The J. M. Smucker Company
Q4 2024 Earnings Call Transcript

Published: 6 Jun 2024

[Aaron Broholm:]

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 Fourth Quarter Earnings. After this brief introduction, Mark Smucker, Chair of the Board, President and Chief Executive Officer, will provide a business and strategy update. Tucker Marshall, Chief Financial Officer, will then provide a detailed analysis of the financial results and our fiscal 2025 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, 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

[Mark Smucker:]

Thank you, Aaron, and good morning, everyone. Today, I will first summarize our full-year performance and then provide highlights on our fourth quarter results. I will also share why we are confident in continuing to deliver sales and earnings growth in fiscal year 2025, while investing to strengthen our brands and expand our key growth platforms. Tucker will then provide additional detail on our fourth quarter results and next fiscal year’s outlook. Fiscal 2024 was a year of significant progress as we achieved our near-term goals and strengthened our business for the long-term. Our performance reflects topline growth supported by consumer demand for our portfolio of leading brands and bottom line results that exceeded our expectations, including a better than anticipated fourth quarter. Full-year comparable net sales increased 8% with volume/mix growth across all of our U.S. Retail segments and our International and Away From Home businesses. Full-year adjusted earnings per share was $9.94, reflecting a double-digit percentage increase versus the prior year. Our results reaffirm that our strategy is working, as we continue to execute and deliver results in a dynamic consumer environment. Notably, we continued to transform our portfolio to increase focus on the strategy of building brands consumers love and establishing leading positions in the advantaged categories of coffee, snacking, and pet foods. With the acquisition of Hostess Brands, the Company gained leadership in the highly-attractive snacking market. Our entry into this category also amplifies our focus on convenient food and beverage occasions allowing us to meet consumer preferences and needs across all parts of the day. The acquisition also supports the delivery of our long-term financial goals by increasing our scale, profitability, and cash flow. We also refined our strategic priorities to better align the organization

[Tucker Marshall:]

Thank you, Mark. Good morning, everyone. I’ll begin by giving an overview of our fourth quarter results, then I’ll provide additional details on our financial outlook for fiscal year 2025. In the quarter, net sales declined 1%. Comparable net sales increased 3%, excluding the prior year sales related to the divested businesses, current year sales for the Hostess acquisition, and foreign currency exchange. The increase in comparable net sales reflects a 2 percentage point increase from higher net price realization, primarily for Frozen Handheld and Spreads, Pet Foods, and International and Away From Home, partially offset by lower net price realization for Coffee. Favorable volume/mix increased net sales by 1%, primarily driven by Uncrustables sandwiches, contract manufacturing sales related to the divested pet food brands, Café Bustelo coffee, and Meow Mix cat food. This increase was partially offset by Folgers coffee, Jif peanut butter, and Smucker's fruit spreads. Adjusted gross profit increased to $117 million, or 15%, compared to the prior year. The increase primarily reflects a favorable impact from the acquisition of Hostess Brands, lower costs, higher net price realization, and favorable volume/mix, partially offset by the impact of divestitures. Adjusted operating income increased $53 million, or 13%, reflecting the increased gross profit, partially offset by higher SD&A expenses. The increase in SD&A was primarily driven by the acquisition of Hostess Brands, increased investments in marketing, and pre-production expenses related to the new Uncrustables manufacturing facility, partially offset by the impact of divestitures. Below operating income, net interest expense increased $62 million, primarily due to an increase in interest expense related to debt issued to partially finance the acquisition of Hostess Brands. The adjusted effective income tax rate was 23.2%, compared to 23.8% in the prior year. Factoring in all these considerations, along with weighted average shares outstanding of 106.4 million, fourth quarter adjusted earnings per share was $2.66, an increase of 1% versus the prior year. Adjusted earnings per share significantly exceeded our expectations in the quarter driven by better than anticipated gross margin, SD&A expenses, the early realization of synergies from the Hostess acquisition, and the net benefit of several unplanned items in the quarter related to certain pension, interest, and tax matters. Turning to our segment results, in the U.S. Retail Coffee segment, net sales decreased 4% versus the prior year. Net price realization reduced net sales by 2 percentage points, driven by a list price decline for the majority of the portfolio, partially offset by reduced trade spend. Volume/mix decreased net sales by 2 percentage points, primarily driven by the Folgers brand, partially offset by increased contributions from the Café Bustelo and Dunkin' brands. U.S. Retail Coffee segment profit increased 5%, reflecting lower commodity costs, partially offset by lower net price realization, and increased marketing and distribution expenses. In U.S. Retail Frozen Handheld and Spreads, net sales decreased 1%. Excluding non-comparable sales in the prior year related to the divested Sahale Snacks business, net sales increased 1%. Higher net price realization increased net sales by 4 percentage points, primarily reflecting a list price increase to recover increased costs for Jif peanut butter. Volume/mix decreased net sales by 3 percentage points, primarily driven by Jif peanut butter and Smucker’s fruit spreads, partially offset by an increase for Uncrustables sandwiches. U.S. Retail Frozen Handheld and Spreads segment profit decreased 7%, primarily reflecting higher pre-production expenses related to the new Uncrustables manufacturing facility, increased marketing investments for Uncrustables sandwiches, and unfavorable volume/mix. The decrease was partially offset by higher net price realization, primarily due to a list price increase to recover increased costs for peanut butter. In U.S. Retail Pet Foods, reported net sales decreased 42% versus the prior year. Excluding net sales in the prior year related to the divested pet food brands, comparable net sales increased 11%. Volume/mix increased net sales by 8 percentage points, primarily driven by $23 million of contract manufacturing sales related to the divested pet food brands and growth for the Milk-Bone, Meow Mix, and Pup-Peroni brands. Higher net price realization increased net sales by 3 percentage points, primarily reflecting a list price increase for Meow Mix cat food. The Meow Mix, Milk-Bone, and Pup-Peroni brands performed well in the quarter growing 11%, 4%, and 7%, respectively. U.S. Retail Pet Foods segment profit decreased 22%, primarily reflecting the non-comparable segment profit in the prior year related to the divested pet food brands and increased SD&A expenses. Excluding the impact of the divestiture, segment profit increased by a double-digit percentage, primarily driven by lower costs, higher net price realization, and favorable volume/mix. In the Sweet Baked Snacks segment, which reflects the acquired Hostess business, net sales were $337 million and segment profit was $70 million. Lastly, in International and Away From Home, net sales decreased 1%. Excluding non-comparable net sales in the prior year related to divestitures and unfavorable foreign currency exchange, net sales increased 8%. Net price realization contributed a 5 percentage point increase to net sales, primarily driven by list price increases across the majority of the portfolio to recover increased costs, partially offset by increased trade spend. Volume/mix increased net sales by 3 percentage points for the combined businesses, primarily driven by Uncrustables sandwiches and portion control products. Net sales for the Away From Home business increased 12% on a comparable basis, led by double-digit percentage growth for Uncrustables sandwiches and portion control products. Net sales for the International business increased 1% on a comparable basis, primarily driven by Uncrustables sandwiches in Canada. International and Away From Home segment profit increased 28%, primarily reflecting higher net price realization, lower costs, and favorable volume/mix, partially offset by increased SD&A expenses. Fourth quarter free cash flow was $298 million, compared to $299 million in the prior year, driven by the decrease in cash provided by operating activities, mostly offset by a decrease in capital expenditures as compared to the prior year. On a full-year basis, free cash flow was $643 million, with capital expenditures of $587 million, representing 7.2% of net sales. In fiscal 2024, we increased our quarterly dividend by 4%, marking 26 consecutive calendar years of dividend growth. We expect our Board to maintain the Company’s current practice of returning approximately 40% to 45% of our annual adjusted earnings per share to shareholders, reflecting dividend growth consistent with future earnings growth. We finished the year with a cash and cash equivalent balance of $62 million and a total debt balance of $8.4 billion. Our trailing twelve-month adjusted EBITDA is approximately $1.7 billion. When accounting for acquisitions and one-time transaction and integration costs, our proforma adjusted EBITDA is approximately $2 billion, which equates to a leverage ratio of 4.2x. We plan to prioritize debt reduction by paying down approximately $500 million of debt annually over each of the next three years. With this anticipated deleveraging, achievement of cost synergies, and overall business growth, we anticipate a leverage ratio of approximately 3.0x net debt to EBITDA by the end of fiscal year 2027. This level of debt provides the financial flexibility for a balanced approach to capital deployment, while maintaining an investment-grade debt rating, and the flexibility to undertake strategic growth opportunities. Let me now provide additional color on our outlook for fiscal year 2025. We expect full-year net sales to increase 9.5% to 10.5% compared to the prior year reflecting a full-year of sales from the Hostess Brands acquisition, a 1% unfavorable impact from reduced contract manufacturing sales related to the divested pet food brands, and a 1% headwind from lapping sales of the divested Sahale Snacks and Canadian condiment businesses. On a comparable basis, net sales are anticipated to increase approximately 1.5% to 2.5%, including approximately $50 million of contract manufacturing sales related to the divested pet food brands versus $136 million in the prior year, or a 1% unfavorable impact. This reflects the continued momentum for our business and brands, including volume/mix growth for Uncrustables sandwiches, cat food and dog snacks, the Hostess brand, K-Cups, and the Away From Home business. Net sales growth also reflects higher net price realization, primarily due to a list price increase for the Coffee segment to recover increased commodity costs. We anticipate full-year gross profit margin of approximately 38%. This reflects favorable volume/mix, higher net price benefits, the realization of synergies, and cost and productivity savings from our transformation efforts. These benefits will be mostly offset by higher commodity costs and ongoing expenses for the new Uncrustables facility. SD&A expenses are projected to increase by approximately 13%, primarily reflecting a full-year of operating expenses from the Hostess acquisition, increased marketing investments, and higher distribution expense from the new Uncrustables facility. Total marketing expense is estimated to be 5.5% of net sales. We anticipate net interest expense of approximately $400 million and an adjusted effective income tax rate of 24.4%, along with a full-year weighted average share count of 106.4 million. Taking all these factors into consideration, we anticipate full-year adjusted earnings per share to be in the range of $9.80 to $10.20. This guidance range includes a few cents of accretion from the Hostess acquisition, thus recovering the $0.40 of dilution in the prior year. Adjusted earnings per share includes a $0.35 investment to continue to advance the Uncrustables brand. Further, adjusted earnings per share includes a net $0.60 impact related to stranded overhead from the pet food divestiture, representing no impact to earnings growth versus the prior year. In the first quarter of the fiscal year, net sales are anticipated to increase a high-teen percentage, primarily reflecting sales from the Hostess acquisition and volume/mix growth for the business, partially offset by $35 million in reduced contract manufacturing sales. Adjusted earnings per share are expected to decline low-single digits, primarily driven by higher SD&A and interest expense, partially offset by income from the Hostess acquisition. The increase in SD&A is primarily driven by the acquisition of Hostess Brands, incremental marketing investments, and pre-production expenses related to the new Uncrustables facility. We project free cash flow of approximately $900 million, with capital expenditures of $450 million for the year. Other key assumptions affecting cash flow include

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