J M Smucker Co (SJM) 2024 Q4 法說會逐字稿

Good morning, and welcome to The J.M. Smucker Company's fiscal 2024 fourth-quarter earnings question-and-answer session. This conference call is being recorded. (Operator Instructions)

I'll now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining our fiscal 2024 fourth-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 question.

(Operator Instructions) Andrew Lazar, Barclays.

Thank you. Good morning, everybody.

Good morning, Andrew.

Hi, maybe to start off, in the slide presentation, you mentioned your expectation for both positive volume and pricing in fiscal '25, and I realize some of the pricing factor is the pass-through nature of coffee, but it's still -- the positive volume and price combination is not something that we're obviously seeing or hearing a lot of, at least, yet from a number of others in the packaged food space.

So I guess I'm just trying to get a sense of -- as you put together your plan for the coming fiscal year, I guess, what gives you that level of visibility that underpins -- particularly on the volume side, given that you're also expecting some positive pricing?

Andrew, good morning. As we noted on our prepared remarks, at the midpoint of our guidance range, we're demonstrating comparable growth of 2%. Inclusive in that 2% comparable growth year over year is a 1 point pet contract manufacturing headwind. So we really see base business growth around 3%. And within that, we're seeing 2 points coming from volume mix and 1 point coming from pricing.

And when you think about the momentum of our portfolio, we continue to see great growth in the frozen handheld aspect of the portfolio led by Uncrustables. We continue to see momentum and cat food led by Meow Mix and also momentum in dog snacks with Milk-Bone. We're also seeing a level of opportunity or growth in our away from home channel as well. And those really began to be the key contributors to that top line performance.

Thank you for that. And then just a quick one. You finished the year with the EPS around $9.94, and at the midpoint, you're looking for EPS around $10, so close to flattish year over year. You called out a $0.35 headwind from investment in Uncrustables, $0.40 benefit from the recapture of Hostess dilution, so those largely offset each other. And you mentioned no impact to EPS growth year over year from stranded costs.

So I guess the net of the one-off items seem relatively neutral to EPS in '25. So I'm trying to get a better sense of, I guess, why the EPS would be flattish despite -- you're looking for solid comparable sales growth. That would include also some volume and price. So I'm just curious if I have that right? And what would be driving a more flattish EPS growth outlook in light of that? Thanks so much.

Yeah, Andrew, the way that you've outlined the formula for year-over-year growth is correct and it doesn't imply a flattish base business growth. We are going to see a level of growth out of our pet portfolio and our away from home and international portfolio, but that's really being offset by some softness that we're seeing in the coffee and peanut butter aspects of our portfolio. And so that's demonstrating the impact to the flattish year-over-year base business.

Ken Goldman, JPMorgan.

Hi, good morning, and thank you. And Aaron, thanks for all your help over the years. We will miss you for sure. I wanted to ask a little bit about the comment that 2025 will be an investment year. Just trying to dig a little bit deeper into what these investments are. You did mention the $0.35 for Uncrustables. Curious if we could learn a little bit more about what some of those are and how recurring they are.

And then just to broaden it out, it seems that marketing as a percentage of sales will be very similar year on year. I'm just curious why it wouldn't go up a little bit more, given what you're saying about it being an investment year and what you said previously about ramping up Hostess' ad spending? Thank you.

Hey, Ken. It's Mark. Good morning. So just a couple of things. We have been consistent over the last couple of years talking about our aspiration to continue to invest in our brands. Tucker can speak specifically to the total marketing, but it will be up slightly as a percent of sales this year. But I would call out that the investment is largely in Uncrustables, right?

And the way I would encourage us all to think about that is we are moving from a supply-driven growth to demand-driven growth, which requires brand building. And so we are now fortunate to be able to turn on brand building and those investments in Uncrustables are largely supporting the brand through marketing, which is a national television and digital campaign to really drive household penetration and trial.

There is a component that is in promotion and merchandising. This is not price. But it is really to support Uncrustables down the frozen aisle to drive awareness and trial and ultimately household penetration. And then there's another component issues related to start-up expenses at the McCalla, Alabama facility.

And Ken, with respect to marketing, our outlook for marketing year over year is up $50 million at the total company level. About $20 million of that is base business increase year over year, largely led by the Uncrustables growth or investment. And then the balance of that is just the inclusion of sweet baked snacks on a full-year basis as you think about that year-over-year marketing change.

That's helpful. I guess my follow-up would be, given that you are raising prices in coffee, given that overall, your pricing will be up and we're in somewhat of a challenging consumer environment, I think, it's fair to say. Is it enough, right?

Do you feel that you are investing enough in pet food marketing, in coffee marketing, in peanut butter. I'm asking because some of your peers have talked about investment years also. It just feels to me like it's a little more focused where you're putting your advertising in '25. And maybe just curious how you feel about that level given those consumer issues we're facing.

Yeah, great question, Ken. If focus is a good word, I might use the word, balanced. Just making sure, as you point out, consumers in certain segments, particularly like coffee and peanut butter, have been seeking a bit of value. And so that has created some competitive environments, which we think will likely normalize over time.

But we view it as our responsibility to be prudent and balanced in terms of where we invest supporting the brands. Obviously, we just had a very significant innovation that's now in market with peanut butter chocolate, Jif, and we're supporting that with a national advertising campaign.

And so just again, we want to make sure that we're taking the high road and that our investments in our brands are balanced and that -- and we feel very confident that our marketing plans are solid for the full year.

Peter Galbo, Bank of America.

Hey, guys. Good morning.

Morning.

Maybe to start, I mean I think if I go through the guidance, (technical difficulty) relates to Hostess. I think what's embedded in there is that Hostess actually grow sales for the year, at least embedded in the guide. And just kind of given where sales have been trending through the first quarter, that would seem to be maybe a bit of a challenge. So maybe you can help us reconcile that either through phasing or just how you're thinking about specifically the Hostess piece of it within the guide for the year.

Yes. So Peter, we have called out about a 9% contribution from Hostess to our FY25 topline outlook. And when you do the math, it's going to imply that Hostess is going to be around $1.4 billion of top line sales in fiscal 2025.

And so as we see that in our first couple of quarters, it will be sort of around flattish to slightly up. And then as we get into the third and fourth quarters, you'll see some continued growth year over year or quarter over quarter.

As we think about the portfolio, we're still very pleased with the acquisition, not only strategically, but the way that it's contributing to some of the near-term objectives that we have. And as we see the pattern of growth over time, not only a little bit of stabilization and maybe restoration in the convenience channel, but our ongoing work with our traditional US retail partners to continue to support that portfolio and then continued opportunity and optimism around just revenue synergies in fiscal '25 and beyond. I think we'll continue to be positive for the overall momentum of Hostess.

I might add -- Peter, it's Mark. Just the integration is going very well. Obviously, we still remain really excited about the brand. It's obviously a leading brand in sweet baked snacks. Also just a comment that sweet baked snacks is still performing a little better than overall snacking.

And so that trend, along with obviously brand support, merchandising support, our innovation pipeline, and Tucker has alluded to some joint merchandising with other brands and just expanding the brand into some of our existing channels, all bode well for that brand over time. So just still feeling very positive about that. And the cultural fit between our two businesses has been great. And again, the integration is going very well.

Okay. Thanks for that. And then maybe, Mark, I think in your prepared comments, there was a line about being above algorithm from a growth perspective on EPS in fiscal '26. Just maybe if you can kind of unpack, what gives you the confidence that after an investment year here that you're going to be able to be above a longer-term algorithm as you get into fiscal '26?

Yeah, Peter, as we think about fiscal '26, what gives us confidence in that outlook is just ongoing base business momentum. We think about the opportunity to advance cost and productivity savings to get another year or full realization of synergies from the Hostess acquisition, to get beyond or relieving stranded overhead, and also see the ability to pay down debt as a way to continue to give us growth and EPS confidence for fiscal '26.

Chris Carey, Wells Fargo Securities.

Hi. Thank you for the question. So just first, and then I have a follow-up. On the outlook for gross margin, you should see some tailwinds for the removal of the contract manufacturing and yet 38% gross margin outlook for the full year, can you just unpack your expectations there?

Yeah. So our outlook for fiscal '25 gross margin is 38% on average for the full year. We are seeing the benefits of our cost and productivity savings. We're seeing the benefits of some early synergies. We have begun to review and address stranded overhead.

Obviously, the divestitures have been supportive to gross margin, but I want to acknowledge that the gross margin is a little bit muted this year because of the implications of price and cost in our coffee portfolio as we've been recovering inflation through green.

And secondly, we're also seeing a bit of an impact come through the Uncrustables portion within frozen handheld and spreads, largely due to bringing on the McCalla facility. And so we exited with a 28% margin, which was better than anticipated in fiscal '24, and we're carrying that into fiscal '25 -- excuse me, just as a clarification, 38%.

Yeah. Okay, great there. And then just a follow-up on the coffee pricing, can you expand on what's embedded for a coffee pricing, the size of the pricing, and perhaps the scope of the pricing within your portfolio, for example, is this only on roast and ground? Or is it across your entire coffee business and including single-serve and the rest? Thanks.

Yeah, just staying at the highest level, we have seen inflation in green coffee, both within the Robusta bean and also the Arabica bean. We've largely taken pricing on more of the mainstream aspect of our portfolio. It doesn't necessarily include the premium or single-serve side of the portfolio. And again, it's a recognition of the increase in our cost basket and the way that we pass along pricing in both inflationary and deflationary environments.

Robert Moskow, TD Cowen.

Hi. A question about coffee. I think you're guiding coffee to a down year for profits, and you also called out some competitive intensity in Folgers. Typically, you manage your profit pool pretty stable. Prices go up in line with the underlying commodity costs.

Is it fair to say that profits have to be down in fiscal '25 because the competitive environment has become tougher? Why would profits be down this year? Typically, you've managed coffee profits flat.

Yeah. So Rob, from a year-over-year perspective, within the coffee segment, we are going to see top line growth, largely driven by the pricing actions. Volume will be softer year over year. As we think about just overall profitability in the portfolio, we are seeing it around flattish.

That's largely just driven due to the dynamics of increased costs and the price recovery and then the impact of elasticity. And then we continue to support the portfolio through marketing overtime as well. And that kind of frames in a little bit of the year-over-year change.

I'll just pause and let Mark talk to some of the category dynamics.

Yes, sure. Rob, just a couple of things. Number one, just acknowledging that the consumer is behaving a bit more cautiously. There's been some trade around, if you will, up and down in the category. The causes of the consumer has -- seems to have activated a bit more competitive intensity in the category.

But again, as my earlier comments, we're going to continue to do what we think is right for the category. Feel that type of activity will normalize over time as it usually does. And we will continue to do what we need to do, which is invest in the business, support our brands, raise prices in a cautious and prudent way when we need to, and continue to shift our portfolio to grow, just like we did with moving into K-Cups and the partnership with Keurig, and now focusing a bit more on some of our liquid and cold offerings. We're going to continue to do those things, and again, allow our portfolio to provide consumers with what they need across the entire spectrum of value.

Okay. And regarding the comparison in the second quarter to the $39 million penalty that you absorbed, supplier penalty, is that an easy comparison in second quarter coming up or is it kind of like a cost of doing business?

We experienced one-time supplier payment in the second quarter of last fiscal year. We really offset that with other levers in the portfolio in support of delivering the full fiscal year. And so it really doesn't have a material benefit to this fiscal year, as we move forward. It just enables us to restore some of that spend that we pulled back against in order to absorb that impact in FY24.

(Operator Instructions) Matt Smith, Stifel.

Good morning. Mark, you talked about shifting the Uncrustables brand into a demand-driven growth environment versus supply constraint. We've seen a fairly linear growth pattern as supply came on supporting the growth.

And as you look to add, call it, $200 million in revenue over the next two years, should we think about that being fairly steady? Or is there some growth phasing as you build up the investments around creating that demand-driven environment?

Yeah, Matt, we have -- our view is that it will be relatively steady. We have brought on capacity, and we'll continue to do so, which will support largely in line with our demand growth. And then our investments in the brand are really aimed at again increasing awareness and household penetration.

There still has runway there. You know, it's always surprising to us to hear that some consumers still don't know what an Uncrustable is, and so there is opportunity continuing to reach new consumers through some of the traditional brand building and merchandising tactics. And that's really what we're aiming to do.

Thanks, Mark. And Tucker, you talked about -- a follow-up question on lower contract manufacturing sales for pet. You talked about a 1 point drag for the year, that's about $75 million or so. You've $35 million in the first quarter. Can you talk about phasing of the remaining $40 million as we move through fiscal '25?

It's a little more indexed in the first six months or the first half of the year, and then it levels off in the back half of the year. So I would say your [promise] is going to come in the first half and then the balance will come in the second half.

Tom Palmer, Citi.

Good morning, and thanks for the question. I wanted to actually follow up on your two answers to Ken earlier. I think if we look at the Uncrustables investments, the $0.35 works out to roughly $50 million. And then you indicated that the base business marketing would be around $20 million. So could we just bridge what kind of the difference is between the $50 million in Uncrustables versus total marketing being up $20 million? And then you've noted $40 million in Uncrustables investments around start-up in fiscal '24. Is there a point where some of these costs start to unwind perhaps in fiscal '26? Thanks.

So Tom, as you think about that $0.35 investment, directionally, you're correct that it would equate to about $50 million. There's really sort of three areas that we continue to support. One is the manufacturing aspect, which is two components. It's the startup or preproduction costs, along with the unabsorbed overhead. And so that's one component.

The second component is the increase in marketing to support the brand development of Uncrustables that Mark spoke to. And then the third is all around this merchandising, promotion, and trial that Mark also shared as well. And that's really what's driving the $50 million or $0.35 investments.

We will continue to invest behind this brand in fiscal '26 and beyond. But what happens is as we begin to get favorable manufacturing absorption or contribution margin coming from the McCalla plant as we get more salable sandwiches as we bring production online and it helps us absorb those costs.

Okay. Thank you for that. And then just wanted to ask on COGS and pricing, outside of coffee, anything notable to call out in terms of COGS and then any kind of pricing actions to consider elsewhere in the portfolio or maybe not?

Tom, it's Mark. No, actually, it's really where we're seeing the activity and the volatility has been in the green coffee space. And at this point, you never say never, but what we're seeing is generally our costs holding relatively steady over the coming months.

Rob Dickerson, Jefferies.

Hello. Tucker, maybe just a quick clarification question on the stranded overhead costs for the year. I feel like previously, right, there was a discussion around, let's say, the potential for those costs to ease maybe as you get to the [right when there are] certain areas you could control before you exited the co-manufacturing agreement. And then there are areas that you really can't, I guess, draft or attack until after you exit it.

So I'm just curious, as we think about the full year, could there be less of those costs as we get through those -- excuse me, through the year? That's one. And then two is just -- could there be areas such that maybe the costs you're speaking to today could potentially be a little bit better than (inaudible) now. Thanks.

So Rob, we've outlined today in our prepared remarks that we have a net neutral impact of stranded overhead year over year. So the $0.60 impact from last year is the same $0.60 impact in this fiscal year. About halfway through this fiscal year, we'll kind of move on from the transition services agreement with Post Holdings.

And the area that we'll begin to address post that timeframe is really around our distribution or network environments that enables us really to pull those levers to address stranded overhead for fiscal year '26. At this stage of the game, I don't see any benefits to stranded overhead based on our outlook that $0.60 impact this year, meaning no impact year over year is really the best outlook. And it really aligns to how the teams will address stranded overhead for the benefit of fiscal year '26.

Okay, got it. And then just the follow-up is, as you spoke to '26, it's still a long way away, but not that far, being potentially above the long-term algo, which I think is high-single digit. It's kind of the fair assumption there is that part of that, or like you say, the conviction to provide that comment would be driven partially by some benefit of the shared overhead relative to year plus outlook on the base business? Thanks. That's it.

Rob, that's correct. As we think about fiscal year '26, a benefit or tailwind should be leaving stranded overhead.

Max Gumport, BNP Paribas.

Thanks for the question. Was retail commentary over the last several weeks about pricing rollbacks. I was just curious if you could talk about what you're seeing on this front and how you'd characterize the pricing environment.

Max, here, it's Mark. And I was expecting that question. So remember, we know we've got really great partnership with our retail customers and almost a dozen category advisor shifts across our categories. So generally speaking, we're seeing our relationships and our partnerships with our retailers as business as usual and continuing to manage and use the levers that we have in front of us, whether that's different types of trade or merchandising and promotions, making sure that we're being transparent with those customers.

Obviously, you've heard us talk a little bit about the price increase on coffee and then largely seeing our cost basket hold steady, at least for what we can see over the next several months. So from our perspective, it's really been business as usual. And we have not seen undue pressure to take additional pricing down because quite frankly, the cost basket just simply doesn't justify that.

Great. And then my follow-up is trying to tie together a few of the last question for you on the call, which is around the cost you lapped in 2Q in terms of that $39 million impact and $0.29 impact to EPS. It sounds like it's not an easy lap because you also restore some marketing this year. If that's the case, why is the base business marketing -- I think, it was $20 million, now going up by even more. Is there any anything I'm missing there, in terms of is the restoration of coffee marketing? Is that also in that base business marketing number you've discussed? Thanks. I'll leave it there.

Yeah. So Matt, I think the framework that you have is correct. We're definitely lapping the one-time supplier payment. We pulled levers in fiscal '26 to offset that for the benefit of delivering the fiscal year. Some of those activities or items are coming back in this fiscal year, largely in support of the business.

Coffee marketing will be maybe flat to slightly up year over year. I wouldn't necessarily read into that. We always are sharpening the pencil on our marketing spend and making sure that it's the most efficient. We have other investments that we do make within the portfolio as well.

And then lastly, as we continue to support the entire portfolio of The J.M. Smucker Company in terms of reinvesting in our brands, and we're doing that throughout the portfolio. You'll not only see that in coffee, you'll see it in frozen handheld and spreads within pet. And then you'll also see that in the sweet baked snacks segment as well.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Well. thank you, and just appreciate everyone joining us this morning. And I just wanted to acknowledge we had a great year and that has energized our teams. Our people continue to do just amazing work, and we continue to remain in a very strong financial position to deliver profitable growth and increase shareholder value all the way through this year, and then obviously, feeling good about the following year '26.

I did want to just take a moment to thank Aaron Broholm. He has just been a fantastic partner over these many years, and so he will definitely be missed. And we want to support Aaron in his future endeavors.

So just wanted to take a moment to thank Aaron and welcome Crystal, who is in the room today. Crystal is going to do a great job. And I'm just very pleased with this team, not just this team in the room, but every one of our employees and the work that they do every day.

So thank you and have a great day and hope everyone enjoys their summer.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.