disconnect.