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 9:00 am Eastern Time today for a live question-and-answer session with management to further discuss our fourth quarter results and next year’s outlook for fiscal year 2025. I will now turn the discussion over to Mark Smucker.

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

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.

Operator:

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

Tucker Marshall:

Andrew, 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.

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.

Operator:

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

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.

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.

Operator:

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

Mark Smucker:

Good morning, Peter.

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.

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.

Operator:

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

Tucker Marshall:

Good morning.

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.

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.

Tucker Marshall:

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

Operator:

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

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.

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.

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.

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.

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.

Operator:

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

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.

Tucker Marshall:

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

Alexia Howard:

Good morning, everyone.

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?

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?

Alexia Howard:

Great. Thank you very much. I will pass it on.

Steve Powers:

Hey, thanks. Hi, Mark. Hi, Tucker.

Steve Powers:

Tucker -- good morning. So Tucker, I don't want to beat a dead horse, but I do want to go back to the stranded overhead, the conversation you were having earlier, and just play it back to you. I think a lot of the confusion on this point comes from -- I think it was Slide 9 in your CAGNY deck when you gave a number of fiscal '25 considerations. The way that slide reads is that is it's a year-over-year impact, right? So all of the considerations on those slides are pluses and minuses relative to -- it seems to '24. Stranded overhead is a negative. And it's confusing because as you said earlier, contract manufacturing and stranded overheads are independent considerations. And while there should be stranded overhead carryover from '24 before it's fully rationalized in '26 and beyond, I guess I'm struggling from what you said earlier to see how it is worse than '25 than in '24. So maybe you can just kind of -- maybe I'm misinterpreting either the slide or your comments earlier, but just talk through how to think about stranded overhead specifically, if you could. Thank you.

Steve Powers:

Yes, it does. So I think that -- so let me just -- so it sounds like the plug is that when you talked earlier about contract manufacturing, being essentially a zero margin activity. You weren't including in that all of the other income considerations that you just spelled out. Fair?

Steve Powers:

Understood. Very clear. Thank you so much.

Operator:

Thank you. Our next question today is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.

Mark Smucker:

Good morning.

Mark Smucker:

Pam, I would love to tell you the number or the direction for next fiscal year, but that would be inappropriate until we finish our planning process. So unfortunately, we'll have to do that on the fourth quarter earnings call. I'm sorry.

Tucker Marshall:

As we ramp up Uncrustables production in McCalla, we will continue to see an impact associated with carrying overhead and a level of preproduction expenses we are still refining what that estimate will be. But the great thing about McCalla is it will be producing saleable sandwiches for the benefit of fiscal year '25. As you think about our transformation office, we continue to be very pleased with our initial year where we've stood up the office where we've created almost 10 active work streams and support of cost and productivity savings in support of realizing synergies associated with the Hostess acquisition and also in support of addressing stranded overhead associated with the divested pet food brands. And the exciting thing is it's not only contributing dollars for reinvestment back into the business, but it's supporting our earnings and earnings growth and delivery, but it's also enabling new ways of working for our employees and cross-functional teams to really deliver great benefits to our company and organization.

Tucker Marshall:

Thanks.

Rob Dickerson:

Great. Thanks so much. I don't mean to -- I'm just kidding. I just want to ask you a kind of broader question on Coffee. I guess, Mark, when we think historically the coffee business is always very strong. It's been a consistent performer, operating margin kind of most of the time, let's say, the majority of the time historically was coming in a little bit north of 30%. Totally understand at that point in time, input costs were a bit lower. But now I look at the business and think, okay, well, I mean Cafe Bustelo is clearly doing extremely well. Dunkin' is still strong with new innovation platform. Folgers still take volume share to the largest brand. So it seems as if the business itself is in a good position, I mean, even on a relative basis across the category, you're investing a little bit in price, but still pass-through category. I'm just trying to right-size kind of like how you're thinking about that margin profile, but just even say broadly speaking over the next couple of years, vis-à-vis kind of volume and price, right? Because volume is strong and pricing comes through usually kind of in a pass-through business, I would think there would be some fixed cost leverage that would allow you to start to recover kind of back to that 30%-plus profile, or just not there yet. So just curious as to how you're thinking about that. Thanks.

Rob Dickerson:

Okay. Fair enough. And then if I could just ask a fairly simple kind of dumb down question. In the Frozen Handheld and Spreads segment, you've clearly outlined kind of the revenue [indiscernible] per year over the next -- I mean, this year and then over the next 2 years. So for modeling purposes, right, it's easy enough to say, okay, well, let's take what they finish this year in the segment and add $100 million, right? That's Uncrustables, it seems like you have decent visibility on that. Are there any other puts and takes in that segment that could potentially get that segment, let's say, higher than that incremental $100 million that you've already defined on Uncrustables and partially speaking to the innovation coming from Jeff and then I don't know if they're offsets on spreads. That’s all. Thanks a lot.

Rob Dickerson:

All right. Great. Thanks so much.

Max Gumport:

Hi. Thanks for the question. First one is on Coffee. So on volume mix, it looked like it came in a bit better than we might have expected based on tracked channel trends during the quarter. I was hoping you could unpack the mix impact versus volume, and then also what you were seeing in tracked channels versus non-tracked channels? And how are those factors [indiscernible] your view on the fourth quarter? Thanks.

Max Gumport:

Thanks. And then on circling back to a slide you put up at CAGNY last week. So you laid out two tailwinds and three headwinds for your top line. Three of those are more -- are not related to organic, two of them are, so continued brand momentum and inflationary pressures impacting consumers. Realize you're not giving guidance yet for FY '25, but as we think about those two factors, is there any reason to think one outweighs the other? I'm really just trying to get a sense for how that continued brand momentum could or could not be offsetting the inflationary pressures impacting consumers? Thanks. I will leave it there.

Operator:

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.

Operator:

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

Operator:

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

Operator:

[Operator Instructions] Our first question today is coming from Andrew Lazar from Barclays.

Tucker Marshall:

Andrew, so underpinning our comparable net sales growth of 8.5% to 9% after isolating the co-manufacturing volume and the Jif peanut butter product recall, we are still anticipating 4 points of top line growth. And within that 4 points is 3 points of volume mix and 1 point of price.

Tucker Marshall:

So Andrew, the $650 million reflects calendarizing the Hostess performance on the Smucker fiscal year. The second component is it reflects the time of ownership since the transaction closing. And so there is 1 week of lost sales in the 6-month period. We approximate that to be about $25 million. And then also, we are assuming the business in a bit of a seasonality or a period of low across October, November, December and January, as you think about the holiday season, the holiday bank. And then also as you think about New Year's resolutions, so I think you would want to account for that in your annualization. And then lastly, there's a few transitory dynamics that the company is working through. One, it just relates to competition and competition's return to supply on shelf. And two is some dynamics with the customer around getting product from the back of store on to shelf. And so those will restore here in the coming months and will also support the annualization. But as we've noted in our prepared remarks, we are committed to the top line growth of 4% for this portfolio and we do see growth in fiscal '25 and accretion from the bottom line standpoint as well.

Ken Goldman:

Just to follow up on the comment that was just made about competition. Just so I understand a little bit more clearly that competitor, I assume we're talking about McKee; they've been back on shelf for over a year now. Their supply chain issues we're lapping the recovery there. So I'm just curious a little bit why this would be new or something that would be cited as sort of a, I guess, a nonrecurring headwind and also it doesn't really go away, I assume, it's going -- something that's going to be there for a while. So I just kind of wanted to make sure I understood that comment a little bit.

Ken Goldman:

Okay. And then can you walk us through a little bit of sort of how you see the cadence of gross margin for the rest of the year? Obviously, we can kind of back into the implied rough number but you had your, I think, in 6 years on an adjusted basis, you talked about pricing, lower coffee cost and volume mix that helped. But your guidance implies that it will be a little bit lower in the back half which also, I think, suggests that maybe some of what helped 2Q was somewhat nonrecurring. So just curious, is that the right way to think about it? And if so which of those benefits to 2Q might fade a little bit or I am thinking about that the wrong way?

Operator:

Next question is coming from Robert Moskow from TD Cowen.

Tucker Marshall:

So Rob, the outlook for segment profit for the Sweet Bank Snacks is approximately $150 million of segment profit contribution or about $1.11 from an EPS standpoint. Yes, we did soften that based on top line but we expect that to restore as we move forward beyond this fiscal year. There are a few opening balance sheet items incorporated in there that offer about $0.05 impact to segment profit. And we continue to support the Hostess organization with reinvestment in the business in order to support the brand growth and development.

Mark Smucker:

Rob, it's Mark. First of all, where there was maybe a bit of a hiccup on the customer side, the teams have largely worked through that. And so as we approach our next fiscal, we would expect that issue to abate and are very confident there. As I mentioned in my earlier comments, where we continue to be very excited about the business is just from a macro standpoint, the consumer continues to snack, right? And there are -- consumers are eating at more times a day, often one of those snacks is a sweet snack. So that supports, obviously, the Hostess business but it also supports things even like Uncrustables and coffee, where folks may choose a sweet coffee beverage at some point in the afternoon. So we're very confident in the consumer environment around snacking but specifically to Hostess where they have a lot of great capabilities is their cadence of innovation. They have the ability to be very agile in terms of the way they approach different times of the year, sometimes seasonal, their abilities around net revenue optimization and the way they merchandise products. So those capabilities are in part what drove us to have Dan as a leader over both Hostess and pet because there are some -- those are things that are similar to our pet snacks business, the merchandising, the NRO and the innovation cycles. So we feel very confident in those capabilities. And we also like, of course, their expertise in C-store which over time, will benefit the broader Smucker portfolio. So just a great complementary fit at a time when our base business is performing exceptionally well. And so just, again, feeling very confident about the way this deal has come together.

Peter Galbo:

Tucker, in the detail you gave around kind of the twin impact for the rest of the year. The one thing I didn't notice was just did you clarify what you thought purchase accounting was going to be to kind of the gross margin, maybe at least in the third quarter. I don't know if that carries forward but anything you can do to help us there?

Peter Galbo:

Okay. Got it. And then maybe more just a bigger picture question. I think if you kind of back out the impact of the supplier termination in coffee. Your margins in the quarter would have been north of 30% for that business. And just curious, with the lower coffee cost flowing through, just any direction you can give us on how you're thinking about coffee segment margins kind of on the go forward here for the rest of the year?

Operator:

Next question today is coming from Matt Smith from Stifel.

Tucker Marshall:

Yes. So as we came into our second quarter, the midpoint of our guidance range was $9.65 and we had approximately a $0.10 over delivery in our second quarter which was largely a result of improved gross profit margins along with some other SG&A favorability and we've locked that $0.10 into the guidance range. In the back half, we also see an additional $0.10, again, largely driven by the improvement in our outlook for gross profit margin that enabled us to capture another $0.10. So absent the impact of the dilution associated with the Hostess acquisition, the midpoint of the guidance range is $9.85 which demonstrates 10 points of growth.

Mark Smucker:

Matt, it's Mark. It's predominantly a sales component. And keep in mind, this is something that we're going to be working on over time and time, I mean, over a year-plus time period. And so we have begun that journey. We have a venture team that is very engaged in the liquid coffee space, both with some of our smaller Bustelo, single-serve options but more recently with some multiserve, shelf-stable Dunkin' cold brew items that you can find in the normal coffee aisle. So we're at the early days of our liquid coffee journey, acknowledge that it is an important journey and that we will continue to expand our offerings in liquid which include in the -- later in the fiscal year, some offerings in the Bustelo. So it is going to be modest contribution in the near to medium term but we are committed to that journey and we'll continue to look to ways to expand our liquid coffee presence in the across the entire grocery space.

Jason English:

Congrats on the strong quarter. Sticking on coffee. What type of supply agreement did you terminate and why?

Jason English:

RTB [ph] or the innovation stuff.

Jason English:

Got it. Okay. And your coffee portfolios performed pretty well in the last couple of years. You've had good momentum. In that context, I'm surprised by the leadership transition. So can you talk about what's driving the choice to put new leadership on top of the business and what you expect the new leadership to do differently?

Operator:

Next question is coming from Rob Dickerson from Jefferies.

Tucker Marshall:

Yes, Rob, the way that we're thinking about it is, if you isolated this fiscal year's impact of the Hostess acquisition which we've approximated to be $0.40 dilution and you looked at base Smucker, we would anticipate a level of EPS growth for base Smucker year-over-year. And then we would anticipate Hostess also contributing a level of accretion to the company as well. So hopefully, that gives you some context. And what gives us reason to believe in the Hostess accretion for next year is a full year of ownership as we see business growth and delivery as we begin to realize our synergy outlook. And as we think about the impact of paying down debt and therefore, reducing some interest expense.

Mark Smucker:

Yes, Rob, thanks for the question. First of all, promotional activity, just one quick comment there is generally normal, right? It's sort of as expected, business as usual. And our categories are performing generally as we would expect from a promotional environment standpoint. On a marketing and advertising standpoint, we do expect our marketing spend to be up in the remaining 2 quarters of the year. And we have been very pleased with the performance of our marketing efforts. One notable one is that we just launched in the first time in over a decade, our Uncrustables advertising which actually launched during Monday Night Football a couple of weeks ago between the Eagles and the Chiefs. And so that has been a fantastic launch and we expect it to continue to drive awareness for Uncrustables which surprisingly not every consumer has heard about or tried Uncrustables. So we believe that's going to help continue to drive demand and household penetration. So just one quick example there that we're really excited about.

Mark Smucker:

I just want to thank you all for your time this morning. We had another fantastic quarter and just really pleased with the base business and the timing of us absorbing this new fantastic business which is Hostess. It's really been an exciting couple of months, a busy couple of months but none of it would be possible without the outstanding Smucker and Hostess employees and really just want to thank them for their continued hard work and dedication to their company and your company and looking forward to continuing to create great shareholder value for you, our investors. Have a great holiday season and thank you for listening.

Operator:

Good morning. And welcome to The J.M. Smucker Company’s Fiscal 2024 First Quarter Earnings Conference Question-and-Answer Session. This conference call is being recorded and all participants are in listen-only mode. Please limit yourselves to two questions and require if you have additional questions. I’ll now turn the conference over to Aaron Broholm, Vice President of Investor Relations. Please go ahead, sir.

Operator:

Thank you. [Operator Instructions] Our first question is coming from Andrew Lazar from Barclays.

Tucker Marshall:

Andrew, good morning, this is Tucker. You are correct. As you began to break down our 9% comparable growth guidance, that 4% does have 3 points of volume/mix growth, largely driven by Uncrustables coffee, Milk-Bone and Meow Mix and then the 1 point of pricing, as you have noted.

Andrew Lazar:

Got it. Thank you for that. And then just lastly, pet sales growth was a bit below what we’d modeled. I guess I’m curious, how did it compare to your expectations? And if sales were a bit slower, I guess, what’s driving the weakness? And was it contract manufacturing-related or something else? Thank you.

Andrew Lazar:

Got it. And just the decline is -- what would drive the decline in the co-man sales?

Operator:

Thank you. Next question is coming from Peter Galbo from Bank of America.

Tucker Marshall:

Peter, good morning. We delivered our quarter in line with our expectations. And let me break this down for you. On a reported basis, we were down 4%. But as you isolate the impact of the pet food divestiture, on a comparable sales basis, we would be up 21%. Embedded in that 21% is 11 points of Jif growth or restoration primarily due to lapping the peanut butter recall. The second component would be the required co-manufacturing agreement or growth of 3 points. That leaves base business growth of 6.5 points for the quarter. And within that 6.5 points, we saw approximately 2.5 from a volume/mix standpoint and 4 points from net pricing.

Tucker Marshall:

Yes. It’s the math associated with the divestiture impact on a reported basis year-over-year.

Mark Smucker:

Yes, sure, Peter. It’s -- first of all, we’re really pleased with the Uncrustables growth. Keep in mind that we had -- we’re lapping a really strong Q1 last year as well as we had a very strong prior quarter, which happened as a result of us really getting completely off allocation. So the momentum on Uncrustables is actually really strong, and we expect growth to continue to be around that 20-ish percent for the full year. And what’s driving it is, of course, some expansion into new channels. I mean, Canada is so far very -- very relatively small but great customer acceptance there, some other expansion into Away From Home. But I think probably most notably is the fact that we have just a lot of runway on household penetration. If you look in my prepared remarks, just talking about peanut butter and jams and jellies being 3x the household penetration of Uncrustables. So there’s plenty of runway there. And we’re turning on advertising and other in-store activations. They are really, for the first time, going to start driving demand and pulling through the network. So, just very positive on Uncrustables still and expect to hit around $800 million for the year in sales.

Ken Goldman:

Just following up on your commentary that for the second quarter, like-for-like sales should be up mid single digits and EPS up low single. Just as we think about modeling the quarter, are there any unusual tailwinds or headwinds to consider? I guess, how do we think about the specific cadence of your contract sales on pet in the quarter? Are there any lingering benefits from lapping the Jif recall that may bleed into 2Q? Just wanted to get a sense of anything we should think about just as we’re modeling as precisely as we can.

Ken Goldman:

Got it. That’s helpful. Thank you. And then just to follow up on your comment about SD&A. You previously guided, I think, to roughly even expense on that line item each quarter this year. Obviously, 1Q came in light. As we think about the next few quarters, should each of them be roughly the same? I guess, it’s around $355 million implied, or there -- might there be a little bit more lumpiness as they sometimes, so?

Ken Goldman:

And should we just model that in evenly, barring any other information?

Operator:

Next question is coming from Matt Smith from Stifel.

Mark Smucker:

Yes. I think, Matt, we are seeing pricing offset current inflation in our consumer foods business. I think generally, across our entire business, pricing is relatively stable. We would consider ourselves still in an inflationary environment. We have had some -- we’ve sharpened our price points on coffee and passed some of that through to customers and consumers. And so, that will help coffee in our future quarters as well. But generally speaking, whether it’s consumer or the business in total, we have recovered inflation.

Mark Smucker:

There’s a -- a pretty short answer is generally no. We have not seen significant deflation across the industry.

Pamela Kaufman:

Just wanted to dig into the coffee outlook a bit more. Can you talk about your strategy for coffee pricing this year given the favorability in coffee costs and how to think about the outlook for promotions versus potential list price changes? And I guess, generally, what are your expectations for segment growth? And how should we think about pricing versus volumes for the balance of the year?

Pamela Kaufman:

And then, just on the pet segment. Can you talk a bit about what you’re seeing in the consumer behavior in the pet category? We’ve heard from some of your competitors that consumers are exhibiting increasing demand elasticity and some trade-down in pet, particularly when it comes to treating. Obviously, Milk-Bone sales were still strong in the quarter. So just curious to hear what you’re seeing in the dynamics in the category.

Operator:

[Operator Instructions] Our next question is coming from Rob Dickerson from Jefferies.

Mark Smucker:

Rob, it’s Mark. Yes, we feel very good about our balance sheet right now. And obviously, this has been our intent all along. As you know, we have over the last couple of years been really focused in terms of refining our portfolio. But it does not mean that we’re not interested in acquisitions. We remain very interested. And as you know, the industry as a whole has been somewhat quiet on the M&A front, but it’s not for lack of investigating and looking, keeping lines in the water. And so, we hope that M&A will continue -- or acquisition specifically will continue to play an important part of our growth story over time.

Jason English:

Congrats on a strong start to the year.

Jason English:

A couple of questions for you. So the SG&A favorability looks like it was really corporate expense-related. What drove it? And why shouldn’t we take that to the bank and assume it’s going to be lower for the remainder of the year?

Jason English:

So, I assume the timing was that corporate line because distribution is distribution. Marketing, that looks like it’s timing, right, because you’re holding the full year. Within corporate, what was the timing benefit this quarter? Because it was chunky. Your corporate was much lower than we expected.

Jason English:

Okay. That’s helpful. Thank you. And then, turning back to some of the segments. Looking at coffee, the price was weaker than we expected, and it sounds like it’s going to get even a little more -- and it sounds like it’s going to turn deflationary based on the comments you made around the investment just this month. A, is that right? B, do you expect the segment to still post organic growth if price is deflating? Given there’s really no volume growth in the industry, it actually looks like it’s contracting. And sorry, three-part question. In light of the price investment, should we view a return to low-30s EBIT margins as out of reach for this year?

Operator:

Next question today is coming from Max Gumport from BNP Paribas.

Tucker Marshall:

Max, good morning. As you noted, we came into our fiscal year with a gross profit margin guidance of 36.5% to 37%. We have now guided to a 37% outlook for the balance of the year. So on average, we’ve come up about 25 basis points. What gave us conviction in doing that was just seeing some cost favorability within total cost of goods sold. In areas where you have a level of commodities, you have a level of transportation, you may have some in the manufacturing and distribution environment. But it’s not significant. It’s just some level of cost improvement. As we think about the outlook for the balance of the year, that gross profit margin will improve in each of the next three quarters in order to get you to the 37% outlook for the full year, and it will be pretty consistent over Q2, Q3 and Q4.

Mark Smucker:

Matt, it’s Mark. I won’t speculate on how long. I do think as we have refined our portfolio to fit our strategy, obviously, pet snacks is really our crown jewel there. And I answered a little bit of that question earlier. Keep in mind that -- we all as pet owners feed our pets, obviously, pet food. Pet snacks are a little bit more discretionary. But nonetheless, keep in mind that consumers oftentimes treat their pets better than their children. And so, we do believe that the pet snacks and our -- particularly our dog snacks portfolio, will continue to perform as we continue to meet the needs of consumers wherever they may be at from value to premium. So, we really feel good about where our portfolio is positioned there.

Steve Powers:

Just a question on -- as it relates to free cash flow. Given that you’ve raised your outlook $0.25, which implies a decent -- I mean, if that is a cash EPS increase, I would expect a little bit of flow through, maybe $25 million or so, to free cash flow that we don’t seem to be seeing. So, maybe you can just talk about what’s driving that. Thank you.

Operator:

Next question is coming from Robert Moskow from TD Cowen. Perhaps your phone is on mute, Robert.

Mark Smucker:

Yes, Rob, welcome back.

Mark Smucker:

Rob, it’s Mark. We’re already in process, of course, on those efforts. And it’s all around productivity and making sure that the plants themselves are operating at their highest capacity. There’s some nominal capital investments to make sure that the equipment is running as best it can. And so, it’s really -- it’s fundamentally around those types of things. And we do expect the improvement to continue through the second quarter and support the demand.

Mark Smucker:

It should be normal.

Mark Smucker:

Thank you. Thank you all for your time today for joining the call. We are really pleased with the positive start to our fiscal year. And of course, as we always say, our results were really made possible by our outstanding employees. So, I’d like to just take a moment to thank them for their hard work and dedication to the Company. We hope that many of you will be able to join us in Boston at the Barclays conference next week. A live webcast of our presentation on September 5th at 12:45 can also be accessed from our Investor Relations website. So, I hope to see you all there in person or virtually. Thank you.

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 2023 fourth 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 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 fourth 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.

Tucker Marshall:

Thank you, Mark. Good morning, everyone. I’ll begin by giving an overview of fourth quarter results, which finished above our expectations. Then I’ll provide additional details on our financial outlook for fiscal year 2024. Net sales increased 10%, including a 1% favorable impact of lapping customer returns related to the Jif peanut butter product recall. Excluding the impact of divestitures and foreign exchange, net sales increased 11%. The increase in comparable net sales was driven by an 11 percentage point increase in net price realization, primarily reflecting list price increases across the portfolio. Volume/mix was neutral compared to the prior year. Adjusted gross profit increased $117 million, or 18% compared to the prior year. The increase reflects a favorable net impact of higher net price realization and increased commodity and ingredient, packaging, and manufacturing costs. Favorable volume/mix also contributed to the gross profit increase and improved margins. Adjusted operating income increased $57 million, or 16%, reflecting the increased gross profit, partially offset by higher SD&A expenses. The increase in SD&A expenses was primarily driven by increased incentive compensation. Adjusted operating income also reflects the net benefit of one-time, unplanned, items in the quarter of approximately $20 million related to certain legal, tax, and insurance matters. Below operating income, net interest expense decreased $3 million, and the adjusted effective income tax rate was 23.8% , compared to 22.3% in the prior year. Factoring in all these considerations, along with share repurchases that resulted in weighted average shares outstanding of 105.9 million, fourth quarter adjusted earnings per share was $2.64, an increase of 18% from the prior year. Turning to our segment results, U.S. Retail Pet Foods net sales increased 9% versus the prior year. Net sales increased 11% excluding noncomparable sales in the prior year related to the divestiture of certain pet food brands. The net sales increase was led by growth across all segments, including dog snacks, dog food, and cat food. Higher net pricing actions across the portfolio contributed a 12 percentage point increase to net sales. A reduced contribution from volume/mix decreased net sales by 1 percentage point, primarily driven by cat food, as we continued to experience capacity constraints, partially offset by dog food and dog snacks. U.S. Retail Pet Foods segment profit increased 21%, primarily reflecting favorable volume/mix, a favorable net impact of higher net price realization and increased commodity and ingredient, packaging, and manufacturing costs, and a one-time, unplanned, benefit associated with a legal matter from a prior acquisition, partially offset by increased marketing investments. Turning to the U.S. Retail Coffee segment, net sales increased 7% versus the prior year. Higher net price realization increased net sales by 10 percentage points, primarily reflecting list price increases across the portfolio to recover higher commodity costs. A reduced contribution from volume/mix decreased net sales by 3 percentage points, primarily driven by roast and ground coffee. Net sales growth occurred across all brands in the portfolio, led by Folgers growth of 9%, Café Bustelo growth of 19%, and Dunkin’ growth of 1%. Our K-Cup portfolio continued its momentum, as net sales grew 7% versus the prior year. U.S. Retail Coffee segment profit increased 22%, primarily reflecting lower marketing spend, as we lapped the Folgers relaunch campaign in the fourth quarter of the prior year, and a favorable net impact of higher net price realization and increased commodity costs. In U.S. Retail Consumer Foods, net sales increased 14 percentage points versus the prior year, including a 5% favorable impact of lapping customer returns related to the Jif peanut butter product recall. Higher net price realization increased net sales by 12 percentage points, primarily reflecting list price increases across the portfolio and lapping the unfavorable impact of customer returns in the prior year related to the Jif peanut butter product recall. Volume/mix increased net sales by 2 percentage points, primarily driven by Smucker's Uncrustables frozen sandwiches, partially offset by a decrease for Jif peanut butter. U.S. Retail Consumer Foods segment profit increased 9%, primarily reflecting favorable volume/mix, partially offset by increased marketing investments. Segment profit also reflects lapping the prior year unfavorable impact of unsaleable inventory, customer returns and customer refunds, mostly offset by an insurance recovery related to the Jif peanut butter product recall. Excluding items related to the recall, the net impact of higher net pricing and increased commodity and ingredient, manufacturing, and packaging costs was slightly unfavorable. Lastly, in International and Away From Home, net sales increased 12%. Excluding unfavorable foreign currency exchange and noncomparable net sales in the prior year related to the divested pet food brands, net sales increased 15%. Net price realization contributed a 13 percentage point increase to net sales for the combined businesses, primarily reflecting list price increases across the portfolio. Volume/mix increased net sales by 2 percentage points, primarily driven by coffee and frozen handheld products, partially offset by baking mixes and ingredients and fruit spreads. The Away From Home business net sales increased 25% on a comparable basis, driven by double-digit growth for coffee, Uncrustables sandwiches, and portion control. Net sales for the International operating segment increased 4% on a comparable basis. International and Away From Home segment profit increased 38%, primarily reflecting a favorable net impact of higher net price realization and increased commodity costs. Fourth quarter free cash flow was $299 million, compared to $221 million in the prior year, driven by an increase in cash provided by operating activities and a decrease in capital expenditures as compared to the prior year. On a full-year basis, free cash flow was $717 million, with capital expenditures of $471 million, representing approximately 5.5% of net sales. In fiscal 2023, we increased our quarterly dividend by 3%, marking 25 consecutive calendar years of dividend growth. And, we were added to the S&P 500 Dividend Aristocrats Index. In the fourth quarter, we repurchased approximately 2.4 million common shares, which settled for $360 million. Cash and cash equivalent balances were at $656 million, compared to the prior year end of $170 million. We finished the year with a gross debt balance of $4.3 billion, and paid down $186 million for the full year. Based on a trailing twelve-month adjusted EBITDA of approximately $1.6 billion, our leverage ratio stands at 2.7x. We anticipate maintaining a strong balance sheet with an investment grade debt rating. This enables a balanced capital deployment model, which includes strategic reinvestments in the business through capital expenditures and acquisitions, while returning cash to shareholders through dividends and share repurchases. 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 expect comparable net sales to increase 8.5% to 9.5% compared to the prior year, demonstrating the continued momentum for our business and brands. This reflects increased volume/mix benefits across all three of our U.S. Retail segments and our International and Away From Home business. Net sales growth also reflects higher net pricing, primarily due to the carryover of pricing actions implemented in the prior year to recover increased costs across our portfolio. We anticipate full-year gross profit margin of 36.5% to 37.0%, which reflects a 355 basis point increase at the mid-point versus the prior year. This reflects higher net pricing from actions taken in the last fiscal year, cost and productivity savings, including benefits from our Transformation Office, and a mix benefit associated with the divestiture. SD&A expenses are projected to be favorable by approximately 5% at the mid-point of the guidance range, primarily reflecting reduced expenses associated with the divested business, partially offset by approximately $45 million of pre-production expenses related to the Uncrustables capacity expansion, increased marketing spend across the remaining business, and investments in liquid coffee. Total marketing expense is estimated to be 5.5% of net sales. We anticipate net interest expense of approximately $140 million and an adjusted effective income tax rate of 24.2% – along with a full-year weighted-average share count of 102.5 million. This weighted-average share count reflects repurchases of approximately 2.4 million shares completed during the month of March, and approximately 2.4 million shares completed during the month of May. Taking all these factors into consideration, we anticipate full-year adjusted earnings per share to be in the range of $9.20 to $9.60. This reflects a mid-single digit percentage increase at the mid-point of the guidance range. There are factors impacting the comparability of our guidance versus the prior year, including the recovery of earnings related to the Jif peanut butter product recall in fiscal year 2023 and the net stranded overhead impact from the divested pet food brands in fiscal year 2024. We anticipate the net stranded overhead impact to be approximately $0.60, inclusive of income and reimbursements from transition services and co- manufacturing agreements. In the first quarter, comparable net sales and adjusted earnings per share are anticipated to increase approximately 20%, primarily due to lapping the impact of the Jif peanut butter recall and continued business momentum. We project free cash flow of approximately $650 million, with capital expenditures of $550 million for the year. The increase for capital expenditures primarily relates to capacity expansion for Smucker’s Uncrustables. Other key assumptions affecting cash flow include

Operator:

Good morning, and welcome to The J. M. Smucker Company's Fiscal 2023 Third Quarter Earnings Question-and-Answer Session. This conference call is being recorded and all participants are in a listen-only mode. Please limit yourself to two questions and re-queue if you have additional questions. I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, Aaron.

Operator:

Certainly. The question-and-answer session will begin at this time. [Operator Instructions] Our first question today is coming from Peter Galbo from Bank of America. Peter, your line is now live.

Mark Smucker:

Good morning.

Tucker Marshall:

Peter, good morning. So as you know, in our prepared remarks this morning, we reaffirmed an approximate 33.5% gross profit margin for the full fiscal year. And we have seen sequential improvement in our gross profit margin, each of the consecutive or sequential quarters, with the fourth quarter being our strongest. And yes, you are correct, that is largely due to us getting into the coffee best margin of its four quarters in the fourth quarter. As it relates to next fiscal year, we have talked a little bit about what the puts and calls are as it relates to margin improvement. And I guess what I would just say is this. One is we'll continue to see the benefits of volume/mix going forward. We will see the benefit of lapping the Jif peanut butter product recall. We will also see a moderation of cost inflation as a benefit, along with stabilization and supply chain and manufacturing environments, along with benefits coming from our transformation office and then also, over time, the benefit of the divestiture after addressing stranded overhead.

Mark Smucker:

Sure, Peter. Yes, as we've been pretty consistent over these past couple of years, we're talking about the supply chain, in general, our strong ability to manage through some of the disruptions and just acknowledging that there – the supply chain still is a bit fragile and it varies by quarter or month in terms of where some of that fragility might be. We have experienced some supply disruption in our Meow Mix business, which we are working through in the third quarter as well as the fourth quarter. But we do acknowledge as also temporary and that we will work through that, and we would have expected to continue with the double-digit run rate growth on Meow Mix. But again, just reiterating that it is temporary. And over the next several months, we should be able to work through that.

Peter Galbo:

Great. Thank you.

Andrew Lazar:

Great. Thanks. Good morning.

Andrew Lazar:

I guess to start, your full-year gross margin outlook of 33.5% is still some, call it, 450 basis points below pre-pandemic levels. And some of this is clearly the mechanical impact of pricing on gross margin. But perhaps you could quantify maybe some of the key buckets as we think about sort of gross margin recovery moving forward.

Andrew Lazar:

And then you guided to low double-digit year-over-year decrease in EPS for fiscal 3Q, and obviously, results came in better than that. With organic sales and gross margin roughly in line with Street forecast, it seems the bulk of the upside came from SG&A. What drove the favorability there, at least versus Street estimates, given it looks like marketing spend for the full-year is expected to be on track with your initial estimates? Thank you.

Andrew Lazar:

Got it. Thank you.

Kenneth Goldman:

Hi. Thank you. You posted a good free cash flow number in the third quarter. You talked about how fundamentals were – came in better than you expected. But you didn't adjust your outlook for free cash flow for the year. I was just curious if there's any read into that, if there's any particular reason why maybe that wasn't raised. And it does imply – but in the fourth quarter, it will be the lowest number for Smucker in any fourth quarter since 2013. So I'm just curious if there's any conservatism in there.

Kenneth Goldman:

Got it. And then just to build a little bit on the question about SG&A. It implies, if I'm doing the math correctly, that it will be a little bit over $400 million in the fourth quarter. It's only been that high one-time in the history of the company. So I just wanted to dig a little bit further into what is the – if there is something discrete headwind or investment that you're making in the fourth quarter in SG&A that will drive it up that high. Again, using just the rough math that you've provided.

Kenneth Goldman:

Thank you.

Operator:

Thank you. Next question today is coming from Chris Growe from Stifel. Your line is now live.

Mark Smucker:

Good morning.

Tucker Marshall:

Chris, good morning. The sequential improvement in gross profit margin is really across the entirety of the portfolio as we continue to see a bit of stabilization and overall cost inflation as we begin to see the benefits of lapping price increases. And as we continue to operate under the general business momentum that is enabling the margin to improve each quarter and really, it's coming through most elements or all elements of the portfolio.

Mark Smucker:

Yes, Chris. It's Mark. We're very pleased with our progress this quarter. I mean if you look at every business grew in coffee, every brand grew in pet, every brand essentially grew as well. And we saw good growth, of course, in Uncrustables with 38% growth. And then continuing to gain share on Jif. So we tend to target around two-thirds of maintaining and growing. And so we're really pleased with the performance – the number that you referenced is largely driven by some of the supply chain challenges in Meow Mix, and we do feel confident that over time, as we manage through that, we'll get back to where we expect to be.

Mark Smucker:

Thank you.

Robert Moskow:

Hi. Just a few small ones. When you're thinking about fiscal 2024, Tucker, can we assume that all of your segments will have positive volume. I mean, I think Jif peanut butter is pretty obvious. But are you expecting positive volume in cat food, dog snacks or snacks in general and coffee. And then secondly, on free cash flow, is it possible that free cash flow is above normal in 2024 because of a working capital benefit as your coffee costs are falling. And then I have a quick follow-up.

Robert Moskow:

Got it. And maybe you've answered this before, but the $700 million in cash you'll get from the dog food divestiture, do you intend to spend all of that on share repo?

Robert Moskow:

Okay. Vague, but, we can follow-up. All right. Well, thank you.

Steve Powers:

Thanks and good morning.

Steve Powers:

Maybe just to go back to the 3Q versus 4Q. Correct me if I'm wrong, but I think you had said last quarter that you expected the fourth quarter EPS to be up about 10% year-over-year. I think the guidance implies now kind of a range of 2 to 11. The $0.05 you called out that shifted from 3Q to 4Q equates to about 2% of that. So I'm just – can you put those numbers in context and because I'm struggling to understand the full drivers of the – what now wider range in 4Q acknowledging the $0.05 shift?

Steve Powers:

Okay. And the other question unrelated is just on the Dunkin' brands, where you cited greater elasticity in that premium segment. Maybe just a little bit more commentary around what you've seen so far and how you expect that to improve going forward because the commentary suggests you do expect it to improve, but just wanted to hear a little bit more on that?

Steve Powers:

Okay, thank you. That's confirming. Appreciate it.

Operator:

Thank you. Next question today is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.

Mark Smucker:

Good morning.

Mark Smucker:

Sure, Pam. It's Mark. So we have continued to invest broadly across our portfolio and supporting all of our brands. There was a step up a bit in the third quarter because we turned on new advertising on Nutrish, which has actually been supporting the brand and the growth of that brand. So that's been positive. And you may also recall that as we've talked about our marketing as a percent of sales, we've continued to invest in our brands, but because of inflation that percentage has fluctuated a bit this year. And over time, we would anticipate continuing to target, say, above a 6-ish percent of net sales on our marketing broadly across the entire portfolio.

Mark Smucker:

Yes. I guess I would just start by saying that coffee costs have not moderated significantly over the past couple of quarters. We did see a dip as you highlight in spot prices when we were experiencing some volatility. But as you know, we buy coffee and hedge our coffee position to make sure that we can achieve our financial plan. And so the coffee markets and particularly in the last several weeks have rebounded, and we've continued to see that there is some inflation and more elevated coffee costs. So as always, we will adjust our pricing whether that's list or using other levers to the extent that our physical position would dictate so. So I can't really give you any more than that, but we will be responsible and prudent and pass along price changes effectively over the coming quarters.

Operator:

Thank you. Next question is coming from Cody Ross from UBS. Your line is now live.

Mark Smucker:

Good morning.

Mark Smucker:

Cody, we actually have taken pricing for the benefit of our portfolio, and that is a forward-looking comment as well. So we have effectively already done our pricing activities in pet. And I'm sorry, the second part of your question, I think I missed it, could you repeat that?

Mark Smucker:

Yes, I think I already answered that.

Mark Smucker:

Yes, Cody, thanks for the question. Over a couple of decades plus, we've been a very acquisitive company, and that has really helped increase our stature in the industry and with our customers, and we're very proud of the trajectory that we're on. And we've also been very clear in the last several years about portfolio reshape. And although there's been some divestitures predominantly in the most recent years, that is all in service of executing our strategy. And consumer shift over time, which dictates that our portfolio needed to shift over time. And so the decisions that we've made of late really reinforce that our strategy is right, and we're focused on the right brands. And as we've talked about acquisitions, we still want acquisitions to play an important role in our growth story. But we will make sure that as we think about future acquisitions that we're very prudent and responsible and that we go for acquisitions that are going to enhance our existing portfolio or possibly provide a meaningful position in a new and growing category at a responsible price.

Robert Dickerson:

Great. Thanks so much. Might be two questions for Tucker, so sorry, Mark. Tucker, it just kind of looks like pre-pandemic – when I look at your SD&A line, normally, let's say, it used to be a little first half weighted. I'm assuming driven somewhat by seasonality. Obviously, last year, it was lower for obvious reasons. This year, you're ramping more in the back half to give, I would assume, back to kind of more steady state. I realize you're not giving guidance for next year. But as we think through that line over the next six quarters or so, let's say, is that kind of like a return to normal as we see in the back half of 2023 and then we think about 2024 that maybe it goes back to a bit more first half weighted? Or as we look at what you put up in Q3, maybe that's kind of like a decent proxy run rate to think about kind of in the steady state? Thanks.

Robert Dickerson:

All right. Perfect. Thanks. And then simple question. Ken asked about free cash flow, what could be implied for Q4 CapEx so far this year, though, through the three quarters would also imply kind of a material step-up in Q4 relative to what we even saw in Q3, which was a step-up from the first half. So I just want to make sure that, that implied step-up is right? And then maybe if you could just comment quickly on why there's such a step-up, like you're finishing certain projects kind of almost there. That should be done by the end of the fiscal year. And that's it. Thanks so much.

Robert Dickerson:

Super. Thank you.

Mark Smucker:

Thank you.

Alexia Howard:

Good morning, everyone.

Alexia Howard:

Two quick questions. You talked about the share trends being somewhat disrupted this quarter by supply chain challenges. Do you expect those share trends are going to bounce back sharply next quarter? Or do we have to wait until we lap the Jif recall, just wondering around those trends on the market share side?

Alexia Howard:

Great. Thank you. And then just as a follow-up, just the peanut butter distribution trends. I know you've been working to rebuild that market share and distribution. Can we expect meaningful improvement over the next few months? Or I mean, I'm sure you've been working very hard to get it all back. But is this the kind of run rate that we're at, at the moment?

Alexia Howard:

Great. Thank you. I'll pass it on.

Operator:

Thank you. Next question is coming from Max Gumport from BNP Paribas.

Mark Smucker:

Max, it's Mark. We've been on a journey with Nutrish over the last 18 to 24 months in terms of making sure that, that brand is healthy. And it is now. We spent a lot of effort trying to optimize the portfolio, making sure the assortment is more narrow and productive, revitalizing some of the packaging and then most recently launching some new advertising as we were preparing that business for sale. And so really very pleased with the progress that we've made there and making sure that we leave that brand as well as the other dog food brands and 9Lives in good hands as those brands ultimately will transition to post.

Mark Smucker:

Thank you.

Mark Smucker:

Thank you, Kevin. I would like to just, first of all, say that it was great seeing many of you at CAGNY last week and really appreciate your time this morning and joining us here, really pleased with the quarter and the momentum that we have been able to consistently deliver over the past several – and all, of course, all of that is really a tribute to our outstanding employees. And so just always wanting to take a moment to thank our employees for their hard work and dedication to the company and I hope all of you have a great day. Thank you.

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 2023 Second 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 2023 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 am Eastern Standard Time today for a live question-and-answer session with management to further discuss our second quarter results and outlook for the full 2023 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.

Tucker Marshall:

Thank you, Mark. Good morning, everyone. First, I’ll begin by giving an overview of our second quarter results, and then I’ll provide details on our updated financial outlook for the remainder of fiscal 2023. Total company net sales increased 8%. Excluding the impact of divestitures and foreign exchange, net sales increased 11%. The increase in comparable net sales was primarily driven by a 17 percentage point increase from higher net price realization, reflecting list price increases for each of the Company's U.S. retail segments and for International and Away from Home, partially offset by a 6 percentage point decrease from volume mix, primarily driven by the U.S. Retail Coffee segment. Adjusted gross profit was in-line with the prior year, primarily reflecting a favorable net impact of higher net price realization and increased commodity and ingredient, transportation and packaging costs, inclusive of the unfavorable impact related to the Jif peanut butter recall, mostly offset by a reduced contribution from volume mix, and the noncomparable impact of the divested natural beverage and grains businesses. Further, excluding the unfavorable impact related to the Jif peanut butter recall, gross profit would have increased versus the prior year. Adjusted operating income decreased $8 million, or 2%, reflecting an increase in SD&A expenses. Within SD&A, general and administrative and distribution expenses increased $13 million, partially offset by favorable marketing expense of $8 million. We remain confident in our overall level and consistency of marketing and brand building activities to sustain momentum for our key growth platforms. Below operating income, net interest expense decreased $1 million, primarily due to the net favorable impact of debt repayments and issuances in the prior fiscal year. The adjusted effective income tax rate was 24.4%, compared to 23.5% in the prior year. Factoring in all these considerations, along with diluted weighted-average shares outstanding of 106.9 million, second quarter adjusted earnings per share was $2.40, a decrease of 1% from the prior year. Turning to our segment results, U.S. Retail Pet Foods net sales increased 9% versus the prior year. Net sales increased 14%, excluding noncomparable net sales in the prior year related to the private label dry pet food divestiture. Higher net pricing actions across the portfolio contributed a 16 percentage point increase to net sales, partially offset by a decreased contribution from volume/mix of 3 percentage points, primarily driven by decreases for dog food. Net sales growth was led by double-digit percentage increases across all segments, including cat food, dog snacks, and dog food. Our strategic growth brands, Meow Mix and Milk-Bone, experienced both sales and volume growth in the quarter, with net sales increases of 22% and 20%, respectively. U.S. Retail Pet Foods segment profit increased 21%, primarily reflecting a favorable net impact of higher net price realization and increased commodity and ingredient, transportation, and packaging costs. Turning to the U.S. Retail Coffee segment, net sales increased 10% versus the prior year. Higher net price realization increased net sales by 23 percentage points, primarily reflecting list price increases across the portfolio to recover higher commodity costs. A reduced contribution from volume/mix decreased net sales by 13 percentage points, primarily driven by the Folgers and Dunkin’ brands. Net sales growth occurred across all brands in the portfolio, led by Folgers growth of 12%, Café Bustelo growth of 21%, and Dunkin’ growth of 3%. Our K-Cup portfolio continued its momentum, as net sales grew 7% versus the prior year. U.S. Retail Coffee segment profit decreased 10%, primarily reflecting a decreased contribution from volume/mix and increased marketing investment, partially offset by the favorable net impact of higher net price realization and increased commodity and manufacturing costs. In U.S. Retail Consumer Foods, net sales decreased 2% versus the prior year. Excluding the prior year noncomparable net sales impact for the divested natural beverage and grains businesses, net sales increased 7%. The comparable net sales increase relative to the prior year was driven by higher net price realization of 9%, primarily reflecting list price increases across the portfolio. A reduced contribution from volume/mix decreased net sales by 3 percentage points, primarily driven by decreases for peanut butter and fruit spread products, partially offset by an increase for Uncrustables sandwiches. Net sales growth was led by Uncrustables sandwiches and Smucker’s fruit spreads, which grew 21% and 19% respectively, partially offset by a 4% decline for Jif peanut butter. U.S. Retail Consumer Foods segment profit decreased 10%, primarily reflecting higher manufacturing, commodity ingredient and packaging costs, inclusive of cost related to the Jif peanut butter product recall and the non-comparable segment profit in the prior year related to the divested businesses. The decrease was partially offset by higher net price realization, lower marketing spend, and favorable volume mix. Lastly, an international away from home net sales increased 14%, excluding non-comparable net sales in the prior year related to the divested natural beverage grains, businesses and unfavorable foreign currency exchange, net sales increased 17%. The away from home business net sales increased 19% on a comparable basis, driven by double-digit growth for coffee and Uncrustables sandwiches. The international operating segment net sales increased 15% on a comparable basis, primarily due to pet food and pet snacks, baking mixes and ingredients and coffee. International and away from home segment profit increased 3%, primarily reflecting a favorable net impact of higher net price realization and increased commodity costs partially offset by a decreased contribution from volume mix. Second quarter free cash flow was $103 million compared to $106 million in the prior year as a $43 million increase in capital expenditures offset the increase in cash provided by operating activities. Capital expenditures for the quarter were $102 million, representing 4.6% of net sales. Based on a total debt balance of 4.6 billion in a trailing 12 month EBITDA of approximately $1.5 billion, our leverage ratio stands at three times. We continue to prioritize the use of cash toward dividends and debt repayments, while evaluating other strategic uses of cash to support future growth and shareholder value. Let me now provide additional color on a revised outlook for fiscal 2023. Ongoing cost inflation, volatility and supply chains and the overall macroeconomic environment continue to impact financial results and cause uncertainty and risk for the fiscal year 2023 outlook. Any manufacturing or supply chain disruption as well as changes in consumer purchasing behavior, including the potential impact to volume due to recent price increases, retailer inventory levels and broader macroeconomic conditions could materially impact actual results. In particular, the Jif peanut butter recall will impact our financial results for the full fiscal year. We continue to focus on managing elements we can control, including taking the necessary steps to minimize the impact of cost inflation, the product recall, and any potential business disruption. As always, we will continue to plan for unforeseen volatility, while ensuring we have contingency plans in place. This guidance reflects performance expectations based on our current understanding of the overall environment. We are pleased to increase our full-year net sales expectation by 1.5%, and now anticipate full-year net sales to be up 5.5% to 6.5% compared to the prior year. Excluding prior year sales of divested businesses, net sales are anticipated to increase approximately 8% at the midpoint of our guidance range on a comparable basis. This growth reflects higher net price actions, primarily to recover increased commodity ingredient, transportation and packaging costs. Net sales growth reflects increased volume mix for Uncrustables sandwiches, the Meow Mix brand, and continued momentum in away from home channels. These tailwinds are being partially offset by the anticipated volume mix impact of price elasticity of demand and an estimated 2% unfavorable impact from the Jif peanut butter recall related to manufacturing downtime and customer returns and fees. The increase in our net sales guidance versus our previous expectation reflects stronger than anticipated results in the second quarter across our U.S. Retail segments and increased demand in our U.S. Retail Pet Foods and Consumer Foods segments in the back-half of the fiscal year. We expect a full-year adjusted gross profit margin of 33.5%. We continue to project SD&A expenses to increase by approximately 9%, primarily reflecting increased compensation, along with approximately $30 million of pre-production expenses and higher marketing spend. Total marketing expense remains unchanged at approximately 5.5% of net sales, demonstrating our commitment to invest in our brands. We anticipate net interest expense of approximately $160 million and an adjusted effective income tax rate of 24.1%, along with full-year weighted-average shares outstanding of approximately 106.9 million. Taking all these factors into consideration, we anticipate full-year adjusted earnings per share to be in the range of $8.35 to $8.75, reflecting a $0.15, or 2% increase at the mid-point of the guidance range as compared to our previous expectations. The earnings outlook includes an estimated $0.80 unfavorable impact to adjusted earnings per share related to the Jif peanut butter recall inclusive of the estimated impact of manufacturing downtime, customer returns and fees, and unsaleable inventory, partially offset by anticipated insurance proceeds. This estimate has not changed since our last guidance communication. Earnings are expected to decline in the third quarter by a low-double-digit percentage compared to the prior year, as benefits from continued top-line momentum across our portfolio will be offset by higher compensation and marketing expenses, as well as business investments. Fourth quarter earnings are expected to grow approximately 10%, reflecting the benefits of continued momentum across our portfolio, sequential gross margin improvement and moderation of SD&A expenses. Free cash flow for fiscal year 2023 is anticipated to be $550 million, reflecting capital expenditures of $550 million. Other key assumptions affecting cash flow remain unchanged including depreciation expense of approximately $235 million, amortization expense of approximately $225 million, pension contributions of $70 million, share-based compensation expense of $20 million and other non-cash charges of $20 million. We are pleased with our second quarter results, which show the strength of our brands and the continued momentum of the business. We are taking the right actions to support continued operational excellence, while managing through this dynamic and inflationary environment. I am confident in our strategy and believe we are in a strong financial position to deliver sustainable and consistent long-term growth for our shareholders. In closing, 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.

Operator:

Good morning. Good morning. And welcome to The J. M. Smucker Company’s Fiscal 2023 First Quarter Earnings Question-and-Answer Session. This conference is being recorded and all participants are in a listen-only mode. Please limit yourself to two questions and re-queue if you have additional questions. I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Operator:

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

Mark Smucker:

Good morning, Andrew.

Tucker Marshall:

Andrew, good morning. We are continuing to experience cost inflation that is having a mid- to high-teens impact on our cost of product goods sold. That is not a change from what we said in our initial outlook for this fiscal year. There are two areas that we continue to assess; one is the Jif impact is coming in better than anticipated, so that has supported our margin uplift from the bottom end of the range; and two, as we continue to manage costs within our overall infrastructure to the extent that we are able to in this environment. As you have noted, we still anticipate 15 points of pricing for the full fiscal year. There is not a material change to that from our original guidance. And again, what we are carrying in from fiscal 2022 is about mid-single digits and actions that we have taken for the full benefit of fiscal 2023 is high-single digits as well on the pricing front.

Mark Smucker:

Yeah. Sure, Andrew. It’s Mark. When you think about just taking a real quick step back on our total portfolio, we participate, of course, in all segments of our categories and that includes the entire value spectrum, if you will and Pet is no different. And so if you think about Milk-Bone and how Milk-Bone has outpaced the pet snacks segment, particularly in this last quarter and it actually gained share, that is driven both by some of the premiumization, the innovation that we have launched, but also just by base Milk-Bone, which is, quite frankly, a very affordable snack option for pets. And likewise, with Meow Mix having also taken the number one spot in cat also meets the value equation for many consumers. So, I think, strategically, we want to continue to play across that spectrum in our categories and make sure that we are providing consumers with options.

Nora Young:

Hi. This is Nora Young for Ken. Good morning.

Tucker Marshall:

Good morning.

Mark Smucker:

Nora, it’s Mark. I will start and Tucker may add. But, first of all, we are very pleased with our Coffee performance. Again, it goes back to the comments I just made around Andrew’s question. And we lead, so we did lead in taking price and that helped drive our dollar growth and our dollar shares continue to be very strong across the coffee category. And although, we did anticipate some elasticity in the quarter, those were largely as expected as we are now seeing our competitors follow in pricing, and so as we move forward, we would continue to monitor very closely consumer behavior, but we are encouraged by the fact that over 70% of cups consumed are still consumed at home. So we still feel very good about our total coffee business and we will continue to invest in it. We also noted the reinvestment in Folgers with a new advertising campaign to reinvigorate that brand as well. So all signs are continuing to support the business and drive balanced growth.

Peter Galbo:

Hey, guys. Good morning. Thank you for taking the question.

Peter Galbo:

Mark, maybe just to follow up on Andrew’s question around Pet Food. I know you gave some comments on both treats and cat food. It seems like dog actually had a pretty solid quarter, I think, up 18%. So if you can just comment there? I know you haven’t put in the full brand refresh on Nutrish at this point, but just what you saw in dog specifically in the quarter in terms of trade down and what you are expecting kind of over the balance of the year there? Thanks.

Peter Galbo:

Got it. That’s helpful. Thanks, Mark. And then, Tucker, just -- I have gotten a couple of questions on this morning, but just wanted to understand the moving pieces on Jif. There was a pretty meaningful insurance recovery in the quarter. I believe that was contemplated already in the prior $0.90 guide that you had given, but just wanted to clarify that? And then just on the move from, I guess, $0.90 to $0.80, it seems like things have come back faster. I think there were $0.65 impact in the first quarter, so maybe a little bit still into 2Q. But just anything else you can help us to understand on the second quarter as it relates to Jif and then maybe just the quarter overall? Thanks.

Operator:

Thank you. Next question is coming from Chris Growe from Stifel. Your line is now live.

Mark Smucker:

Good morning.

Tucker Marshall:

Chris, the $0.65 impact in the quarter did have the anticipated insurance recovery. There’s still a $0.15 exposure in Q2 and Q3.

Tucker Marshall:

Correct. We have factored in what we believe is the appropriate factor for the insurance recovery and our total $0.80 estimates…

Tucker Marshall:

Again, the predominance that came through in Q1 and I just acknowledged to you that the impact was against the $0.65.

Mark Smucker:

Chris, it’s Mark. Yes. We are still very bullish on Uncrustables and everything related to it in terms of production remains on track. We are finishing the Longmont expansion, that’s the Denver facility and we are well underway in construction of the McCalla, which is Alabama facility. And so all of that, remember, McCalla is not going to come online for a couple of years, but all of the efficiency improvements that we have seen in Kentucky, as well as Longmont are going to support us meeting demand. So, although, we are not quite meeting demand, in other words, supply is not quite caught up with demand, all of the work on production is intended to do so over time and we do expect that we have, again, significant runway and the ability to get that brand to $1 billion over time.

Robert Moskow:

Hey. A couple of questions. I want to make sure I understand the assumptions for profit growth for the rest of the year. From what I can tell, you are assuming kind of flattish operating profit, maybe even down a little bit for the next few quarters and I just want to make sure I am doing the math right. Is that true, but especially given first quarter, it looks like your profit would have been well ahead of last year ex the Jif recall and then a quick follow-up.

Robert Moskow:

Okay. And maybe more specific then, in the Retail Consumer Foods segment, your profit was down about $65 million versus a year ago, but the $90 million of that was the Jif recall. So is this division’s profit well ahead -- tracking well ahead of a year ago ex the recall, and therefore, should we assume a higher -- a profit growth commensurate with that in this division for the rest of the year?

Operator:

Thank you. Our next question is coming from Jason English from Goldman Sachs. Your line is now live.

Mark Smucker:

Good morning.

Tucker Marshall:

Yeah. Why don’t I start just with our assumption around marketing spend for the fiscal year. So we did experience some SG&A favorability in the first quarter associated with marketing. However, we remain committed to spending the dollars that we planned at the beginning of the year and are still maintaining our guidance of 5.5% of net sales spend against our brands. We believe it’s important for the ongoing reinvestment and growth of those brands and overall health and profitability of the company.

Jason English:

Okay. Okay. And back to the question on coffee and why you expect volume to get better. I don’t think I was -- I didn’t walk away, feel like I had a lot of clarity on the answer there. So is -- I will ask a more direct question, is it because you expect competitors to follow, therefore closing the price gaps, and if that’s the answer, are you seeing it happen already or is it because you are expecting to maybe feather in some promotions to dampen those price gaps, and if so, what’s the timing and cadence of that?

Operator:

Thank you. Next question is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.

Mark Smucker:

Good morning.

Mark Smucker:

Pam, we generally have implemented a majority of our pricing, but we still are in an inflationary environment, so it remains to be seen if -- I would never use the word finished. And you will recall that when we do move price, we have consistent -- been consistent in moving price both up and down depending on our delivered costs, obviously, it’s been more up in the last year or so. But we do believe that we have taken a majority of it and we will watch carefully as we consider whether or not there may be further pricing required in the coming quarters.

Pamela Kaufman:

Okay. Thanks. That’s helpful. And then my second question is just an update on your M&A strategy, given your comments earlier this year about your interest in potential acquisitions, where does this stand, have you been evaluating any potential acquisitions and can you remind us what the criteria is, and if that’s changed at all?

Operator:

Thank you. Our next question is coming from Cody Ross from UBS. Your line is now live.

Mark Smucker:

Good morning.

Mark Smucker:

The answer to the first question is no.

Mark Smucker:

And the second part of your question, I am sorry, Cody, was around market share? We -- we have seen good share growth. Clearly, Milk-Bone and Meow Mix are, again, our areas of focus, very pleased with the results there, about a full share point on Milk-Bone and continued share growth on Meow Mix. So really pleased, again, with the way our investments are playing out in those two segments. And then we spoke earlier just about dog food and our efforts there to stabilize that business.

Tucker Marshall:

So, Cody, what’s consistent is our reinvestment in the business of maintaining 5.5% of marketing spend as a percentage of net sales. So there’s no change there. Rather, what we are seeing in SG&A is just some favorability on the discretionary side that came through in the first quarter and how we want to continue that trend or trajectory through the balance of the year.

Alexia Howard:

Good morning, everyone.

Tucker Marshall:

Good morning.

Mark Smucker:

Alexia, we really have not seen anything out of the ordinary on inventory levels on our businesses. So for us it’s pretty much business as usual.

Mark Smucker:

Yeah. There’s a lot -- been a lot in the press in the media just around consumer sentiment and being a little bit more cautious. We have seen a bit of that. I think if you look at our categories, they tend to be more resilient than the broader center of store categories and so we have benefited from that. Similarly, there’s been some discussions around private label and this notion of trading down. My response to that would be twofold; number one, again, this notion of making sure we are offering brands across the entire spectrum of value and although you have seen some private label share growth, that is pretty normal in these times and it is not back to pre-pandemic levels. So although there is a little bit of -- there is some shifting in the categories, I would just point to the fact that our categories are resilient and we will continue to invest in our brands.

Scott Mushkin:

Thanks, guys. Thanks for taking my question. I actually wanted to clarify some of the comments around the pet food area. So I think it was mentioned before that there were some out of stock issues, I guess, that’s with competitors. Is that what I am taking, because I think, you guys said, you are fine on the inventory perspective and people haven’t been replenishing, did I get that correct?

Scott Mushkin:

Okay. That’s actually -- that’s a good clarification. Appreciate it. Then I wanted to ask company a little bit long ranging. I have been talking to some of the distributors about what’s going to happen here as maybe inflation cools off, as you guys think out next year, the year after, how do you guys think about that and how your businesses would look if we got a retrenchment that way, nothing is going to happen, but if it did, if it were to happen? Thanks.

Tucker Marshall:

Scott, I would also add that, we remain committed to the profitability and margin profile of our brands and business. And so as we continue to navigate this inflationary environment, as we continue to move forward, we will continue to reinvest in those brands on behalf of our business and we will continue to think through what ongoing continuous improvement or productivity programs will also mean to the long-term health and strategy of the company.

Rebecca Scheuneman:

Great. Good morning and thanks for the question. So my first question has to do with coffee margins. I think that they were down about 350 basis points in the quarter. That was quite a bit more than I expected, obviously, I know that there’s some volume issues there. You had also mentioned that you are investing in Folgers marketing. So I am just kind of wondering, like, as we look at the year and even if volumes…

Rebecca Scheuneman:

… start to perform better there, should we still expect those margins to be lower year-on-year given the increases in marketing?

Rebecca Scheuneman:

Okay. Great. Thank you. And then my second question is about dog food. You had mentioned either in the press release or the prepared comments that you think dog food is well-positioned for evolving consumer habits. I believe what you are referring to there is kind of given inflation, you could see some consumers trading down from the premium and super premium to more of the mid-tier. First of all, is that what you are referring to, and if so, are you seeing that yet or is that something that you just anticipate you could be seeing? Thank you.

Rebecca Scheuneman:

Okay. Great. Thank you.

Mark Smucker:

Well, I want to thank everyone for your time joining us this morning, and as always, our results were made possible by our outstanding team, our employees, and I really want to just thank them for their discipline and hard work and dedication to our company and our brands. And we hope to see many of you in Boston at the Barclays Global Consumer Staples Conference in a couple of weeks and there will be a live webcast of our presentation on September 6th at 2:15 and you can access that from our Investor Relations website. Have a great day.

Operator:

Good morning, and welcome to The J.M. Smucker Company's Fiscal 2022 Fourth Quarter Earnings Question-and-Answer session. This conference is being recorded. [Operator Instructions] I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Operator:

[Operator Instructions] Our first question today is coming from Andrew Lazar from Barclays.

Mark Smucker:

Andrew, it's Mark. Thanks for the question. I guess I would just respond directly, first of all, by saying that we don't believe that there's a window, right? And it is our responsibility to always manage our costs, which we do on an ongoing basis to ensure that we're thinking about cost productivity. And when we do need to take pricing, we will do that. And that will not change. So we will continue to partner with our customers, as we've talked about in the past, and be very prudent and judicious. We're obviously cognizant of the pressure that is on consumers. But as you know, we have a responsibility to our shareholders to protect our dollar profit. And we have confidence that not only have we been able to do that, that we will be judicious and prudent going forward and use all of the levers at our disposal to do so. So we will continue to manage through it. I know that we've experienced a significant amount of inflation, and Tucker can provide more detail. But a majority of our cost increases have successfully been priced for at this time.

Mark Smucker:

Sure, of course. Well, first of all, demand continues to exceed supply. And so we're continuing to manufacture as many sandwiches as we can. We actually made over 1 billion sandwiches in the fiscal year, which was, of course, a record. And we did see a little bit of a deceleration in the fourth quarter, largely just because we had some supply constraints related to supply and labor, which we have resolved. And so we do expect to return this quarter to double-digit growth. And then as the completion of the second phase of our Longmont investments finish, we would expect to see some additional acceleration for Uncrustables sales in the back half. So bottom line, brand is super healthy. It's going to continue to grow. The demand and supply dynamic is as we've discussed, and we continue to make meaningful investments in capacity to support that. So we do believe that we will become a $1 billion brand.

Ken Goldman:

I wanted to follow up on the question about retailers and the price environment by asking about your competitors and the price environment. We are starting to see in some categories, I don't think necessarily in yours, but maybe a little bit in coffee that certain vendors or certain producers are raising prices and others are too, but maybe not to the same degree, at least what we can see in scanner data. So are there any indications you're seeing that whether inspired by retailers or whether inspired by their own decision-making, any of your competitors are being a little more conservative in taking some of the pricing that maybe you think is necessary?

Ken Goldman:

And then for my follow-up, one of the questions we're hearing this morning is whether Smucker's guidance for organic sales growth next year is aggressive, right? I think it came in a little bit or maybe a lot higher than what some people were looking for. So I'm just curious clearly, you've, I think, talked about how you've taken a lot of pricing, you feel that -- feel really good about that. You've also guided to elasticity picking up a little bit. But Mark, are there any things you can tell investors about why they should feel comfortable that elasticity won't be much worse than what you expect? Or maybe that retailers won't really lean in on you and your competitors maybe to start promoting more? I just think people are a little bit looking at this guidance and thinking, all right, it's maybe aspirational to some extent. I was just curious for your thoughts on that.

Mark Smucker:

Yes. I get a couple of headlines, Ken, just to respond directly. We do have a lot of confidence in our portfolio. And I think when you look at the results, particularly this quarter, 86% of our portfolio growing or maintaining share, that just does not -- that just -- it doesn't just happen. It really is a combination of fantastic investment in our business, execution by our employees and the execution of our strategy by which we have refined our portfolio. And so all of those factors have contributed to those fantastic results. And so we just think that our -- we believe that our strategy is truly working. And then more specifically, elasticity, even in the quarter, we did see elasticity coming in better than expected. That trend has continued. As you've heard us talk, we do -- we are modeling, going forward, some elasticity. But at the end of the day, because we've been able to execute our strategy, we have and refined our portfolio. We really are in categories that are pretty resilient and our offerings about those categories are focused on a variety of value propositions and playing in multiple segments. So we just feel that we're very well positioned in this environment and just will continue to execute our strategy.

Laurent Grandet:

Actually, I would start by digging a bit more in Ken's question about the guidance because that's the key question I receive as well from investors. So you already kind of said how much, I mean you expect in terms of growth for Uncrustables in the first quarter and the back half of the year. So maybe could you give a bit more color into what you expect in the coffee segment or in the Pet Food segment, that would be super helpful.

Laurent Grandet:

Okay. Thank you.

Laurent Grandet:

Okay. And maybe a bit on Pet Food, you said you would have great Nutrish towards the end of the year. Should we think about a strong marketing push for Nutrish throughout the end of the year and potentially, I mean some upside on that front? Or because it's still about 1/3 of -- a bit more than 1/3 of your Pet Food business.

Laurent Grandet:

And maybe if I may, last question, completely different, and you haven't discussed about it this morning, but one of the feedback we received from investors and actually since kept -- and that was negatively perceived was you potentially were going to do a larger acquisition in a noncore business. So that was not very well perceived by investors. So I know you came back in some meetings and tried to moderate your -- what you are saying about this. But maybe for clarification, could you please reiterate your position on that point?

Operator:

Your next question is coming from Robert Moskow from Credit Suisse.

Tucker Marshall:

So Rob, let me break down the earnings component first, and then I can address free cash flow and capital deployment secondly. So after you isolate the $0.90 unfavorable impact from the Jif peanut butter product recall, that would put you at about $8.95. And again, that's slightly up to where we finished the year. I would just acknowledge that we did have a very strong finish for the fourth quarter. When you think about the benefit of pricing actions that either came through FY '22 or -- and will also lap into FY '23, along with the additional pricing actions that we have taken in early spring for the full year benefit of FY '23, along with the benefit of shares repurchased in FY '22, that is being offset almost by year-over-year cost inflation, our estimate of price elasticity or down volume mix and our SD&A increased year-over-year, which is in support of investments back into the business and just compensation year-over-year then it basically says you have about a $0.07 difference from where we guided versus where we finished last year. And we think this is a prudent approach at this point in time with respect to guidance after you isolate the impact of the peanut butter recall. A couple of other points that I would highlight is we are making significant investments to continue the Uncrustables growth. That is about a $0.55 impact embedded in our guidance range. There's $30 million of preproduction that we called out in SD&A. And there's another approximately $48 million to $50 million of incremental fixed overhead as we complete Phase 2 of Walmart and as we begin the initial phases of McCallum, Alabama. Then to your second question, as it relates to free cash flow, free cash flow guide is $500 million. There are a few items affecting it just for your awareness. One is the incremental investment for Uncrustables, the completion again in Longmont and the beginning phases of McCallum. Then we also do have the Jif impact that's affecting free cash flow. I estimate that to be about $100 million, and we are making in the first quarter $80 million of cash contributions into our pension funds as well. We remain committed to a balanced capital deployment model, reinvesting in the business, returning cash to shareholders. We will look at the dividend for the future because we want to continue to increase that dividend as we have done, and we will consider strategic reinvestments but we will also keep our eyes open to seeing share repurchases are appropriate as we think about delivering long-term shareholder value. So hopefully that rounds out your 2 questions.

Jason English:

Congrats on the solid pet numbers. It's great to see the broad-based growth within that portfolio. I do want to come back to -- I wanted to come back to the Uncrustables side real quick and just make sure I understood what's going on there. It looks like based on what we're seeing in scanner data, there's 20 points or more of price going through that business. So for sales to be down in retail, it would suggest that you're seeing volume declines of 20 or more percent and you're still expecting if you're only coming back to low doubles next quarter or this quarter that we're currently in, you're still expecting volume declines to persist. Is that right? And that seems like a big number in terms of volume. Like what are the contributing factors to that?

Mark Smucker:

Yes. I would just add, Jason, that we want to convey to all of you and our investors that you should have no concerns whatsoever about Uncrustables. The volume was up 7% on the full year, and we do expect continued volume growth in the next year based on everything we've said. So it really was a temporary hiccup. And given the demand and supply offsets, we do expect that brand to continue to grow dollars double-digit over this next year, for sure.

Tucker Marshall:

Jason, let me start with the pricing dynamic that you're referencing. One, we do have 15% benefit to our top line year-over-year as a result of pricing. A portion of that 15% is due to actions that we took in FY '22 that did not provide a full year benefit. So I think you have to be careful in isolating the 15% to our mid- to high teens call out in our prepared remarks. The second comment that I would offer is, is that we did take pricing in early spring for the full year benefit of FY '23, that is in that 15%. And then underlying our philosophy has been to recover dollar-for-dollar cost inflation to make sure that we're passing along just the appropriate cost increases that we're seeing. And so therefore, we do feel as though we are recovering that impact year-over-year and over the last 2 years.

Tucker Marshall:

Our guidance reflects -- that 15% reflects what we have taken in -- excuse me, have taken in the early spring, and so we feel as though at this point in time, we are set for the fiscal year.

Tucker Marshall:

We believe that our 15% acknowledges the cost inflation and the conversations that we've had with retailers to date. We will continue to monitor our cost basket as we move forward and address any incremental increases to the extent they occur and/or happen.

Peter Galbo:

Tucker, if I could just actually ask a follow-up on Jason's question there. With the 15% pricing number, I mean should we also assume then that you're relatively locked on the cost of goods side as well? Like are you secured on raw materials and price kind of for the year at least to this point? Or is there more kind of still to price out for the year?

Mark Smucker:

I guess -- Peter, I would just -- I just wanted to reemphasize that as we think about, again, taking price, we want to be very judicious in how we do that. And so our goal is not necessarily to over recover. We do have to pull all levers. We have to manage productivity and cost. And so to my earlier comments a little while ago about being sensitive to what the consumer is experiencing and then partnering with our customers to make sure that we are passing along is justified.

Mark Smucker:

Sure. So as you know, we initiated a voluntary recall on select Jif products. Consumer safety, of course, is utmost important to us. We care very much about our end consumer. And we continue working with the FDA to ensure that the Lexington facility is up and running as safely and as quickly as possible. Our Memphis facility was not affected by the recall and has continued to produce Jif products. Our New Bethlehem facility, which produces specialty peanut butters, does not manufacture any Jif products and is not -- also not affected by the recall. All of the peanut butter that goes to Uncrustables is produced in Memphis. And so we have continued to produce that butter and send it to our 2 facilities for Uncrustables.

Tucker Marshall:

So as we called out in our press release this morning, I think there is a $0.90 impact that is our current and best estimate. About half of that impact is due to customer returns, which will come through primarily in our first quarter and the other half of that impact is what we're referring to is manufacturing downtime, which will primarily impact us in the first quarter as well. And as we continue to learn more, we'll continue to update you and others.

Pamela Kaufman:

We're starting to an uptick in consumer trade down in some categories in the scanner data. Generally, how are you thinking about consumer propensity to trade down in your categories? And how are you managing this risk? And then on the flip side, are there any areas of your portfolio where you could see a benefit if consumers look for savings or trade down?

Pamela Kaufman:

And then just a follow-up question on your inflation outlook. Can you talk about what your current input cost coverage is for fiscal '23? What percent of your costs are covered for the year? And where do you have exposure?

Operator:

Our next question is coming from Cody Ross from UBS.

Tucker Marshall:

Yes. So the 15% year-over-year impact associated with pricing, again, is a component of FY '22 lapping into FY '23 and again, as a component of recent pricing actions we've taken for the full benefit of FY '23. Again, our philosophy on pricing has been solely to recover input cost inflation on a dollar-for-dollar basis. We believe that it's prudent in last fiscal year and this fiscal year to forecast the impact of price elasticity of demand. In FY '22, they have come in a little bit better than anticipated or under historical trends, but we do think there will be greater pressure in FY '23. And that 7% really is a composition of what we're anticipating from price elasticity of demand, but it also have some underlying momentum behind it, too, as well, which is from our Uncrustables brand that we anticipate demonstrating sort of mid-single digits to high single-digit volume growth year-over-year and a continued return to growth from our Away From Home business. And so it is our best look right now, kind of the volume impact year-over-year, Cody, and we'll continue to manage and monitor and update as we move forward in the subsequent quarters.

Mark Smucker:

Well, a couple of things, maybe a little bit of repetition is we have generally taken a majority of the pricing across our portfolio thus far in anticipation of our costs that we would incur this fiscal year. There may be additional pricing actions that are required depending on costs and inputs and so forth. And our confidence derives from the fact that we continue to have very strong relationships with our retail customers and that we really approach any meaningful cost increases very judiciously and really work to partner with our customers and have very open dialogue as we move forward. So again, this is part of our business. It's our job, and we want to manage through it in the most positive way possible, so we remain confident.

Mark Smucker:

Well, I want to thank all of you for joining today. It's -- we clearly have executed against our strategy and are very pleased with our results and so our outlook reflects that as well. But these results are really possible because of our team and our fantastic employees. So wanted to just acknowledge and recognize the tremendous work, which -- and there's a lot of it to be very honest, that all of our folks have been doing, but just wanted to take a moment to acknowledge our employees and thank them for delivering such a strong year. Thank you very much.

Operator:

Good morning and welcome to The J.M. Smucker Company's Fiscal 2022 Third Quarter Earnings Question and Answer Session. [Operator Instructions] I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Operator:

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

Mark Smucker:

Good morning, Andrew. It's Mark.

Mark Smucker:

Thank you for the question. We are very much committed to continuing to invest in our brands and that as we have over the last two years and going forward, we will remain very committed to spending the requisite dollars against our brand. I would highlight couple of our previous comments on our more recent calls that we have become more efficient in our spend and we have been able to get better bang for our buck on our marketing spend and also just the fact that there has been so much inflation makes the percent of sales look lower or lower but in terms of what we're committed to we did have a little bit of a down quarter but I want to be very clear with all of the, our investors that we are committed to maintaining the momentum, we've had great, over two-thirds of our brands continue to grow or maintain share and so our strategy clearly is working, shifting our resources to the highest growth opportunities and in this inflationary environment is really only so much you can spend, but rest assured that we are committed and we will continue to support our brands now and ongoing.

Tucker Marshall:

Andrew, good morning. We have experienced green coffee cost inflation throughout our entire fiscal year and we have taken the necessary pricing actions to recover on a dollar for dollar basis that cost inflation but we have known that the significant step up in green coffee cost inflation occurs in our fourth quarter and then will continue onward into next fiscal year.

Mark Smucker:

Thank you.

Ken Goldman:

Tucker, in terms of the reduction to your EPS guidance, I know it's difficult, but is it possible to maybe parse out a little bit how much is being driven by, I guess, inflation and some other incremental headwinds versus how much is merely the mathematical impact of the - of the newer divestitures?

Ken Goldman:

Great, that's clear. Thank you. And then for my follow-up, can you discuss the, I guess, the timing of the impairment charge to Nutrish. I appreciate this reevaluation or revaluations rather, the results of regular reviews, but what was new in your analysis or you're thinking that drove you to conclude the growth would be lower than what you previously expected, I guess in other words, why now and does this change your plans to turn around the business next year with that new ad campaign?

Ken Goldman:

Great, thanks Tucker.

Laurent Grandet:

Yes, good morning everyone.

Laurent Grandet:

So, two questions for me. Good morning. The first is on Uncrustables, so still seeing strong growth coming from that line and we are seeing this as well in Nielsen but as your new line is coming, if I'm correct and outside fiscal year '23, should we, is there any potential issues in term of capacity constraint in fiscal year '23 or, I mean, the ramp-up should you continue to grow 30%, 40% in that product and you will get the new lines up and running? That's my first question.

Laurent Grandet:

Thanks, Mark, very helpful. And then, I mean, in terms of M&A, at CAGNY you mentioned you were envisaging to do a larger M&A outside your core business at least, I mean, the cat was on the table and that was a departure from your previous communications where you were more thinking about doing tuck-in acquisition in existing businesses. So, when speaking with investor post CAGNY, there was kind of a bit negative on that comment. So, could you - could you explain maybe a bit more what's the rationale on trying to go outside your core three businesses and what could give some pretty more comfort to investors should you do that?

Laurent Grandet:

Thanks, Mark, for the clarification. I pass it on. Thank you.

Operator:

Thank you. Next question today is coming from Chris Growe from Stifel. Your line is now live.

Mark Smucker:

Good morning.

Tucker Marshall:

So, Pet has experienced, as most of our businesses have experienced throughout the year persistent and ongoing cost inflation and they have taken multiple rounds of pricing to recover that inflation. And so what we are experiencing are two dynamics now. The timing of pricing against cost recovery or cost inflation and secondly incremental costs that are coming into both the third and fourth quarters that we will also have to recover as well. So, we would envision that Pet will still see - continue to see some down margin but over time as pricing catches up to the inflation and we continue to advance productivity that will support the business.

Tucker Marshall:

Chris, we don't disclose our hedging positions, but what I offered earlier on the call was that we have experienced green coffee inflation throughout our entire fiscal year. We have taken pricing actions to recover on a dollar for dollar basis that inflation and that our most significant step up in green coffee costs occurs in the fourth quarter, this quarter and will continue onward and we will continue to address that inflation.

Operator:

Thank you. Your next question is coming from Steve Powers from Deutsche Bank. Your line is now live.

Tucker Marshall:

So, in our fourth quarter, what is new news from our previous guidance is that we continue to see additional inflation primarily in the ingredient transportation, packaging and manufacturing side that is predominantly impacting our Pet portfolio in Q4.

Mark Smucker:

Steve, it's Mark. Let me just start with a general statement which is as we have all year, we have adjusted our pricing to recover dollar for dollar cost and that does include some productivity initiatives as well and so recent pricing actions are no different. And now would even include pricing actions that we have taken, even in the last few weeks. So, the goal of course is to maintain the momentum of our brands including investment and offset the inflation. In terms of elasticity, we have enjoyed better than historical elasticities and, but we've been very prudent as we forecast forward to make sure that we're building into our forecast what we think are realistic elasticities and so there could be a bit of moderation, but we want to make sure and make sure that our investors know that we are taking a prudent approach to how we're forecasting the business. And I guess the last question or the last comment I would make just on a, from an inflation standpoint, as the whole industry and all industries for that matter are experiencing this, but even within our industry, just to remind ourselves that the tide does raise all boats and since it is pretty ubiquitous across every single category, I think what that does do it does keep the playing field fairly level.

Tucker Marshall:

Steve, what we have done is, we have built our forecast on recovering the cost inflation and the timing of covering that cost inflations from pricing actions while putting our best estimate in for the impact of price elasticity of demand, we have done that consistently throughout our fiscal year and as we've taken additional waves of pricing throughout our fiscal year. I think what Mark has acknowledged is, is that those elasticities have performed better than historical and we would acknowledge that we'll continue to monitor as we move through our fourth quarter and into our next fiscal year. And then I would also acknowledge to a previous question that we are still calling for underlying organic top line growth year-over-year of 4.5%, which is consistent coming out of our second quarter and currently on this call.

Mark Smucker:

Thank you.

Robert Moskow:

Hi, thanks. I'm just curious about the whole philosophy on providing quarterly guidance. I'm looking at your past quarterly guidance, in the last five or six quarters and it seems like you've been beating it very consistently and to a very large degree and so I want to know what's going right, I guess, on these quarterly cadences, especially over the last two, like what surprised you positively, like for example for third quarter, I could have sworn that there was going to be a mismatch in coffee in third quarter, that was the expectation, did that turn out better than you thought? And then going forward, do you think in this volatile environment that quarterly guidance is still possible to give?

Robert Moskow:

Okay. I appreciate it. A follow-up question though, most people would argue that inflation continues to rise from here, that we're not done with inflation and supply chain disruption probably will continue as well, given that you and the whole industry is really playing catch up, is it fair to say that maybe the first half of fiscal '23 will still be a catch-up period in this dynamic?

Mark Smucker:

Hi, Rob, it's Mark. I would just add one comment about the supply chain and Tucker is right. We expect the disruption to continue what I - on a positive, we have made great strides in managing what we can control and I've highlighted on the previous couple of calls how our execution has been excellent and our people have - it's a tribute to our people that they've been able to stay focused on the day-to-day and the execution and notably one area that we have made some improvement is in labor. So labor being an area that we can control of late, we've actually made some headway there. And there are going to be things just to acknowledge, some things will be out of our control, but the fact that we've made improvements in staffing as well as expanding our supplier base over the last many months has definitely allowed us to manage our supply chain better.

Mark Smucker:

Thanks.

Peter Galbo:

Hi guys, good morning. Thanks for taking the questions.

Peter Galbo:

Tucker, I just wanted to follow up actually on Rob's question, thinking about the fourth quarter and maybe more of a clarification, if we just take kind of the inputs you've given us for 4Q, you end up more towards the high end of the revised range or the very high end of the revised range, and just, I wanted to make sure if that math checked out or what would cause you to deviate from that, just given what you've - given what we know from you at this point?

Peter Galbo:

Okay. And the one other thing I just wanted to clarify, I think last week at CAGNY, you had kind of mentioned capital return or share buyback would kind of help offset some of the dilution from earnings and that wasn't in this morning's release or in any of the prepared comments, just post some of these divestitures I wanted to see if that was still part of the plan in 4Q and going into next year? Thanks very much.

Operator:

Thank you. Your next question is coming from Jason English from Goldman Sachs. Your line is now live.

Mark Smucker:

Good morning, Jason.

Tucker Marshall:

We have timed our dollar-for-dollar green coffee inflation against pricing actions in the fourth quarter.

Tucker Marshall:

What we would envision in our fourth quarter is as we are taking into account the pricing actions that we have taken throughout our fiscal year and the impact to Q4, we have also acknowledged the underlying momentum of the business and we have accounted for the impact of price elasticity of demand by taking material pricing against material inflation.

Operator:

Thank you. Your next question is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.

Mark Smucker:

Good morning.

Tucker Marshall:

Yes, Pam, I would say that we recognize that the category has changed a lot since we acquired that brand and acknowledge that our strength is really in pet snacks and cat food and notably we actually did take the number one position in dry cat food in the last 12-week period with Meow Mix. So, just have we learned, absolutely, right and I think anticipating how that the dog food category has gone and the fact that we are not one of the leaders in the dog food segment of the category speaks to the fact that again our portfolio re-shape, making sure that we're spending our dollars and resources against the areas where we're going to see the most growth and we will remain committed to stabilizing Nutrish and our dog food portfolio, but clearly where our strength lies is pet snacks and cat food.

Tucker Marshall:

Sure. And part of the answer is the same answer I gave a little bit earlier, but just, we can't anticipate what other pricing may come. I would acknowledge and we've talked a lot about coffee. I would just highlight the coffee prices, coffee commodity costs are not at record highs. So, we have seen higher costs such as a one small data point, but the comment really is that we have been very diligent and prudent in adjusting our prices throughout the year for inflation and we have been very prudent in how we have taken those and really just following inflation and making sure that our price increases are truly justified from a cost standpoint and so we have been very successful in doing that. The intent is to recover cost and all of the pricing actions even the most recent ones are no different. And so really, we have to remain focused on maintaining the great top line momentum we've got including investing in our brands while we're offsetting the cost increases. So that will remain our focus and the receptivity has been good, every - as I mentioned earlier, everybody is experiencing this, and so retailers are willing to work with us to find the best path forward and ensure that we're passing on justified cost increases.

Operator:

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

Operator:

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.

Operator:

Hello, and welcome to the J. M. Smucker Company’s Fiscal 2022 Second Quarter Earnings Question-and-Answer Session. At this time all participants are in listen-only mode. During the Q&A, please limit yourselves to two questions and re-queue if you have additional questions. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead sir.

Operator:

Thank you. [Operator Instructions] As a reminder, we ask that you please limit yourselves to two questions and re-queue for your additional questions. [Operator Instructions] Our first question today coming from Andrew Lazar from Barclays. Your line is now live.

Tucker Marshall :

Andrew, good morning. With respect to your question, we are increasing our full year net sales guidance by approximately $160 million or 2% at the midpoint. It really relates to half associated with overdelivery in our second quarter or $80 million. Of that $80 million, what we really saw was underlying business momentum against our brand and growth imperatives along with better than anticipated elasticities from our initial round of pricing actions over the summer and early fall. As we think about the back half of the fiscal year, we are anticipating incremental growth of $80 million against our prior expectations. The prominence of that is coming from continued momentum of volume mix and those better than elasticities. However, in our fourth quarter, we do have significant pricing actions, particularly in coffee and to a lesser extent impacts associated with cost inflation. As a result of that additional round of pricing that will take place in the fourth quarter, we have factored in elasticities against that pricing waiver action. And so, therefore that is all factored into our guidance.

Mark Smucker:

Hey, Andrew, it’s Mark. Thank you for the question. The first headline in response is that, this is up fundamentally about our strategy of investing where the growth is, in other words, we’ve talked about reshaping our portfolio, which is not only about M&A, but it’s also about making sure that we are putting resources against our largest opportunities. And Uncrustables, it’s clearly one of those. If you think about 30 consecutive quarters of growth, mostly, and almost every one of the quarters it’s been double-digits. This last quarter, it’s about 33%. We are going to hit our $0.5 billion target a year early, which is fantastic and that has been supported by the investment in our second facility in Longmont, Colorado, which we have continued to invest in and add lines there to support getting to of course, over $0.5 billion. And yes, you are correct, the investment in the Alabama facility which we will break ground on in the next couple months will support, obviously further growth to what we believe could be north of $1 billion. And so, the reasons why – the reason to believe is, there is just a ton of runway on this brand. I mean, household penetration number one is still low. It’s only about 11%. There is significant room for growth in household penetration. Number two, we have not invested significantly in marketing. And so, we have not turned on any significant consumer spend. And then, there is runway even just on our core peanut butter and jelly offerings, whether that’s in particular, places in U.S. retail, certain locations in away from home. We have not turned on Canada yet. And then there is opportunities in the convenience channel. So, if you think about all of those, plus the fact that we haven’t done any really meaningful innovation, we just think there is a ton of growth opportunities in momentum for that brand.

Mark Smucker:

Thank you, too.

Ken Goldman:

Hi. Thanks so much.

Ken Goldman:

A quick question on free cash. I think the implication is that, you are expecting maybe around $80 million less in operating cash flow than you previously expected. Just looking at your guidance for that in CapEx. And you had highlighted inventory is the biggest headwind. Can you just maybe elaborate a little bit on what’s driving that expected inventory increase? How long you anticipate it lasting?

Ken Goldman:

Makes sense. Thank you. And then, just a quick clarification. I think you mentioned that productivity will help offset some of the inflation you are experiencing. Are you increasing the amount of cost savings that you are looking for which, I think was around $50 million. Has that number gone up or is that still around the same amount that we should be thinking about for the year? Thank you.

Operator:

Thanks. The next question today is coming from Laurent Grandet from Guggenheim. Your line is now live.

Tucker Marshall :

Laurent, you are correct. We expect by the end of our fiscal 2023 to have the phase 2 of the Longmont, Colorado facility complete. And that will enable the ongoing expansion above $500 million sales target. And so, therefore, we do not see a constrain in the near-term associated with the continued growth of that brand and business.

Tucker Marshall :

Laurent, you are correct. We did raise both the low end and the high end of our guidance range by $0.10. That really is broken down as follows

Laurent Grandet :

Okay. Thanks, Mark and keep up the very good execution. Thank you.

Operator:

Thanks. The next question today is coming from Chris Growe from Stifel, Your line is now live.

Mark Smucker:

Good morning.

Tucker Marshall :

So, as you think about the walk for the year, we took an initial round of pricing in the mid-summer timeframe, that is really benefiting the back nine months of the year. And so, that is coming into help support sort of the initial look that we had of cost inflation coming into the fiscal year. When we came through our first quarter, we had additional cost increases that we were seeing that we have taken subsequent rounds of pricing that we will start to see benefiting primarily the fourth quarter, to your point. And then, lastly is, we have seen increased cost since our last call primarily in green coffee and in transportation, which is having us to take an additional round of pricing in our coffee portfolio and pet portfolio as well and we believe that benefit will come through in Q4. So, to your point, yes, we are seeing the predominance of the benefit coming through our Q4 and then, we will pick up sort of the lapping effects into the balance of FY 2023.

Mark Smucker:

Sure, Chris. I think, Tucker in one of his previous answers talked a little bit about some of our elasticity assumptions going forward. But the success that we’ve experienced is a couple of things. First and foremost is what I just said in Laurent’s question about the firing on all cylinders of managing the supply chain through all of its dynamic changes, as well as continuing to invest in our brands during this time, not cut marketing in a material way, but continuing to invest. We’ve had some world-class marketing campaigns, notably Jiff, most recently, as well as just a store level execution to make sure that we do our best work trying to keep our brand in stock. So, I think, it’s those things, plus what we believe is an ongoing tailwind of elevated at-home consumption, driven by the fact that folks are not going to go back to work the way that they wanted it. There is going to be, we believe, a hybrid work model that is going to keep people in their homes more than they used to. And so, since we clearly are breakfast and lunch oriented, that is definitely going to continue to support our business, as well as you know, focusing on pet snacks, Milk-Bone alone was up 17% in the quarter. So, we’ve just had some very nice results supported by both our execution and then some of this what we view as a persisting tailwind of at-home consumption.

Mark Smucker:

Thank you too.

Steve Powers:

Hey, great. Thanks and good morning everybody.

Steve Powers:

Maybe, if you just – circling back to productivity, I think in response to – I believe it was Ken’s question earlier, you said you were not taking up productivity targets for 2022. But you have updated your SG&A forecast lower despite what I would assume is upward pressure on some of those components. So, maybe you can just help me out there in terms of where that – those savings are coming from and if they are just sort of a pullback on this more discretionary items as opposed to corporate activity?

Steve Powers:

Okay. That’s helpful. Thank you. And I guess, maybe, shifting gears if we could circle back to a topic that was sort of in focus last quarter, and maybe just is there any updates in your thinking around Nutrish from the dry dog food side and what you are planning to drive some future reinvigoration there?

Steve Powers:

Very good. Thank you very much.

Bryan Spillane:

Hi. Thanks, operator. Good morning, everyone. Tucker, maybe just to follow-up a little bit on the inflation. We are at a, I guess, now low double-digit runrate year-to-date. And so, I guess, what I was trying to get some perspective or would like to get some perspective on, do we think at this point that we are closer to a peak in terms of just where cost elevation goes. And maybe underneath that, just so we are thinking about maybe the next 12 months even, just what are the pieces that continue to be areas of pressure and may continue to put pressure and what might actually be a source of maybe more moderation as we look forward. Just we try to understand, continues to elevate and what are the probabilities that rate of inflation as we come back a quarter later continues to move higher?

Bryan Spillane:

Okay. Thanks for that. And then, I guess, as we are thinking about the incremental pricing actions, right, the incremental price that you are going to take back half of the year, is that – are those price increases really matching the inflation that you know now. And I guess, if inflation continues to go higher, would it maybe suggest that at some point you have to come back for additional rounds of price increases?

Bryan Spillane:

Alright. Thanks, Mark. Thanks, Tucker. Have a happy Thanksgiving both of you.

Operator:

Thanks. The next question today is coming from Alexia Howard from Bernstein. Your line is now live.

Mark Smucker:

Good morning.

Mark Smucker:

Alexia, it’s Mark, and I’ll start here. So, first of all, I think it’s what we’ve been seeing in terms of just the supply chain uncertainties, how dynamic that is, some of the labor challenges that exists across multiple industries. I think, if you think about those components, those are probably going to persist for the foreseeable future. I think that’s been a pretty consistent theme. The way I would describe it is, when I say dynamic, what we mean is, the challenges that exist can change week-to-week, months-to-months. It could be an ingredient or a packaging component at one point it could be some isolated labor challenges in a particular geography. So it really is somewhat of a moving target. And the fact that we – about six months ago, did actually changed some of our organization structure. We became a flatter organization, which truly has allowed us to be very agile and pivot to those – to where we do see challenges very quickly. And again, I think it’s that ability to be agile and to respond to this very dynamic environment that has allowed us to stay on top of it and continue to deliver products ultimately to our end customers.

Mark Smucker:

Okay. Sure, Alexia. Thanks for the question. So, the general headline is what I said before, it’s just a combination of both consumer and customer, marketing and sales execution. Those two things working together has been incredibly successful. If I recall, we may have spoken a bit at CAGNY last year about some of our new online capabilities that actually just that by way of an example with our retail customers, we have rolled out a capability where we are able to actually see outages, for example, in store clusters or geographies and are able to react to potentially those out of stock quickly and make sure that if we are in, say, a major metropolitan area with one customer, that we can actually go in and target specific groups of stores and actually ensure that we are getting products on the shelves, whether that’s even out of the backroom or not, it’s truly very tactical. But we believe that that capability is one example of how we are able to quickly react and we do believe that that’s best-in-class.

Operator:

Thanks. Our next question today is coming from Robert Moskow from Credit Suisse. Your line is now live.

Mark Smucker:

Rob, it’s Mark. Let me start with your second question around labor. It is systemic, as you know and as I mentioned to Alexia, it is a moving target and in terms of where we might experience is certain labor shortages. I think it depends on the geography. Sometimes in certain geographies, we may be competing for skilled labor. I would – what I would tell you in general is that less skilled labor, which sometimes would be in distribution centers is the labor that probably moves around the most and we see probably the most turnover. But again, I think we’ve been very agile at adapting to the challenges and been able to stay on top of things for the most part. But it is again - it varies and it can shift over time. Pet snacks, I think, in terms of a little bit more specific, obviously, we have been supporting our pet snacks business with advertising which has been very effective. And again some of the other capabilities around sales at the store level have allowed us to remain in stock and Milk-Bone, specifically has been supported by some new innovation, which has actually done reasonably well also. So it is a combination of all of those things that has been supporting our snacks business, as well as Milk-Bone, specifically. The one other comment I would make and I – just from the channels, I think we might have to follow-up with you and get on the specifics of that, but what we are seeing in our numbers is that is typically growth across all channels and that the consumption growth that you are seeing is generally in line with our sales growth.

Operator:

Thanks. The next question is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.

Tucker Marshall :

No, we are actually moving forward and basically sticking to our guns on our marketing plans. Given the inflation across our portfolio more broadly, the percent of sales that you would see will be down slightly versus last year, but our marketing budgets are very much in line with what they were last year. Coffee is actually up slightly. And so, we continue to invest in our brands.

Mark Smucker:

Yes. Sure. The Milk-Bone, for example is really around utilization and there is a number of new Milk-Bone products. Think about biscuits being dipped some other our products, peanut butter for example. Peanut butter on a dog biscuit is one does do very well and those are relatively easy line extensions for us to do. And so, we’ve done well on Milk-Bone. That’s a really good example. Meow Mix, we’ve continued to invest in marketing there. So we see good growth on Meow Mix. And then, Dunkin and Bustelo in coffee, both are – have maintained their households. In fact, what we are seeing is that they are the two brands in the whole coffee category that have maintained their household both at double-digits. And so, continuing to invest in those brands, as well. And then finally, just on Folgers, as we know that the category continues to shift to K-cups. Keurig has done a great job just in terms of selling more brewers and we think this is going to be probably couple million more brewers coming online. And our Folgers brand has been doing fantastic in the K-cups space. So, just shifting our portfolio again to where the growth in or where the growth is going has really benefited us.

Mark Smucker:

Thank you.

Rebecca Scheuneman:

Great. Good morning.

Rebecca Scheuneman:

So, if we take a look at Smucker’s history of innovation and Uncrustables has been a clear home run. But there have been a few stumbles at play. And I am just wondering if you could kind of share your product development process? And what Smuckers does to set itself apart from others in this highly competitive industry?

Rebecca Scheuneman:

That’s very helpful. Thank you. And also, so, it was about a year ago now, at your Investor Day, you’ve laid out your new plan to redesign your marketing model. And I was wondering if you could provide an update on how that strategy is progressing? And as part of that, if you can share like, what percent of your media spend is allocated to digital medium?

Rebecca Scheuneman:

Great. Thank you so much.

Mark Smucker:

Well, first of all, I want to wish everyone a very happy holiday and very happy Thanksgiving this week. Thank you for being with us this week. And I know it’s a holiday week and I think the most important thing is just to pause and thank our employees who have truly done yeoman’s work managing this company through a tremendous number of challenges and really delivering results. So, thank you most of all to our employees and thank you to our shareholders for your support.

Operator:

Good morning and welcome to the J.M. Smucker Company's fiscal 2022 first quarter earnings question-and-answer session. This conference is being recorded. [Operator Instructions] I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Operator:

[Operator Instructions] Our first question today is coming from Andrew Lazar from Barclays.