J M Smucker Co
NYSE:SJM
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J M Smucker Co
Earnings Call Analysis
Q1-2024 Analysis
J M Smucker Co
The company aims to maintain a balanced performance with a mid-single-digit top line growth, specifically targeting the halfway mark between mid to low figures. This ambition is assertive based on their first-quarter over-delivery, primarily driven by Savings and Administrative (SD&A) expenses. Yet, investors should note that the bulk of these expenses will reoccur in the subsequent quarters. Hence, the initial surges won't directly translate into a full-year spike.
The company has been resilient against ongoing inflationary pressures, successfully passing on increased costs to customers through strategic pricing, particularly within their consumer foods segment. This pricing stability, while still navigating an inflationary environment, indicates strong brand power and pricing flexibility, which might serve as a good financial moat in tumultuous times.
A relief on the commodity cost front has allowed the company to sharpen price points on certain coffee brands. This strategic move isn't just reactive but is proactive, as it has been implemented recently and is expected to influence business positively moving into future quarters, hinting at a potential competitive edge in the coffee segment due to adaptive pricing.
The pet segment is experiencing a mix of demand elasticity and some consumer trade-down, particularly in the treat category. However, the company's beloved Milk-Bone brand continues to exhibit strength, an indication that while there might be shifts within the category, the company's diversified range from premium to value-oriented products could withstand consumer trends and keep sales strong.
The company is confident about its balance sheet, reaching a particularly robust position, potentially on track to hit the lowest leverage ratio in nearly a decade by fiscal year-end. Such a strong financial position hints at the possibility for significant capital deployment opportunities, such as strategic acquisitions, hinting at an aggressive growth strategy while maintaining a strong financial buffer.
Despite seeing favorability in Selling, General and Administrative expenses (SG&A), particularly in corporate-related expenses, the company has chosen to reinvest in supporting their brands, signaling a dedication to long-term brand equity over short-term expenditure reductions.
The company reported incremental cost favorability, prompting it to revise full-year gross profit margin guidance from 36.5%-37% to now about 37%. This upward adjustment is attributed to cost improvements across several categories such as commodities, transportation, manufacturing, and distribution, positioning them well for a financially robust year.
Notably, there's an intent to leverage gross profit improvements by reinvesting in marketing and sustainability initiatives. These strategic investments, particularly in liquid coffee, are expected to maintain segment profit margins in the high-20s. This displays the company's commitment to sustainably growing its business while still returning value to shareholders.
While the company did not adjust free cash flow guidance upwards, the rationale behind it was the additional cash taxes incurred due to robust performance in the previous fiscal year and anticipated activities in the current one. Investors should consider this a prudent and conservative approach to financial forecasting.
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Good morning. This is Aaron Broholm, Vice President, Investor Relations for the J.M. Smucker Company. Thank you for listening to our prepared remarks on our Fiscal 2024 First Quarter Earnings. After this brief introduction, Mark Smucker, Chair of the Board, President and Chief Executive Officer, will give an overview of the quarter's results and an update on strategic initiatives. Tucker Marshall, Chief Financial Officer, will then provide a detailed analysis of the financial results and our updated fiscal 2024 outlook. Later this morning, we will hold a separate live question-and-answer webcast.
During today's discussion, we will 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, please note, we will refer to non-GAAP financial measures management uses 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.
Today's press release, a supplementary slide deck summarizing the quarterly results, management's prepared remarks and the Q&A webcast can all be accessed on our Investor Relations website at jmsmucker.com. We invite all interested parties to join us at 9:00 a.m. Eastern Time today for a live question-and-answer session with management to further discuss our first quarter results and outlook for the full 2024 fiscal year. Please contact me if you have additional questions after today's question-and-answer session.
I will now turn the discussion over to Mark Smucker.
Thank you, Aaron, and good morning, everyone. In the first quarter, our momentum continued across our businesses as we delivered a positive start to the fiscal year. Consumer demand for our iconic brands, combined with our focus on execution, increased marketing investments and disciplined cost management drove double-digit comparable sales and earnings growth in the quarter. Growth was strong across all our businesses, reflecting ongoing execution against our proven strategy of leading in the coffee, consumer foods, dog snacks and cat food categories.
Comparable net sales in the first quarter increased 21%, which was in line with our expectations, driven by volume growth across each of our U.S. Retail segments and our International and Away From Home business. Favorable net price realization also contributed to net sales growth, primarily due to the carryover of pricing actions implemented in the prior year to recover increased costs across our portfolio. Price elasticities continued to be modest across our portfolio and remained below historical levels.
There are several factors impacting the comparability of our first quarter net sales versus the prior year, including the favorable impact from the Jif brand, primarily due to lapping the product recall in the prior year and contract manufacturing sales related to the divested pet food brands. Excluding these favorable items, our portfolio achieved comparable net sales growth of approximately 6.5% versus the prior year, including volume growth in each business segment.
Adjusted earnings per share was $2.21, an increase of 32%. Earnings per share results benefited from improved gross profit margins and favorable SD&A expenses. Our first quarter results and continued business momentum gave us confidence to raise our adjusted earnings per share guidance. We have increased our full year expectations for adjusted earnings per share to be in the range of $9.45 to $9.85, which reflects a 3% increase across the range versus our prior outlook. Tucker will provide more details on our updated fiscal 2024 guidance.
Turning to our business segments. In Coffee, net sales grew 5%, driven by volume/mix growth across all brands. This growth underscores the advantages of our broad coffee offerings across various formats and price points. Our Coffee portfolio, which now features 3 of the top 7 at-home coffee brands grew dollar share more than any other branded manufacturer for the ninth consecutive quarter.
Our portfolio continued to outpace the Coffee category with the 3 fastest-growing leading brands in the quarter, Cafe Bustelo, Dunkin' and Folgers. We expect our strong momentum in Coffee to continue as we increase marketing investments behind our brands and pass through a moderation in commodity costs that will provide consumers with increased value and some relief from inflation. This is consistent with our historical practice of passing through lower coffee costs while successfully maintaining profit margins and dollar profit.
Cafe Bustelo net sales grew 22% with volume/mix growth of 19%. Cafe Bustelo is the fastest-growing national brand in the mainstream, one cup and instant categories with consumer takeaway up 18% in the quarter. Cafe Bustelo also captured more share growth than any other leading brand in both dollars and volume during the quarter.
Folgers also continued its momentum with net sales increasing 6%, driven by volume/mix growth. Folgers continues to maintain its strong volume position of over double the nearest branded competitor and has returned to volume share growth in the last month.
The Dunkin' brand achieved both dollar and volume growth in the quarter. Price gaps to competitors have continued to narrow and planned promotional investments supported volume growth as the recent premium category trade down dynamic has moderated. We expect continued volume growth for the Dunkin' brand supported by our recently announced price decline.
We recently launched Dunkin' Cold Brew Concentrate and we are very pleased with retailer acceptance. The concentrate is currently available in black and pumpkin spice flavors at leading retailers. Coffee concentrate is highly convenient for consumers as it requires no brewing equipment and allows for easy customization of the strength of the coffee. We look forward to bringing more no-brew innovation to the at-home market as we continue to make investments and explore opportunities in the fast-growing liquid and cold coffee segments.
In the one cup category, our brands grew 2x the category average during the quarter. Our brands achieved the top 3 volume share gains among all leading brands as our portfolio realized double-digit volume growth in consumer takeaway. Overall, the coffee category continues to remain resilient as the pandemic-driven increase in at-home consumption remains sticky and over 70% of all coffee drinking occasions continue to be at-home.
Turning to our Consumer Foods business. Net sales grew 49%, including a 43% benefit from Jif peanut butter, primarily due to lapping the product recall in the prior year. Net sales also benefited from strong growth for Smucker's Uncrustables frozen sandwiches and Smucker's fruit spreads. Net sales for Smucker's Uncrustables frozen sandwiches grew 11%, primarily driven by double-digit volume mix growth. Total company net sales of Uncrustables Sandwiches were approximately $180 million. We anticipate the rate of growth to accelerate for the balance of the fiscal year as the total brand is expected to grow net sales of approximately 20% for the full year to over $800 million.
This growth will be supported by our initiatives to turn on demand drivers to further increase household penetration, including advertising and in-store activations. We believe we can significantly increase household penetration for Uncrustables as our peanut butter and fruit spreads products maintain household penetration of nearly 3x the current level for Uncrustables.
We remain confident in growing Uncrustables to a $1 billion brand with the completion of our third manufacturing site in McCalla, Alabama. Construction is on track and is expected to provide increased production capacity in calendar year 2025. With this expanded capacity, Uncrustables has significant runway for continued growth.
In peanut butter, the Jif brand has fully recovered as we lapped the recall in the prior year. Jiff has returned to the #1 brand in household penetration, #1 in dollar, unit and volume share. And Jif has 7 of the top 10 selling SKUs in the peanut butter category. We will continue to drive growth for the brand as we bring innovation to the category. This month, we launched Jif in a portable squeeze format, which is an on-the-go snack that can be clipped on to backpacks or other convenient locations. This is an extension of our successful Jif Squeeze products that are driving incremental growth in the category.
Peanut butter is an attractive category as consumers are increasingly seeking affordable sources of protein. This is driving category trade-in that is providing outsized benefits for Jif as the #1 brand in the category.
In Pet Foods, comparable net sales increased 22% versus the prior year, including a 14% benefit from contract manufacturing sales related to the divested pet foods brands and strong growth for Meow Mix cat food and Milk-Bone dog snacks. In dog snacks, the Milk-Bone brand grew net sales 10% as volume/mix and net price realization each contributed 5%. Milk-Bone continued to outpace the category with consumer takeaway up over 13% and grew nearly 2x the category rate. The Milk-Bone brand continues to drive growth through core offerings and premium positioned innovation.
Mainstream dog snacks are driving category growth through favorable price per ounce economics and consumers' desire for value. Biscuits and soft and chewy offerings have generated the largest dollar share growth in the dog snacks category over the last year. Our portfolio benefits significantly from this as we are the #1 manufacturer in both categories.
In biscuits, Milk-Bone has a 62% dollar share and grew over 2 points of share in the quarter. And in soft and chewy, we are the #1 manufacturer with twice the dollar and volume share of the nearest competitor, and we grew over 2 points of dollar share in the quarter. Meow Mix brand net sales grew 13%, and demand continued to exceed our production capacity for dry cat food in the quarter. Following recent out-of-stocks due to supply constraints, we have begun to replenish retailer inventories. The brand has begun to recover share and Meow Mix Original Choice is again #1 in dry cat food based on volume consumption. We expect continued improvement in supply catching up to demand through the second quarter.
Our Pet segment results this quarter demonstrate the benefits of our recent pet food divestiture as profit margins improved nearly 200 basis points over the prior year, driven by improved product mix. We anticipate margins to further improve over time after we fulfill contract manufacturing requirements and mitigate stranded overhead costs related to the recent divestiture.
In addition to the strong performance of our U.S. Retail businesses, momentum continued in our Away From Home business as comparable net sales increased 21%, inclusive of a 12% benefit from Jif peanut butter, primarily due to lapping the recall in the prior year. Growth was driven by portion control, fruit spreads and Uncrustables sandwiches.
Late in the first quarter, we expanded distribution of Uncrustables sandwiches and Away From Home channels. The expansion includes convenience stores, micro markets and other grab-and-go immediate consumption food service locations. As distribution in these channels accelerates, we expect over 20% net sales growth for Uncrustables sandwiches in our Away From Home business for the remainder of the fiscal year.
Overall, our first quarter results demonstrate the strength of our brands and our continued business momentum, which supported market share gains across our portfolio. Brands that are growing or maintaining share accounted for 79% of our U.S. Retail sales in the first quarter, up from 57% in the prior quarter and 75% during the same period a year ago. Our strong market share performance reflects the ongoing and incremental marketing investments in our brands and serves as a testament to the success of our commercial model.
In summary, I would like to highlight a few key points. We had a strong first quarter, including volume growth in each of our U.S. retail segments and our International and Away From Home business. The momentum for our brands remains strong, and consumer loyalty remains high. The categories we play in continue to be resilient and have relatively low private label exposure in comparison to the total store. The breadth of our portfolio provides an advantageous position in the current macroeconomic environment as we provide consumers options ranging from value to premium offerings. And the bold actions to reshape our portfolio over the past few years have positioned our company to deliver increased shareholder value over the long term.
As we look ahead, we are well positioned to adapt to consumer preferences, execute with excellence and sustain the momentum for our business, all of which are powered by our unique culture and dedicated employees who I would like to thank for their outstanding contributions.
I'll now turn it over to Tucker to go over our quarterly financial results and fiscal year 2024 outlook in more detail.
Thank you, Mark. Good morning, everyone. I'll begin by giving an overview of first quarter results, then I'll provide additional details on our updated financial outlook for fiscal year 2024. Net sales decreased 4%, primarily due to the lost sales from the divested pet food business in the prior year. Comparable net sales increased 21%, excluding the prior year sales for the divested business and foreign exchange. The comparable net sales increase reflects an 11% favorable impact from Jif peanut butter primarily due to lapping the product recall in the prior year and a 3% favorable impact from contract manufacturing sales in the current year related to the divested pet food brands.
The increase in comparable net sales was due to favorable volume mix of 13%, with growth across each of our U.S. Retail segments and our International and Away From Home business. Items favorably impacting the year-over-year volume mix increase include lapping the temporary unavailability of Jif peanut butter in the prior year and contract manufacturing sales in the current year related to the divested pet food brands. Excluding these 2 items, volume mix increased low single digits, driven by coffee, Uncrustables sandwiches and Milk-Bone dog snacks.
Comparable net sales growth was also supported by an 8 percentage point increase from net price realization, primarily due to the carryover of pricing actions implemented in the prior year to recover increased costs across our portfolio and the favorable impact of lapping customer returns and fees related to the Jif peanut butter product recall in the prior year.
Adjusted gross profit increased $57 million or 10% compared to the prior year. The increase reflects a favorable net impact of higher net price realization and increased costs and favorable volume mix, including the benefits from lapping the impact of the Jif peanut butter product recall. Gross profit also reflects the unfavorable impact from foregone profits related to the divested pet food brands. Adjusted operating income increased $62 million or 23%, reflecting the increased gross profit and favorable SD&A expenses, partially offset by lapping the insurance recovery in the prior year from the Jif peanut butter product recall.
Below operating income, net interest expense decreased $7 million, primarily due to an increase in interest income, reflecting higher interest rates as compared to the prior year and a decrease in interest expense related to the company's commercial paper program as there were no outstanding balance at the end of the quarter. The adjusted effective income tax rate was 23.6% compared to 23% in the prior year.
Factoring in all these considerations, along with share repurchases that decreased weighted average shares outstanding to 102.8 million. First quarter adjusted earnings per share was $2.21, an increase of 32% from the prior year.
Turning to our segment results. In U.S. Retail Coffee segment, net sales increased 5% versus the prior year. Favorable volume mix increased net sales by 4 percentage points, with growth across all brands in the portfolio. Net price realization was neutral in the quarter. Net sales growth was led by Folgers and Cafe Bustelo, growing 6% and 22%, respectively. The Dunkin' brand declined 4%, primarily driven by planned promotional investments in the quarter.
U.S. Retail Coffee segment profit increased 17%, primarily reflecting decreased commodity costs and favorable volume mix. In U.S. Retail Consumer Foods, net sales increased 49 percentage points versus the prior year, including a 43% favorable impact from the Jif peanut butter product recall, primarily due to lapping the product recall in the prior year. Volume/mix increased net sales by 28 percentage points, primarily driven by Jif peanut butter and Uncrustables sandwiches. Higher net price realization increased net sales by 22 percentage points, primarily reflecting the favorable impact of lapping customer returns and fees related to the Jif peanut butter product recall.
U.S. Retail Consumer Foods segment profit increased 93%, primarily reflecting the net favorable impact of lapping the Jif peanut butter product recall and favorable volume/mix for Uncrustables sandwiches. Excluding the impact related to Jif peanut butter, the net impact of increased costs and higher net price realization was unfavorable.
In U.S. Retail Pet Foods, net sales decreased 40% versus the prior year. Net sales increased 22%, excluding noncomparable sales in the prior year related to the divested pet food brands. Volume/mix increased net sales by 12 percentage points, primarily driven by $51 million of contract manufacturing sales and the Milk-Bone brand. Higher net price realization increased net sales by 10 percentage points, driven by list price increases in the prior year across the portfolio to recover higher costs.
U.S. Retail Pet Foods segment profit decreased 32%, primarily reflecting the noncomparable segment profit in the prior year related to the divested pet food brands, increased marketing investments for the remaining brands and increased distribution costs, partially offset by a favorable net impact of higher net price realization and increased costs and favorable volume/mix.
Lastly, in International Away From Home, net sales increased 17%, including a 12% benefit from Jif peanut butter, primarily due to lapping of the product recall in the prior year. Excluding noncomparable sales in the prior year related to the divested pet food brands and unfavorable foreign currency exchange, net sales increased 22%. Volume/mix increased net sales by 14 percentage points for the combined businesses, primarily driven by portion control and peanut butter products. Net price realization contributed an 8 percentage point increase to net sales, primarily driven by list price increases across the portfolio, partially offset by increased trade spend.
The Away From Home business, net sales increased 21% on a comparable basis, primarily driven by the Jif and Smucker's portion control. Net sales for the International operating segment increased 24% on a comparable basis, primarily driven by Jif peanut butter, coffee products and Uncrustables sandwiches, which recently launched in Canada. International and Away From Home segment profit increased 119%, reflecting favorable volume/mix, primarily due to the favorable impact of lapping the Jif peanut butter product recall in the prior year and a favorable net impact of higher net price realization and increased costs.
First quarter free cash flow was $68 million compared to negative $127 million in the prior year, driven by an increase in cash provided by operating activities, partially offset by a $62 million increase in capital expenditures. The increase in cash provided by operating activities was primarily due to less cash required to fund working capital, lapping a $70 million pension contribution in the prior year and increased earnings, including lapping the impact of the Jif peanut butter product recall. The increase in capital expenditures was driven by the capacity expansion for Uncrustables sandwiches at our McCalla Alabama facility.
In the first quarter, we repurchased approximately 2.4 million common shares, which settled for $372 million. We finished the quarter with cash and cash equivalent balances of $241 million and a total debt balance of $4.3 billion. Based on a trailing 12-month adjusted EBITDA of approximately $1.7 billion, our leverage ratio stands at 2.6x.
In the first quarter, we began entering into derivative transactions to facilitate the forward sale of shares of post common stock received from the pet food divestiture. All 5.4 million shares of our post common stock were hedged during, and subsequent to, the first quarter. We will receive cash proceeds of approximately $466 million in the third quarter of this fiscal year.
We anticipate using the proceeds to pay down debt and maintain a strong balance sheet and an investment-grade debt rating. This is consistent with our balanced capital deployment model, which includes strategic reinvestments in the business through capital expenditures and acquisitions while returning value to shareholders through dividends, share repurchases and debt reduction. In the first quarter, we increased our quarterly dividend by 4% from $1.02 to $1.06.
Let me now provide additional color on our outlook for fiscal year 2024. Ongoing inflation, supply chain challenges and the overall macroeconomic environment continue to impact financial results and cause uncertainty and risk for the fiscal year 2024 outlook. Any manufacturing or supply chain disruption as well as changes in consumer purchasing behavior, including the potential impact to volume due to pricing and broader macroeconomic conditions could materially impact actual results. We continue to focus on managing the elements that we can control, including taking the necessary steps to minimize the impact of inflation and any potential business disruption. This outlook reflects performance expectations based on the company's current understanding of the overall environment.
We continue to expect comparable net sales growth of approximately 9% at the midpoint of our guidance range compared to the prior year, demonstrating continued momentum of our business and brands. This reflects volume mix benefits across all 3 of our U.S. Retail segments and our International and Away From Home businesses. Net sales growth also reflects higher net price realization, primarily due to pricing actions to recover increased costs across our portfolio, mostly in the prior year, partially offset by a decrease in net price realization for the U.S. Retail Coffee segment.
We now expect contract manufacturing sales related to the divested pet food brands to contribute approximately $160 million in net sales, which is approximately $25 million less than our original estimate. We are increasing our full year adjusted gross profit margin expectations to approximately 37%. This reflects our outlook for some cost favorability versus our original expectations.
We continue to project SD&A expenses to be favorable by approximately 5% at the midpoint of the guidance range, primarily reflecting reduced expenses associated with the divested business, partially offset by approximately $40 million of preproduction expenses related to the Uncrustables capacity expansion, increased marketing spend across the remaining businesses and investments in liquid coffee. Total marketing expense is estimated to be approximately 5.5% of net sales.
We now anticipate net interest expense of approximately $135 million, a reduction from our original projection driven by higher interest income. The full year adjusted effective income tax rate is now anticipated to be 24%, along with full year weighted average share count of 102.5 million, which reflects share repurchase activity in the months of March and May and remains unchanged from our original expectations.
Taking all these factors into consideration, we anticipate full year adjusted earnings per share to be in the range of $9.45 to $9.85. At the midpoint of the guidance range, this reflects an increase of approximately 8% compared to the prior year, inclusive of an approximate 7% headwind related to the net impact of stranded overhead from the pet food divestiture. We continue to anticipate the net stranded overhead impact to be approximately $0.60, inclusive of income and reimbursements from transition services and co-manufacturing agreements.
We anticipate second quarter comparable net sales to increase a mid-single-digit percentage and adjusted earnings per share to increase a low single-digit percentage compared to the prior year. We continue to project free cash flow of approximately $650 million, with capital expenditures of $550 million for the year. Capital expenditures remained elevated due to capacity expansion for Smucker's Uncrustables. Other key assumptions affecting cash flow include depreciation expense of approximately $220 million, amortization expense of approximately $155 million, share-based compensation expense of $30 million, other noncash charges of $40 million and cash tax payments of approximately $75 million that are incremental to tax expense.
In closing, our first quarter results demonstrate the continued momentum for our business and brands, and we remain confident in our strategy and ability to deliver on the commitments we outlined today. We are in a strong financial position to deliver sustainable and consistent long-term growth for our shareholders. I would like to express my appreciation for our employees. They have demonstrated their commitment to executing with excellence and their passion for our company positions us for continued success.
Thank you.