The J. M. Smucker Company (NYSE:SJM) Q3 2024 Earnings Call Transcript

The J. M. Smucker Company (NYSE:SJM) Q3 2024 Earnings Call Transcript February 27, 2024

The J. M. Smucker Company beats earnings expectations. Reported EPS is $2.48, expectations were $2.27. The J. M. Smucker Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the J.M. Smucker Company’s Fiscal 2024 Third Quarter Earnings Question-and-Answer session. This conference is being recorded. [Operator Instructions] I’ll now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Aaron Broholm: Good morning, and thank you for joining our fiscal 2024 third quarter earnings question-and-answer session. I hope everyone had a chance to review our results as detailed in this morning’s press release and management’s prepared remarks which are available on our corporate website at 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 questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is coming from Andrew Lazar from Barclays. Your line is now live.

Andrew Lazar: Great. Thanks so much. I guess to start, obviously, Smucker delivered 6% comparable sales growth in fiscal 3Q, and I think you expect something similar in the fourth quarter as well. With Uncrustables set to accelerate, as you talked about in the prepared remarks in the fourth quarter, trying to get a sense of what would be the offset or what you expect might slow to get back to that mid-single-digit range in the fourth quarter? Or is there some conservatism built in?

Tucker Marshall: Andrew, good morning.

Andrew Lazar: Good morning.

Tucker Marshall: We are certainly pleased with our third quarter performance. And as you’ve noted, we anticipate the business momentum to continue into the fourth quarter. Specifically to your question, we would anticipate pet to slow down a bit in the fourth quarter, but still continue its momentum across the portfolio.

Andrew Lazar: Got it. And I guess just picking up on that thread, Pet Food comparable sales obviously increased about 20% in the quarter. And even if you take out about 6 points of growth from contract manufacturing, it was still pretty solid double-digit growth on the base within Pet. And obviously, you expect that to slow a bit. But I guess what — was there something anomalous in the third quarter that led to that strength of growth in underlying Pet that doesn’t continue into the fourth quarter or the next few quarters? Thanks a lot.

Tucker Marshall: Andrew, we did see a normalization of our Pet supply chain specifically on Meow Mix in support of manufacturing that was a contributor to the third quarter. And we would still anticipate in the fourth quarter the Pet gross double digits.

Andrew Lazar: Great. Thanks so much. I appreciate it.

Operator: Thank you. Next question is coming from Ken Goldman from JP Morgan. Your line is now live.

Ken Goldman: Hi. Good morning. Thank you. Last week, you mentioned that marketing would be a headwind to earnings next year. I think partly on Hostess and partly on the Base business, I believe. With the understanding that you’re not quite in a position yet to give exact guidance, I was just hoping to get a little bit better sense of the degree or magnitude to which marketing for the total company may rise. And I’m asking especially in light of this year where I think you’re a decent amount below your longer term target range as a percent of sales? Thank you.

Tucker Marshall: Ken, with respect to marketing associated with our Sweet Baked snacks business, we anticipate a step up in marketing in the coming quarters in support of the brand and our excitement of the portfolio and the opportunity to continue to advance and support the growth of the Hostess brands or portfolio. We have contemplated that at the time of acquisition. We have contemplated that as we gave our outlook for this fiscal year. And we’ve contemplated that as we think about what potential contribution Hostess could provide for FY ’25. Certainly, we look forward to providing a little bit more of the detail of what that step up is on our fourth quarter earnings call when we give the outlook for next fiscal year.

Ken Goldman: Okay. I’ll follow-up offline on that one. And then I wanted to ask, maybe I missed this, but transaction and integration cash costs, I think you raised the number by around $20 million for that in terms of your expectation for this year. Can you go into a little bit of why that was increased unless I’m wrong about that. And were these pulled forward from next year, or are they additive to the total deal cost?

Tucker Marshall: Yes. So it’s really a pull forward of some expenses that we had thought would time out into next fiscal year. We have not raised our outlook for the overall transaction and integration expenses. It’s more of an impact of timing.

Ken Goldman: Thanks, Tucker.

Operator: Thank you. Next question is coming from Peter Galbo from Bank of America. Your line is now live.

Peter Galbo: Hey, guys. Good morning.

Mark Smucker: Good morning, Peter.

Peter Galbo: Mark, maybe you could just expand a little bit on your prepared remarks around Uncrustables, specific to the retail channel. I know you had a difficult compare in the third quarter. And obviously, the Away From Home business is growing pretty nicely. But just what gives you the confidence, I guess, that you’ll go from the minus to kind of do a double-digit in the fourth quarter, specifically in retail?

Mark Smucker: Yes. Sure, Peter. Thanks for the question. If I may, I might just start a bit more high level on the total business and then answer your question specifically. I think first and foremost, we feel great about our performance this quarter. We feel that it is, in many ways, a validating moment and our strategic journey. And I know that all of you on the call particularly our analysts, our sell-side community has been very closely watching us over the last 3 years along that journey, they reshape of our portfolio, the building of these capabilities, the focus on execution, the marketing expertise, the selling expertise, the supply chain resiliency, all of those things really, for us, helped to sort of validate that we’ve made the right decisions and choices along the way.

And ultimately, it starts with the consumer and understanding what the consumer wants. So I would like just to take a moment and just highlight how proud we are of these results, the underlying business momentum and that we have — we feel very confident in the decisions that we’ve made and the way that we’ve been able to reshape our portfolio. As it relates specifically to Uncrustables, our confidence in that brand has not wavered. We are on track to start up the McCalla, Alabama facility this calendar year. And we knew that we were lapping of huge comp in the prior Q3 because the long month, Colorado, the second plant expansion was completed. And so we were able to gain a significant amount of distribution in last year’s third quarter. And so obviously, we were lapping that in the retail space.

And in addition, we still saw — in addition to the lap in the retail space, we still saw really good performance in both Canada and very strong performance in the Away From Home space. But I think notably, if you look at consumer takeaway in the quarter, the consumer takeaway remains very strong, which again, helps to support our confidence in the double-digit growth and the reacceleration of the brand as we move forward into the next several quarters. And then I guess just one final point about Uncrustables, remember, we just turned on marketing. So we’ve had great — not only the advertising, both in traditional and social channels, but also the endorsements that we’ve had across some of our professional sports sponsorships and then our ability to continue to gain distribution in all of those channels just supports the confidence in that brand.

Peter Galbo: Great. Thanks, Mark. And Tucker, maybe just to follow-up on the contract manufacturing sales. The number kind of keeps trickling down, I think, a bit quarter-on-quarter. Just you talked a little bit last week on kind of through the first 6 months of next year. But just any more color you can give us as we start to kind of model out that specific piece of it into next year?

Tucker Marshall: Yes. Peter, so we’ve an outlook for this fiscal year, and it’s approximately $140 million. That’s on a 12-month period. As we think about next year, we know that contract manufacturing sales will continue through — largely through the first half of our fiscal. I think the cadence will be able to articulate a little bit better on our fourth quarter fall. But I think it probably makes sense to sort of work with $140 million and think about sort of the front half.

Peter Galbo: Thanks, Tucker.

Operator: Thank you. Next question is coming from Tom Palmer from Citi. Your line is now live.

Tom Palmer: Good morning and thanks for the questions.

Tucker Marshall: Good morning.

Tom Palmer: Maybe just follow-up quickly on the contract manufacturing that Peter asked on. So you’ve taken down your outlook for sales. I think one of the — you talked on some limitations in terms of remediating [ph] stranded costs, whether contract manufacturing, sales are still going on, but you also had a change to your earnings dilution this year, right, to $0.60. So maybe just get an update, are you able to eliminate some of these stranded costs as you think about this year? Because I think last week, there was a little bit of a call out maybe as we look at the back half of the year, moving parts with the contract rolling off having the stranded cost lag. But again, seeing that this year, the accelerated roll off, it hasn’t really impacted that earnings dilution.

Tucker Marshall: Yes. Tom, maybe for awareness purposes, stranded overhead and contract manufacturing sales are independent. So first of all, speaking to contract manufacturing sales, the outlook for this fiscal year today is $140 million. It is essentially at no profit. Those sales will begin to go away halfway through next fiscal year. The removal or the elimination of contract manufacturing sales really does not address stranded overhead. Stranded overhead outlook for this fiscal year is a net $0.60 impact. We had said since the time of divestiture, there would be an impact in FY ’24 and in FY ’25. To date, we’ve not outlined what the FY ’25 impact is other than to note there will be an impact. As you think about stranded overhead, really what is driving that and the predominance of what will need to be addressed is our network, largely driven by distribution.

So as the post volume and/or product leaves our distribution environment, we need to right size that in support of addressing stranded overhead among other activities that we’ve already identified and are beginning to address for the benefit of next fiscal year. And then ultimately, we believe by the time we step into FY ’26, we should begin to have address stranded overhead and begin to get it behind us.

Tom Palmer: Okay. Thanks for that detail. I wanted to maybe clarify some of the costs on Uncrustables. You mentioned the start up costs for 4Q and kind of the full year start up costs. I just wanted to clarify on that, how much the start up costs were in 3Q as we think about kind of the progression into 4Q? And then secondarily, just a step up in advertising, how significant that might be as we think about 3Q to 4Q? Thanks.

Tucker Marshall: So as we think about the Uncrustables venture, there’s three areas where we see incremental costs. One is as we begin to bring the McCalla facility online that becomes an overhead carrying cost. The second component is as we advance the building of McCalla, there’s a preproduction expenses that we’ve also have in our full year guidance. And then last is, we have turned on marketing and so there’s incremental marketing. And a portion of the outlook for marketing, switching from the third quarter to the fourth quarter, is not only due to timing, but you’re also seeing the step up associated of Uncrustables support for the business or the portfolio.

Tom Palmer: Okay. I just was hoping for any quantification, I guess, as we think about kind of the progression 3Q into 4Q, I understood maybe you guys aren’t providing that?

Tucker Marshall: Tom, we are certainly happy to follow-up with you afterwards just to help you round out your model.

Tom Palmer: Got it. Thank you.

Operator: Thank you. Your next question is coming from Chris Carey from Wells Fargo. Your line is now live.

Chris Carey: Good morning. I just wanted to drill down on the Coffee segment specifically. Can you just give a context on how you see brand performance from here across Bustelo and Dunkin’ and Folgers. And also, how you see volume mix versus pricing just given step up in competition, some pricing actions from some of your competitors. And so just any context on how we should be thinking about coffee evolution going forward on — really on a ball mix versus pricing, any comments on the brands?

Mark Smucker: Sure, Chris. It’s Mark. I’d say overall, we feel very good. Obviously, growth, we view will continue to be driven by Bustelo, Dunkin’ and then K-Cups broadly across all brands. Our K-Cup performance in the category — in the quarter, rather, was very good. We outpaced the category. We gained just over 0.5 point of share in K-Cup, and that includes solid performance on Folgers. And then, of course, as we’ve launched liquid, some liquid executions and Dunkin’. Dunkin’ in the shelf-stable coffee aisle has already sort of captured that #2 position in liquid coffee concentrate. And we’re launching similar Bustelo executions in the same format that are coming here in the next — by the end of the fiscal. And so we feel very good about our performance in Coffee.

Folgers is a mature brand, but we are pleased with the performance there as we’ve continued to — our share of voice. We are advertising on all of our brands. And so we have a very strong share of voice there. And so just feeling generally optimistic about the coffee category in total and recognizing that we need to continue to shift and start to own some of the liquid executions as we have, but that segment is going to continue to grow. K-Cups will continue to be a very important part of the segment. And our goal is to continue to move to where the consumer is headed as well.

Chris Carey: Okay. Thanks. And just want to follow-up on the marketing expense in Q4. Obviously, understanding the shift in Q3 to Q4. Can you just perhaps give a little context around what areas of the portfolio will see the marketing step up in Q4? And just in general, where you see the most potential to invest behind the portfolio from a marketing standpoint in kind of more of a medium term perspective, understanding the comments that you made on Hostess last week. Thanks.

Mark Smucker: Yes. It’s — Chris, it’s Mark, again. It’s pretty much across the board in marketing. I wouldn’t say it really — it doesn’t skew to one business or another. I think you can generally apply it, it spreads pretty evenly. I guess I would just remind the group as well that we are committed to continuing supporting our brands through marketing. We — over time and depending on obviously pricing and relative pricing, we still strive to be in that 6% to 7%-ish of net sales. Obviously, it varies a little bit by category. But marketing is really key to our model, and it’s important to maintain a reasonable level of spend to support the brands over time.

Operator: Thank you. Next question is coming from Robert Moskow from TD Cowen. Your line is now live.

Robert Moskow: Hi. Thanks for the question. Actually two. First, Mark, on Hostess. Those of us familiar with that company are used to seeing maybe like one big product innovation that kind of dominates the pipeline. And when I looked at some of the announcements for this calendar year anyway, it seems like more like a couple of little things. So I was hoping you could dive a little bit more into how you view the pipeline this year compared to past pipelines? And then secondly, for Tucker on free cash flow, The guide is down $30 million. You mentioned a couple of things impacting it, one of which was cash taxes, which is, I think, a $40 million increase. Can you go through the puts and takes as to — it looks like from the puts and takes, you might actually be even lower than that 30% guide, given the cash taxes. So what was offsetting it? Thanks.

Mark Smucker: Sure, Rob, it’s Mark. I’ll start on innovation. I think reading between the lines of your question, one of the things that you might have been referencing is [indiscernible], right? Because that was a pretty large innovation and really pleased with the performance on [indiscernible]. It hits on a lot of different consumer insights, if you will, in terms of what — why consumers enjoy that product. I would also just point out that Hostess has been very successful in their innovation of doing iterative innovation. I mean some of that — sometimes that’s seasonal, sometimes that’s variations on flavors, fillings, those types of things. That will continue, that needs to continue. And as I talked about the complimentary capabilities that Hostess team has as well as our legacy team, we view without giving too much way that they’re continuing to be great opportunities for continued growth, innovation being a key driver of growth going forward.

So we won’t be unveiling anything just today, but wanted to just make sure that we are focused on it, the pace of innovation, the cycle times of innovation are still very important and protecting that and fueling it will continue to be a focus for us.

Tucker Marshall: Rob, with respect to your free cash flow question, you’re correct, the outlook for the fiscal year is now $500 million. The change of $30 million is largely driven by the cash taxes, as you have noted, being partially offset by just a little bit stronger earnings and also a little bit more favorability coming across all working capital.

Robert Moskow: Okay. Maybe a follow-up, Mark, on Hostess. I think you fielded a question on Hostess’ pricing. It is down in our tracking data. And then there’s a couple of competitors that were also down, but then there’s another competitor that’s up a lot. Is — can you give more like clarity on what Hostess’ pricing strategy is for the last 6 months or so? And is it achieving its objectives?

Mark Smucker: Rob, just generally, I think that as we look at any of our categories, we want to make sure that we are being thoughtful and prudent about pricing and that we are recovering our costs. And generally speaking, not over recovering. So at the end of the day, we have to be responsible to the consumer, obviously, to our shareholders and making sure that we are doing the right things for the business, where we feel that from a pricing perspective, right now, we are in a good place, that the price is — the pricing is set where it needs to be. And we will continue to compete effectively with the other brands in the marketplace.

Robert Moskow: Very helpful. Thank you.

Operator: Thank you. Next question today is coming from Matt Smith from Stifel. Your line is now live.

Matt Smith: Hi. Good morning. You’ve talked about investing more behind Hostess bringing that advertising and marketing closer to a high single-digit as a percent of sales. And you’re starting that increase, it sounds like in the fourth quarter. Should we think about the path towards your target level as a multiyear step up? Or do you expect to exit next year closer to that targeted investment level?

Tucker Marshall: We do expect to step up over time, and so we may not be completed there in fiscal ’25. It will be a journey.

Matt Smith: Thank you. And a quick follow-up on the Pet sales comment. You talked about growing in the fourth quarter, and I want to make sure, is that growth inclusive of the co-manufacturing sales? And I can leave it there. Thank you.

Tucker Marshall: Correct. My comments around Pet growth were inclusive of the co-manufacturing volume.

Operator: Thank you. Next question is coming from Alexia Howard from Bernstein. Your line is now live.

Alexia Howard: Good morning, everyone.

Mark Smucker: Good morning.

Alexia Howard: Can I ask — there’s been a lot of discussion about the marketing step up. Can I ask where you’re at on promotional activity? Are you anticipating certain parts of the business leaning into promotions more over the coming quarters? And if so, which parts of the business? And I’m wondering how the depth and breadth of promotional activity compares to pre-COVID at this point. Do you still have to get back to those levels? Or where are you in that transition?

Mark Smucker: Alexia, it’s Mark. I think we don’t — we are not seeing anything abnormal in promotional spend. We are generally back to pre-pandemic promotional levels across our categories, the categories and competition, in our view, is behaving normally and rationally. So we don’t see anything out of the ordinary from a promotional standpoint.

Alexia Howard: Okay, great. And then just touching on the state of the U.S. consumer, I think at the CAGNY conference last week, there were a number of companies that said things seem to be improving. U.S. consumer confidence seems to be in a reasonably good place. Are you seeing any sort of glimmers of light in terms of emerging from a rather challenging last calendar year as we move into 2024?