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spk07: Thank you, America. Your line is now live.
spk10: Hey, guys. Good morning. Thank you for taking the questions. Tucker, maybe we could just unpack a bit on the top line or the revised top line. Is it fair to assume that the full raise is really on the volume mix side? I think previously you had said you had about 15 points of price that you expected for the year. I just wanted to make sure that that number hadn't moved.
spk05: That is correct. It's largely driven by volume mix across our portfolio.
spk10: Okay. And then maybe if we could just talk a little bit about coffee. You know, coffee costs, I think green coffee costs have started to roll over. And so just seeing the change that Andrew brought up on the gross margin side, understanding there's a bit of timing, but When might we expect some of that benefit, if coffee prices have rolled, to kind of start to flow through and impact the gross margin?
spk00: Peter, it's Mark. Thanks for the question. Just, you know, as we always say on coffee, we, you know, it's largely a pass-through category, and we will pass through cost increases or decreases at the time that we realize them. And so, although we are not transparent with our hedging practices, we do take a very prudent approach to how and when we pass those costs through. I guess I would also just highlight that, you know, our strategy has been to ensure that we are recovering dollar for dollar cost. That continues to be the case. And so as we did lead on the way up in pricing, we have now seen and continue to see competitive price gaps close and the performance of our portfolio in aggregate has been satisfactory. You know, obviously the solid top line growth, continued share growth, as well as our ability to meet consumers across the entire value spectrum continues to be very important.
spk05: And Peter, I also want to remind you that the first and second quarters for the highest green coffee costs year over year for us, and then it begins to moderate in the third and fourth quarters. As such, you should anticipate the margin profile within our coffee business to improve as we continue to work through the second quarter and into the fourth quarter. as we step into those year-over-year changes.
spk07: Thank you. Next question today is coming from Ken Goldman from JP Morgan. Your line is now live.
spk03: Hi, thank you. Can we just get a little bit of a clearer sense of what your marketing dollars are expected to look like in the third quarter versus the fourth quarter? Just because there's such a shift, it might help us sort of model that a little more cleanly. I guess I'm curious, where do you expect in terms of categories or brands for some of these dollars to go in the back half of the year?
spk05: Ken, good morning. Just acknowledging that we remain committed to reinvesting in our business and building our brands. We continue to support a 5.5% spend of net sales against our marketing budget. And just acknowledging there was some timing favorability in the second quarter that is trending into the third quarter. we will be slightly above that 5.5% in the quarter as you think about modeling and the flow for the year.
spk03: You raised your outlook for earnings, but not for CapEx or free cash flow. So what's incrementally negative in operating cash flow that's perhaps offsetting that expectation for higher net income that'll keep free cash kind of constant versus your prior expectation?
spk05: Ken, so we maintained our capital expender outlook at $550 million for the fiscal year. Again, the predominance of that is in support of our strategic growth around the Uncrustables brand. And then acknowledging we did not take our free cash flow guidance up. That was largely due to an additional estimated cash tax payment that we forecasted in for the fiscal year.
spk07: Thank you. Next question is coming from Robert Moscow from Credit Suisse. Your line is now live.
spk04: Hi, thanks. Just looking through our Nielsen tracking data, it looked like there was actually a pretty significant slowdown in your single-serve coffee sales. Is that a good reflection of what's going on? And if so, can you talk about the drivers for it?
spk00: Sure, Rob. This is Mark. You know, I think when you look at the total coffee category, coming back to this notion of ensuring that we're addressing all of the needs of consumers, we did see a little bit of a shift as you highlight on KCUP. You know, we watch consumer behavior very closely. There may have been some folks brewing more drip coffee. You know, we don't necessarily view that as a sustainable trend. Obviously, you know, Brewer penetration in the Keurig Brewers has grown significantly over the last several quarters, so we would expect over time that would continue to benefit us. There was a little bit of a deceleration in premium coffee, and that would be across the segment as opposed to, you know, our brands specifically. And so, you know, as again, price gaps in the premium coffee space have continued to close. And so we would expect over the subsequent quarters to continue to see growth for our Dunkin' business as well as our single serve business.
spk04: Okay. And just to follow up, you know, you've said actually I think for several months that you are prepared for an environment where coffee costs fall and you're you're taking more steps in advance to prepare for it. Can you be more specific as to maybe something you're doing differently this time so that the flow through is more seamless?
spk00: Well, the first thing that we've, you know, tried to remind everyone is that we haven't seen record coffee costs like we saw, you know, a decade or so ago. And so the environment as we've managed through it has been, you know, the playbook. has remained the same. We continue to execute against those same activities that we always would, whether that's being very prudent about passing through the pricing, thinking about promotional activity in a normalized way. So in other words, not out of the ordinary. And then very importantly, and maybe most significantly, continuing to invest in our brands even in a period of inflation. And so just, you know, always taking the approach, Rob, of balancing pricing, volume mix, and the ways in which we support our brands, both with the consumer and customer, we've got to continue to take a balanced approach. And that has served us well, and we believe it will continue to do so.
spk07: Thank you. Our next question today is coming from Chris Grove from Steve Boyer Line. It's now live.
spk02: Hi, good morning.
spk07: Morning.
spk02: Good morning. I just had a question for you first on a bit of a follow-up from an earlier question on inflation. Is there any nuance to how much inflation you realize in the second quarter? Is that pretty well in line with what you expect for the year? And if I could just add to that, is pricing offsetting cost inflation on a dollar basis in the second quarter? Have you gotten to that point yet?
spk05: So, Chris, what we would say is that the second quarter did have a higher level of inflation, primarily due to the impact of green coffee. We, in the green coffee space, recovered on a dollar-for-dollar basis that cost inflation, and we put the predominance of our pricing actions in place prior to the beginning of our fiscal year so that we believe that we are recovering our inflation as we come through the fiscal year.
spk02: And that comment then, Tucker, was more than just coffee. Overall, for the company, you have pricing and placed offset inflation. Is that correct?
spk05: Correct.
spk02: Okay. And then just one follow-up question, if I could. I think about the gross margin. And you talked about in a couple areas of your business where you have higher manufacturing costs. I think you mentioned it in coffee and consumer. Is that sort of ongoing supply chain challenges that every company is seeing, perhaps lower volume as well? I'm guessing what I'd like to get to, if I could, would be what degree you're seeing a gross margin drag today from these supply chain challenges? Like how much can the gross margin improve from here if you had a more normalized supply chain environment?
spk05: You know, Chris, as we think about our full year outlook for the gross profit margin at 33.5%. Really, what that reflects is, again, the year-over-year cost input inflation. It reflects the impact of the Jif peanut butter recall. It does have a component of supply chain environment, and it also acknowledges that the volume mix profile of the business has evolved, particularly as you sell more pet food. And so as a result of that, that's all comprised within the gross profit margin guidance. But as we move forward and when we begin to experience cost moderation or even deflation, when we see stability in supply chains, and as we continue to advance the strategy of the company, particularly on the growth front, but also as we bring along continuous improvement programs such as our transformation office, Those will all continue to support the margin profile of the company over time.
spk07: Thank you. Next question is coming from Steve Powers from Deutsche Bank. Your line is now live.
spk01: Yes, thanks. And you may have sort of just addressed this, but I just wanted to clarify, because you cited volume mix, you know, as coming in better just related to your higher top line and dollar-based profit outlook on the year, but you also have cited, you know, that same volume mix is the primary reason for full-year gross margin moving to the lower end of the prior range, just given that inflation and pricing seem largely unchanged on the year. So could you just unpack that a bit more? Is that the mix shift to pet food that you just mentioned, just so we understand the move lower to 33.5% gross margin on the year alongside the better top line?
spk05: I think the 33.5% reflects our best outlook for the back half of the fiscal year and therefore the full fiscal year, acknowledging that as we took up our top line, we took into account the portfolio and the growth across pet and consumer, and that's all embedded in our 27-cent uplift due to volume mix. And again, that's being partially offset by some business investments through SD&A. Okay. Thank you.
spk07: Thank you. Next question is coming from Jason English from Goldman Sachs. Your line is now live.
spk06: Hey, good morning, folks. Thanks for slotting me in. A couple of quick questions. You mentioned your confidence in your ability to hold coffee prices until you see the deflation. Assuming that's a couple of quarters from now, are you happy with where price gaps are today? Or for you to be able to hold for that long, do you need to see competitors continue to raise prices and close the gaps from where they are?
spk00: Jason, for the most part, we've seen the gaps close. As I mentioned in an earlier question, on premium, we're seeing those gaps close now over these last several weeks. And we think that will continue to be the case. And again, a little bit of that shift in the premium space has been indicative of the entire segment as opposed to maybe just our brand. So we think that those competitive gaps will come back in line. as have the gaps have closed meaningfully in the mainstream space as well. So just continuing to leverage, you know, the entire spectrum, the value spectrum of our portfolio will continue to bode well for us.
spk06: Okay. So just to paraphrase real quick to make sure I understood, you've seen the gaps close, but you expect to see them to close further. So you do need further convergence.
spk00: Well, no. Is that correct? I think on the premium, no, no. In most segments, we have seen, and in premium, they have largely closed to the extent that we would expect the competitive dynamics to normalize.
spk06: Got it. And quickly on pet, there's about $1.5 billion worth of capacity coming online in the U.S. in pet next year. How do you expect that to impact the competitive environment?
spk00: Well, first what I would highlight is that there have been, as you know, some supply chain challenges across PAT in general, and that's an industry comment. We have continued to fare very well throughout that dynamic. And our focus has been on optimizing our portfolio, focusing primarily, as you know, on pet snacks and cat food. And the optimization in particular in our dog food portfolio has performed very well and has allowed us to capture value there, as well as experience some stabilization and some moderate growth in the dog food space. Again, you know, at the end of the day, we've got to remain focused on snacks and pet because that's where we have the ability to continue to lead. And then executing the playbook that we've previously talked in our dog food portfolio is yielding fruit.
spk06: Okay. All right. Thanks a lot, guys. I'll pass it on.
spk07: As a reminder, that's star one to be placed into question queue. Our next question is coming from Cody Ross from UBS. Your line is now live.
spk08: Good morning, folks. Thank you for taking our question. Tucker, I just want to go back to one of the responses you gave earlier just around the 12 cent EPS impact from SD&A expenses. I believe that's a shift. Can you just unpack that a little bit more? What is shifting from 2Q to 3Q? And can you just perhaps quantify it a little bit for us? Thank you.
spk05: Cody, the 12 cent impact to the 27 cent top line improvement due to volume mix is largely due to new additional business investments that we are making. An example of that would be in support of our transformation office. And then I would also acknowledge that a portion of our 21 cent over delivery in the second quarter was due to timing of SDNA. And some of that will now transition into the third quarter. So you will have a portion of the incremental 12 cent investment in the third quarter, a portion in your fourth quarter, and then you will have timing from the second quarter of already previously planned STNA fall into your third.
spk08: That's helpful. Thank you. And then just real quick, I want to pivot back to your pet segment. You grew 14% organically, which is quite substantial. but it trailed Nielsen in the quarter by roughly four points based on our calculations and your growth decelerated on a three-year stack basis. What is causing the mismatch between consumption and shipments today? Thank you.
spk00: Well, again, you know, let me just start, Cody, with PetSnacks. You know, we grew in our PetSnacks business at two times the category rate and gained a meaningful amount of share. So, Where our strategy hinges first and foremost on pet snacks, we're very pleased with our performance. And that is a comment that is relative to both our core biscuit business as well as the innovations that we've launched against our snacks, primarily in the premium space. And you can't deny the growth on MeowMix of significant growth in 19 of the last 20 quarters. So where we have focused and really executed our strategy, the portfolio is performing exactly as we would have expected and in many cases had exceeded our expectations.
spk07: Thank you. Next question is coming from Max Comper from BNP Paribas saying the line is not live.
spk09: Hey, thanks for the question. With price increases continuing to hit the shelf and the consumer continuing to feel more of an impact from the economic environment, are you starting to see more significant signs of price elasticities or trade down emerging in any categories? And if so, are there any similarities that these categories share?
spk00: Max, this is Mark. You know, I would start by highlighting that our categories are very advantaged, you know, particularly in the fact that we have, we under index in those categories as relative to private label. And so some of the return or share growth that you've seen in private label is attributable to the fact that those brands had many supply chain challenges during the pandemic. And that supply chain has gotten a bit better for some of the store brands and has allowed them to recapture some of the share that they had lost in the pandemic. But overall, our categories remain extremely strong. Our brands remain strong. And the fact that we provide the consumers with a number of different options across the value spectrum consumers will continue to be able to find brands in our portfolio that meet their budget and deliver ultimately value for them. So we continue to remain very confident in our strategy and our ability to meet consumers' needs across that spectrum. Thanks. And one follow-up.
spk09: You recently reduced the skew count of your smokers' fruit spreads by 30%. in order to position the business for improved profit, opportunities for growth, and continued category leadership. You mentioned in your prepared remarks that velocities are up 40%. Can you discuss what other impacts you've seen from this adjustment so far?
spk00: Well, first, I'd actually like to thank you for highlighting that. That is obviously our namesake business. Of course, it's not our largest business, but You know, over the years, we've had a very significant proliferation of SKUs. And as we looked at that business and got much more strategic about it, realized that we stand to benefit from a significant optimization of the portfolio. And basically what you said came true is that we reduced our SKU count and we saw significant flow back into core items, which has benefited both top and bottom line. And again, it ultimately comes back to a strategy of being focused.
spk07: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
spk00: Well, first of all, I'd like to thank everyone for taking the time on a holiday week early on a Monday morning for being with us. Just really appreciative of the fact that we've had another very strong quarter, and that's a tribute to our employees who, at the end of the day, are responsible for our results and execute tirelessly every day and with a lot of passion. So I really want to thank them for the great results. And then we really look forward to seeing all of you on our Investor Day, which is Wednesday, December 14th, in New York. So for any additional details, you can reach out to Aaron. We wish all of you a very happy Thanksgiving and a great holiday week. Have a great day.
spk07: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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