The J.M. Smucker Company

Q4 2023 Earnings Conference Call

6/6/2023

spk06: Good morning, and welcome to the J.M. Smucker Company's Fiscal 2023 Fourth Quarter Earnings 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 Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.
spk02: Good morning, and thank you for joining our Fiscal 2023 Fourth Quarter Earnings Question and Answer Sessions. 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 jmsmucker.com. We will also post an audio replay of this call at the conclusion of this morning's Q&A session. During today's call, we may make forward-looking statements that reflect our current expectations about future plans and performance. These statements rely on assumptions and estimates And actual results may differ materially due to risks and uncertainties. Additionally, we use non-GAAP results to evaluate performance internally. I encourage you to read the full disclosure concerning forward-looking statements and details on our non-GAAP measures in this morning's press release. Participating on this call are Mark Smucker, Chair of the Board, President and Chief Executive Officer, and Tucker Marshall, Chief Financial Officer. We will now open up the call for questions. Operator? Please queue up the first question.
spk06: Thank you. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your telephone. If you wish to withdraw your question, please press star 2. For operator assistance, please press star 0. As a reminder, please limit yourself 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. And that's star 1 to be placed into question queue. Our first question is coming from Andrew Lazar from Barclays. Your line is now live.
spk04: Great. Thanks so much. Good morning, everybody.
spk00: Good morning, Andrew.
spk04: Maybe to start off, by our math, if we adjust your fiscal 24 guidance for the GIF recall and stranded cost impacts, we come up with underlying EPS growth of about 3% or so at the midpoint. I guess with your expectation for, you know, 9% comparable sales growth and gross margin expansion and such, just trying to get a sense of what might be holding back underlying EPS growth in 24 or, you know, whether there's understandably some conservatism built in given the still dynamic operating environment overall.
spk10: Andrew, good morning. As you've mentioned, we have 9% top-line comparable growth. That is really underlying 4%. organic business growth, along with 3% associated with the Jif peanut butter product recall, and also 3% associated with requirements under a co-manufacturing agreement associated with the recent pet divestiture. As you think of the bottom line, we do see mid single digit underlying organic EPS growth. And I think the one difference where your 3% calculation versus our 5% would be factoring in about 14 cents of one-time benefits that impacted FY23 as we completed the fiscal year.
spk04: Got it. And then you mentioned your expectation for volume growth in every segment in fiscal 24. If we exclude the benefit just getting back from the GIF recall and some of the contract manufacturing that you talked about, would it still be the case that you would expect volume growth in every segment in 24? Correct. Great. Thank you so much.
spk06: Thank you. Next question today is coming from Peter Galbo from Bank of America. Your line is now live.
spk07: Hey, guys. Good morning. Thanks for taking the question.
spk00: Morning.
spk07: Thank you guys for the bridges on slide seven and eight. You know, maybe we could just to circle back on Andrew's question around volume. Again, if you strip out, you know, JIF and PET, and maybe you can discuss a little bit around the Coman agreement on PET. The rest of the portfolio, I think, really only needs to kind of grow volumes low single digits. It would seem like you could get there on Uncrustables alone. So just wanted to unpack that a little bit and see how you're thinking about maybe just that organic piece within the Org Sales guide on volume.
spk10: Yeah, you're definitely seeing the benefits of the expansion of Uncrustables and the organic growth, as you've mentioned. You're also seeing some volume growth in the coffee portfolio. And then you're seeing continued momentum in the pet business as well. And then as it relates to the Jif peanut butter product recall, I think we've talked about that enough, so I won't spend much time there, but I will acknowledge that we do have requirements under the co-manufacturing agreement associated with the pet divestiture, which is largely reallocating volume between the plants that we retained and the plants that we sold associated with those pet brands. That will mostly take place in this fiscal year. There will be some additional co-manufacturing volume that will transition into FY24, but the predominance is really in this fiscal year is we rationalize or reallocate the supply chain and manufacturing network. Okay. Just one correction.
spk07: I think you meant into fiscal 25.
spk10: Correct.
spk07: Got it. Got it. Okay. No, that's helpful. And then on slide eight with the earnings bridge, it looks like your assumptions around cost or I guess COGS inflation may actually be slightly deflationary, and I'm sure there's some to unpack there. But just looking at the implied, I guess, on SD&A, it still seems like that would be relatively prudent or conservative, just given kind of the amount of sales that went out the door. with the divestiture. And so, you know, what's it going to take kind of to get that work down lower, faster, just as we kind of bridge the model. Thanks, guys.
spk10: As it relates to the cost of products goods sold, we're seeing some rate-based favorability in our overall COPS environment, but nothing material to suggest anything from a deflationary standpoint. We still live in an inflationary environment and all of its implications. As it relates to SDNA, you know, on a year-over-year basis, we are seeing the benefit of the divestiture, so down five, but we are making some material investments across our platform in the form of pre-production expenses associated with McCalla, Alabama facility. We're also seeing some investments in marketing, and we're also seeing some investments in liquid coffee. And then we will continue to address stranded overhead in this fiscal year. as it relates to the 60 cents that we acknowledged in our guidance bridge. Great.
spk06: Thank you. Thank you. Next question today is coming from Ken Goldman from JP Morgan. Your line is now live.
spk09: Hi. Thank you. I wanted to ask a couple of things about stranded costs. First, is there a way for us to kind of think about what the gross stranded costs are versus just the net? And second, what's the best way to think about, and maybe this goes back to Peter's question about how to sort of eliminate some of the SDNA over time, but what's the best way to think about the ultimate sort of net headwind on a run rate basis? You know, once the TSA has passed, once your transformation office, you know, maybe has found some additional efficiency. It's just trying to think longer term here, what those numbers might be. Thanks.
spk10: So Ken, good morning. In the near term, you know, we call that a 60 cent impact. If you did the math, it would be roughly an $87 million operating income impact associated to this fiscal year. And really what is occurring is that net impact is total stranded overhead minus TSA or transition services agreement income and reimbursement for certain services and activities. That's resulting in that 60 cents or approximately $87 million in operating income. We will look to address this in fiscal year 24. We will see some lingering impacts into fiscal 25. We're not in a position to comment on that as we work through these agreements along with benefits coming out of our transformation office to address stranded overhead. But in the long run, to your long run point, we look to address all stranded overhead costs associated with this divestiture.
spk09: Okay, thank you for that. And then just to follow up, you know, on that, 60-cent figure, whatever the gross number is, obviously it's higher than that. I think many of us were looking for a little bit of a lower gross stranded cost figure. I think just based on maybe what we've seen or heard about in previous divestitures, is there something unique that would lead to a stranded cost figure that's this high? Or maybe, you know, many of us, including me, we're just kind of mismodeling that as we think about, you know, what a typical stranded cost situation might be.
spk10: You know, Ken, there's a couple of considerations. I don't think there's anything unique here. You know, stranded overhead costs do exist after you divest 20% of your top line. We completed that divestiture at the end of this fiscal year. We do have requirements over the next, this fiscal year and into fiscal year 25 to support these transition services agreements and co-manufacturing agreements. And so we will begin to address that over time in order to relieve the stranded overhead. but we don't see anything abnormal, but there is work to be done.
spk11: Thank you.
spk06: Thank you. Next question is coming from Steve Powers from Deutsche Bank. Your line is now live.
spk08: Oh, hey, thanks. Thanks, everybody. Following up on the 60 cents, just to be clear, so it sounds like you plan to address, or you start to address that 60 cents in the year. So I guess as we think about your guidance, You know, does that embed, you know, 60 cents, you know, or some number less than that? You know, just how do I think about the progress you aim to make in the fiscal year relative to the static 60 cents you called out, you know, in the guidance range?
spk10: So good morning, Steve. The 60 cents reflects our best estimate for the impact to this fiscal year that is embedded in our guidance range. And we will work to relieve that over time and to address it as we move beyond this fiscal year. But it is our best estimate, as I've noted, and it is reflected on our guidance range.
spk08: Okay. So 60 cents reflects the efforts you plan to make to, you know, make progress against those costs in the year. Correct. And there will be 60 cents residual into next year. Okay. Great. Thank you for that. The other question, maybe you could help us with the 20% organic growth or the net sales growth call for the first quarter. I think that's a good number more than many were modeling consensus overall. Maybe the moving parts in there, how much is the GIF contribution, how much is underlying, how much is otherwise? That would be helpful. Thank you.
spk10: Yes, so as you think about that, what you're really seeing in the first quarter is the impact of the JIF peanut butter product recall. You're also seeing momentum in the coffee portfolio as it laps a soft first quarter from a prior year. And then you're also seeing underlying base business momentum and aspects like uncrustables, among others.
spk08: Okay. Is there any way to bucket that or quantify that last bit, just the – the underlying assumption in the first quarter versus the comparison in the GIF, or do you prefer not to?
spk10: With respect to GIF, I mean, we've called out that it's a three-point impact to this fiscal year. It was a two-point impact to prior fiscal year, and the predominance of that hit us in the first quarter. So I think that would be your largest driver in your model.
spk08: Yeah, okay. Thank you for that. I appreciate it.
spk06: Thank you. Next question is coming from Matt Smith from Stiefel. Your line is now live.
spk05: Hi, good morning. Morning. I wanted to ask about the level of promotional activity and innovation you anticipate in fiscal 24. We saw a reduction in more specifically promotional activity over the past couple of years across the industry. You've said you expect a low single-digit contribution from pricing and most of that to carry over benefits. Do you expect a stronger carryover benefit and that's offset by a resumption of a more normal promotional environment?
spk00: Matt, it's Mark. Generally speaking, the promotional environment is very similar to pre-pandemic. In other words, we, competitors are behaving pretty much as expected and rationally. our customer relationships, you know, as we think about promotions and trade spend as one of the levers to affect price and drive both sales and volume, we are not seeing anything out of the ordinary, nor are we seeing elevated trade as it relates to historical, keeping in mind that, you know, different categories behave differently at different times based on their you know, based on the underlying commodity costs or what have you. But fundamentally, we don't see anything abnormal in the promotional environment.
spk05: Thanks for that, Mark. And maybe if I could just a follow-up on the savings from the transformation office. Could you talk about the sources of savings? You expect some benefit to gross margin and SD&A over time. And is there a phasing component to that? the offset of stranded overhead when we think about the phasing of profit growth through fiscal 24?
spk10: We are seeing the benefits from our transformation office due to the success of our team and employees who have begun working through the eight work streams and setting up the various initiatives. And as we've called out today, at EPS level, underlying organic earnings per share growth approximates mid-single digits, or about 5%. And what's supporting that 5% year-over-year growth are benefits from our transformation office. And so it's doing what we intended in support of our near-term and long-term growth expectations. As it relates to the transformation office as well, it will also support us driving initiatives and advancing initiatives to address stranded overhead during this fiscal year and into next fiscal year as well. And that's how we're seeing the benefits from the transformation office today.
spk05: Thank you, Tucker. I'll leave it there and pass it on.
spk06: Thank you. Next question is coming from Cody Ross from UBS. Your line is now live.
spk11: Good morning. Thank you for taking our questions. I just want to go back to the 1Q organic sales guide for it to be up about 20%. Can you give more color here? How does that break down between price and volume? And then any commentary by segment would be helpful because this is much higher than both our and the street's expectations.
spk10: So we're calling out top line growth year over year from a comparable basis of 9%. And again, that breaks down 4% underlying base business growth, organic, 3% JIF peanut butter product recall, and 3% associated with requirements of the co-manufacturing agreement. You know, when we think about the impact, what you're really seeing is about seven points or high single digits of volume mix benefit. and about three points of pricing benefit as well to support that 9% comparable growth.
spk11: And that's for the full year?
spk10: Correct. That's on a full year basis, correct. And then we called out the first quarter being up 20, and that's largely driven by it. predominantly driven by volume mix, which is associated with the business momentum, along with the Jif peanut butter product recall, and has a component of mid-single digit plus in price.
spk11: Got it. Thank you for that. And then I just want to switch over to a question on coffee here. Can you provide the mix of Arabica versus Robusta coffee in your coffee segment? And in that context, spot price for Robusta coffee is up nearly 20%. Philosophically, how do you balance protecting profit dollars and maintaining market share? Do you expect to lean into promotions more going forward or will you try to recover margin? Thank you.
spk00: Hey Cody, it's Mark. Thanks for the question. You know, I would just remind the group that when we think about our coffee business, we are managing that business for the long term and as we think about our hedged position and our physical cost as we bring our hedge, convert our hedge position into physical coffee, we plan and hedge to meet our financial plan. So, you know, just acknowledging that the coffee market has been generally volatile. We have seen sequential improvement in our coffee costs, which should continue through this fiscal year. But we do manage for the, you know, when we think about the cost, we do try to manage for the full year. And our coffee business continues to be extremely healthy in all three of our brands. So we've seen even, you know, premium coffee with Dunkin', which is 100% Arabica. returning to growth as we've adjusted and seen pricing, relative price gaps come back in line to more normalized rates. Folgers continues its strong growth trajectory from a net sales perspective, and then Bustelo is the fastest growing brand in the category. So really pleased with the coffee performance. We haven't and aren't willing to talk specifically about the split between Robusta and Arabica, but we do, again, manage for the long term and are very confident in our ability to do so over the course of this fiscal year.
spk11: Thank you. I will pass it on.
spk06: Thank you. Next question is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.
spk01: Hi, good morning.
spk06: Morning.
spk01: So there's been investor concern about the current dynamics between retailers and suppliers and that retailers may be adopting a harsher stance around pricing. Do you think that this is fair? And how would you characterize the current rapport between suppliers and retailers? And is anything changing on the margin?
spk00: Yeah, Pam, our experience with our retailers, we have outstanding relationships with our retail customers. And as we've navigated through over the course of the next, the last couple of years and multiple pricing changes, we have been able to do so effectively and work with them to really pass along those cost increases in a prudent and justified way. Our categories are very resilient. We have a relatively low incidence of private label in the categories that we participate. And for that reason, they continue to be very important to our retail customers. But again, when we think about any type of negotiations with them, we want to approach those in a in the spirit of partnership, as well as making sure that we work with them to only pass along what is truly necessary and justified, and then within our own four walls, manage our costs accordingly as well.
spk01: Thank you. And just a follow-up question on your input cost outlook for fiscal 24. What's your overall expectation for cost inflation? And can you talk about your commodity cost coverage? And then related to that, just your outlook for gross margin cadence over the course of the year.
spk10: Yeah, so Pam, from a big picture standpoint, we are not seeing material inflation or material deflation. We've seen some rate-based improvement in aspects of our cost profile, but largely in whole on a year-over-year basis. from an overall inflationary rate base, we're pretty consistent. You know, as you think about the flow of margins, you know, over the balance of the fiscal year, or excuse me, over this fiscal year, we will see margin improvement year over year on a total company basis. And we will likely begin to see some margin improvement in each of the quarters as we move forward. But they're generally pretty consistent throughout the year.
spk06: Thanks, that's helpful. Thank you. Next question is coming from Jason English from Goldman Sachs. Your line is now live.
spk03: Hey, guys. Sorry, calling a couple different phone lines. Okay, a few different questions still on the docket here. Let's pick up where we just left off, margin expansion through the year. Based on the very low profitability of the pet divestment, it looks like you should pick up a few under basis points of margin right there. As a matter of fact, the entirety of your gross margin expansion for next year looks like it should be built just simply on that mixed dynamic. Can you confirm and actually go ahead and just quantify what that mixed tailwind is on a gross and even margin line, please? Thank you.
spk10: So we will see margin improvement year over year in our pet portfolio associated with the divestiture, but it will also have the implications of a low margin co-manufacturing agreement, which is required for us to support the transition. And it will also have some of the impact associated with stranded overhead. So we will see both margin and segment profit improvement. but we won't realize the full benefits until we work through both the stranded overhead and the co-manufacturing agreements.
spk03: Okay. And I'm surprised to see you including co-man in organic rather than netting against divestments. How long do those TSM's last? When should we expect that to therefore turn into an organic sales headwind?
spk10: So we have called it out specifically. We acknowledge that on a comparable basis, year-over-year growth for this fiscal year would be 9%. Embedded in that is 4% underlying organic business growth, which does not include the co-manufacturing agreement. We then called out approximately 3% associated with the Jif peanut butter product recall and about 3% associated with the co-manufacturing agreement. As I said previously, we expect the predominance of that volume to begin falling off at the end of this fiscal year because much of it relates to us reallocating volume and brands to facilities that we divested. And so we'll continue to work through that this fiscal year.
spk03: Okay. And then sticking on, Pat, you've cited capacity constraints in CAP. It looks like your capacity constraints pale in comparison to the industry at large. And Mars, who seems to have suffered the worst, appears to be back on much more firm footing, reflecting what we're seeing in Nielsen data. I think their growth was at 42% or something last quad week. This looks like a problem for you in terms of your ability to sustain volume growth as competitors reengage. Are we misinterpreting what we're seeing in the data, or is this indeed a headwind that you're planning for and assuming for in your guidance?
spk00: Yeah, Jason, it's Mark. As we've talked over the last couple years, we've been really proud of our team's ability to navigate through pockets of supply disruption. This is no different, and it is one of them. And our demand for Meow Mix is outstripping supply at the moment. So we actually have already begun, you know, plans are in place. We're investing in both infrastructure and labor to make sure that we can improve efficiencies and increase our throughput. for the long term, and so we would expect that those dynamics to stay with us here through the first half of the year, but we should come out of it after that and be back to a more normalized supply-demand relationship.
spk03: And these dynamics, are you referring to the big surge we're seeing in competitive activity? I guess I'm confused, because I'm asking about competitive activity in the What are the dynamics that you're referring to?
spk00: I'm just referring to our own internal dynamics to make sure that we're bolstering supply to meet the demand that we're seeing on MeowMix.
spk03: Okay. Okay. Thank you.
spk00: Thank you.
spk06: Thank you. Next question is a follow-up from Peter Galbo from Bank of America. Your line is now live.
spk07: Hey, guys. Thanks for taking the follow-up. Just one quick one. Can you just comment on the post shares? You know, like you have a decent chunk, obviously, that I don't think is any kind of blackout period. So just like what the plan is, what the timeline looks like. Thanks very much.
spk10: Peter, as a clarification, we did in both March and May complete a repurchase of 4.7 million shares with the cash proceeds that we received at closing in support of replacing the divested EPS in support of our FY24 guidance. And as you mentioned, we do have about 5.4 million shares of post common stock. And we will over time look to exit those shares on an orderly basis that ensures that we ascribe the value that we deserve against those shares. And so we will continue to look through that during our fiscal year. None of the benefits associated with any contemplated monetization would be embedded in our guidance range at this time. And we would only embed it at that time. once we completed any monetization. But again, I think the important takeaway here is that we'll do this on an orderly basis to ensure that we maximize the value of our position in post.
spk06: Great, thanks. Thank you. I'll now turn the conference call back to management to conclude.
spk00: Thank you, and thank you all for tuning in this morning. Just wanted to reiterate how pleased we are with our performance of the last fourth quarter in the full fiscal year. I mean, the bottom line is our strategy, which we've done an outstanding job of implementing and executing, has allowed us to achieve these results, 13 quarters of exceeding expectations. So we're really proud of that. Obviously, you know, the portfolio reshape, participating in very resilient categories and and doing what we say we're going to do, investing in our brands and executing with excellence have really supported our success. And all of that comes back ultimately to our employees who are phenomenal and have really put in the work to get it done. And so we are committed to continuing the momentum and providing a solid and consistent shareholder return. Thank you all for your support. Thank you for listening, and I hope you all have a great rest of your day.
spk06: Thank you, everyone. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
Disclaimer

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