The J.M. Smucker Co. Announces Fiscal 2024 Third Quarter Results

ORRVILLE, Ohio, Feb. 27, 2024 /PRNewswire/ -- The J.M. Smucker Co. (NYSE: SJM) today announced results for the third quarter ended January 31, 2024, of its 2024 fiscal year. Financial results for the third quarter of fiscal year 2024 reflect the divestiture of the Canada condiment business on January 2, 2024, acquisition of Hostess Brands, Inc. ("Hostess Brands") on November 7, 2023, divestiture of the Sahale Snacks^® business on November 1, 2023, and divestiture of certain pet food brands on April 28, 2023. All comparisons are to the third quarter of the prior fiscal year, unless otherwise noted.

EXECUTIVE SUMMARY

• Net sales increased $12.9 million, or 1 percent. Net sales excluding the acquisition, divestitures, and foreign currency exchange increased 6 percent.
• Net income per diluted share was $1.13. Adjusted earnings per share was $2.48, an increase of 12 percent.
• Cash provided by operations was $406.5 million compared to $584.6 million in the prior year. Free cash flow was $249.6 million, compared to $442.7 million in the prior year.
• The Company updated its full-year fiscal 2024 financial outlook.

CHIEF EXECUTIVE OFFICER REMARKS

"We are pleased to have delivered another quarter of strong financial results, including organic sales and earnings growth, driven by focused execution on our strategic priorities, sustained customer and consumer loyalty to our iconic brands, and volume growth across our business," said Mark Smucker, Chair of the Board, President and Chief Executive Officer. "During the quarter, we completed the acquisition of Hostess Brands and two divestitures, supporting our priority to drive growth by focusing our portfolio and resources toward coffee, snacking, and pet foods."

"Our teams are prioritizing growth opportunities for our leading brands, integrating Hostess Brands, and increasing focus on productivity and synergy-related activities. We remain confident in our strategy to lead in attractive categories, build brands consumers love, and deliver sustainable growth and shareholder value."

THIRD QUARTER CONSOLIDATED RESULTS

Net Sales

Net sales increased $12.9 million, or 1 percent. Excluding $393.6 million of noncomparable net sales in the prior year related to divestitures, $300.3 million of net sales in the current year related to the Hostess Brands acquisition, and $0.3 million of unfavorable foreign currency exchange, net sales increased $106.5 million, or 6 percent.

The increase in comparable net sales reflects a 4 percentage point increase from volume/mix, primarily driven by Meow Mix^® cat food, contract manufacturing sales related to the divested pet food brands, and the Café Bustelo^® brand. Comparable net sales growth was also supported by a 2 percentage point increase from net price realization, primarily due to list price increases for the U.S. Retail Pet Foods and U.S. Retail Frozen Handheld and Spreads segments and for International and Away From Home, partially offset by lower net price realization for the U.S. Retail Coffee segment.

Operating Income

Gross profit increased $67.3 million, or 9 percent. The increase primarily reflects a favorable impact from the acquisition of Hostess Brands, higher net price realization, favorable volume/mix, and lower costs, partially offset by the impact of divestitures. Operating income decreased $20.5 million, or 6 percent, primarily driven by a $98.3 million increase in special project costs, reflecting integration costs related to the acquisition of Hostess Brands, partially offset by the increase in gross profit and a $6.7 million decrease in selling, distribution, and administrative ("SD&A") expenses.

Adjusted gross profit increased $89.0 million, or 12 percent. The difference between adjusted gross profit and generally accepted accounting principles ("GAAP") results primarily reflects the exclusion of the change in net cumulative unallocated derivative gains and losses. Adjusted operating income, which further reflects the exclusion of special project costs and amortization as compared to GAAP operating income, increased $99.9 million, or 28 percent.

Interest Expense, Other Debt Costs, and Income Taxes

Net interest expense increased $61.9 million, primarily due to an increase in interest expense related to the Senior Notes and Term Loan issued to partially finance the acquisition of Hostess Brands.

The effective income tax rate was 38.4 percent, compared to 24.3 percent in the prior year. The adjusted effective income tax rate was 26.1 percent, compared to 24.8 percent in the prior year. The increase in the effective income tax rate was primarily due to one-time adjustments associated with the acquisition of Hostess Brands, which are excluded from the adjusted effective income tax rate. Additionally, higher state income taxes related to the acquisition resulted in an increase to the effective and adjusted effective income tax rates.

Cash Flow and Debt

Cash provided by operating activities was $406.5 million, compared to $584.6 million in the prior year, primarily driven by more cash required to fund working capital and lower net income adjusted for noncash items, partially offset by the settlement of the Hostess Brands interest rate contracts. Free cash flow was $249.6 million, compared to $442.7 million in the prior year, reflecting the decrease in cash provided by operating activities and a $15.0 million increase in capital expenditures.

FULL-YEAR OUTLOOK

The Company updated its full-year fiscal 2024 guidance, as summarized below.

Comparable net sales are expected to increase approximately 8.75 percent compared to the prior year. This reflects favorable volume/mix from underlying business momentum, as well as higher net pricing. Net sales are expected to decrease approximately 3.6 percent compared to the prior year, reflecting net sales of approximately $8.22 billion. The net sales decrease reflects $1.5 billion of net sales in the prior year related to the divested pet food brands, $23.7 million of net sales in the prior year related to the divested Sahale Snacks^® business, $19.4 million of net sales in the prior year related to the divested Canada condiment business, and $650 million of anticipated net sales in the current fiscal year related to the acquisition of Hostess Brands.

Adjusted earnings per share is expected to range from $9.45 to $9.65. The adjusted earnings per share range reflects a net unfavorable impact of approximately $0.60 related to stranded overhead from the pet food divestiture, inclusive of income and reimbursements from transition services and contract manufacturing agreements. The adjusted earnings per share range also reflects a net unfavorable impact of approximately $0.40 related to the Hostess Brands acquisition, which includes incremental profits from the Sweet Baked Snacks reportable segment, more than offset by incremental administrative expense related to the acquisition, incremental interest expense related to new debt to fund the acquisition, incremental tax expense related to a change in the effective income tax rate, and additional common shares issued in connection with the transaction.

This guidance assumes an adjusted gross profit margin of approximately 37.5 percent, an adjusted effective income tax rate of 24.6 percent, and 104.4 million weighted-average common shares outstanding, inclusive of the effect of the Hostess Brands acquisition. Free cash flow is expected to be approximately $500.0 million with capital expenditures of $610.0 million.

THIRD QUARTER SEGMENT RESULTS

(Dollar amounts in the segment tables below are reported in millions.)

U.S. Retail Coffee

Net sales decreased $7.6 million, or 1 percent. Net price realization reduced net sales by 4 percentage points, primarily driven by list price decreases, partially offset by reduced trade spend. Volume/mix increased net sales by 3 percentage points, primarily driven by the Café Bustelo^® and Dunkin'^® brands.

Segment profit increased $3.8 million, primarily driven by favorable volume/mix, mostly offset by the unfavorable net impact of lower net price realization and lower commodity costs.

U.S. Retail Frozen Handheld and Spreads

Net sales increased $2.6 million, or 1 percent. Excluding $7.8 million of noncomparable net sales in the prior year related to the divestiture of the Sahale Snacks^® business, net sales increased $10.4 million, or 2 percent. Higher net price realization increased net sales by 5 percentage points, primarily reflecting a favorable impact of lapping customer returns and fees related to the Jif^® peanut butter product recall in the prior year and a list price increase for Jif^® peanut butter. Volume/mix decreased net sales by 2 percentage points, primarily driven by decreases for Jif^® peanut butter and Smucker's^® toppings and syrups.

Segment profit increased $10.0 million, primarily reflecting higher net price realization, inclusive of a favorable impact of lapping the recall, partially offset by increased marketing investments and pre-production expenses.

U.S. Retail Pet Foods

Net sales decreased $293.4 million, or 39 percent. Excluding $372.5 million of noncomparable net sales in the prior year related to the divested pet food brands, net sales increased $79.1 million, or 20 percent. Volume/mix increased net sales by 13 percentage points, primarily driven by Meow Mix^® cat food, $24.5 million of contract manufacturing sales related to the divestiture, and growth for Milk-Bone^® dog snacks. Higher net price realization increased net sales by 7 percentage points, primarily reflecting list price increases across the portfolio.

Segment profit increased $0.5 million, primarily driven by higher net price realization, favorable volume/mix, and lower costs, mostly offset by the impact of noncomparable segment profit in the prior year related to the divested brands and increased distribution costs.

Sweet Baked Snacks

The segment contributed net sales of $300.3 million and segment profit of $68.0 million, including an unfavorable fair value purchase accounting adjustment of approximately $8.1 million attributable to acquired inventory. Net sales and segment profit measures for the prior year are not provided due to acquisition-related accounting adjustments and differences in non-GAAP reporting measures under prior ownership.

International and Away From Home

Net sales increased $11.0 million, or 4 percent. Excluding $13.3 million of noncomparable net sales in the prior year related to the divested brands and $0.3 million of unfavorable foreign currency exchange, net sales increased $24.6 million, or 9 percent. Volume/mix increased net sales by 5 percentage points, primarily driven by Smucker's^® Uncrustables^® frozen sandwiches. Net price realization contributed a 4 percentage point increase to net sales, primarily driven by list price increases across the majority of the portfolio, partially offset by increased trade spend.

Segment profit increased $12.8 million, primarily reflecting higher net price realization and lower costs.

Financial Results Discussion and Webcast

At approximately 7:00 a.m. Eastern Standard Time today, the Company will post to its website at investors.jmsmucker.com a pre-recorded management discussion of its fiscal 2024 third quarter financial results, a transcript of the discussion, and supplemental materials. At 9:00 a.m. Eastern Standard Time today, the Company will webcast a live question and answer session with Mark Smucker, Chair of the Board, President and Chief Executive Officer, and Tucker Marshall, Chief Financial Officer. The live webcast and replay can be accessed at investors.jmsmucker.com.

The J.M. Smucker Co. Forward-Looking Statements

This press release contains forward-looking statements, such as projected net sales, operating results, earnings, and cash flows that are subject to risks and uncertainties that could cause actual results to differ materially from future results expressed or implied by those forward-looking statements. The risks, uncertainties, important factors, and assumptions listed and discussed in this press release, which could cause actual results to differ materially from those expressed, include: the Company's ability to successfully integrate Hostess Brands' operations and employees and to implement plans and achieve financial forecasts with respect to the Hostess Brands' business; the Company's ability to realize the anticipated benefits, including synergies and cost savings, related to the Hostess Brands acquisition, including the possibility that the expected benefits will not be realized or will not be realized within the expected time period; disruption from the acquisition of Hostess Brands by diverting the attention of the Company's management and making it more difficult to maintain business and operational relationships; the negative effects of the acquisition of Hostess Brands on the market price of the Company's common shares; the amount of the costs, fees, expenses, and charges and the risk of litigation related to the acquisition of Hostess Brands; the effect of the acquisition of Hostess Brands on the Company's business relationships, operating results, ability to hire and retain key talent, and business generally; the effect of the sale of certain pet food brands on the Company's ability to retain key personnel and to maintain relationships with customers, suppliers, and other business partners; disruptions or inefficiencies in the Company's operations or supply chain, including any impact caused by product recalls, political instability, terrorism, armed hostilities (including the ongoing conflict between Russia and Ukraine), extreme weather conditions, natural disasters, pandemics (including the novel coronavirus), work stoppages or labor shortages, or other calamities; risks related to the availability, and cost inflation in, supply chain inputs, including labor, raw materials, commodities, packaging, and transportation; the impact of food security concerns involving either the Company's products or its competitors' products, including changes in consumer preference, consumer litigation, actions by the U.S. Food and Drug Administration or other agencies, and product recalls; risks associated with derivative and purchasing strategies the Company employs to manage commodity pricing and interest rate risks; the availability of reliable transportation on acceptable terms; the ability to achieve cost savings related to restructuring and cost management programs in the amounts and within the time frames currently anticipated; the ability to generate sufficient cash flow to continue operating under the Company's capital deployment model, including capital expenditures, debt repayment to meet our deleveraging objectives, dividend payments, and share repurchases; a change in outlook or downgrade in the Company's public credit ratings by a rating agency below investment grade; the ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period; the success and cost of marketing and sales programs and strategies intended to promote growth in the Company's businesses, including product innovation; general competitive activity in the market, including competitors' pricing practices and promotional spending levels; the Company's ability to attract and retain key talent; the concentration of certain of the Company's businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and the Company's ability to manage and maintain key relationships; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in the useful lives of other intangible assets or other long-lived assets; the impact of new or changes to existing governmental laws and regulations and their application; the outcome of tax examinations, changes in tax laws, and other tax matters; a disruption, failure, or security breach of the Company or their suppliers' information technology systems, including, but not limited to, ransomware attacks; foreign currency exchange rate and interest rate fluctuations; and risks related to other factors described under "Risk Factors" in other reports and statements filed with the Securities and Exchange Commission, including the Company's most recent Annual Report on Form 10-K. The Company undertakes no obligation to update or revise these forward-looking statements, which speak only as of the date made, to reflect new events or circumstances.

About The J.M. Smucker Co.

At The J.M. Smucker Co., it is our privilege to make food people and pets love by offering a diverse portfolio family of brands available across North America. We are proud to lead in the coffee, peanut butter, fruit spreads, frozen handheld, sweet baked goods, dog snacks, and cat food categories by offering brands consumers trust for themselves and their families each day, including Folgers^®, Dunkin'^®, Café Bustelo^®, Jif^®, Smucker's^® Uncrustables^®, Smucker's^®, Hostess^®, Voortman^®, Milk-Bone^®, and Meow Mix^®. Through our unwavering commitment to producing quality products, operating responsibly and ethically and delivering on our Purpose, we will continue to grow our business while making a positive impact on society. For more information, please visit jmsmucker.com.

The J.M. Smucker Co. is the owner of all trademarks referenced herein, except for Dunkin'^®, which is a trademark of DD IP Holder LLC. The Dunkin'^® brand is licensed to The J.M. Smucker Co. for packaged coffee products sold in retail channels such as grocery stores, mass merchandisers, club stores, e-commerce and drug stores, and in certain away from home channels. This information does not pertain to products for sale in Dunkin'^® restaurants.

Non-GAAP Financial Measures

The Company uses non-GAAP financial measures, including: net sales excluding acquisition, divestitures, and foreign currency exchange; adjusted gross profit; adjusted operating income; adjusted income; adjusted earnings per share; earnings before interest, taxes, depreciation, amortization, impairment charges related to intangible assets, and gains and losses on divestitures ("EBITDA (as adjusted)"); and free cash flow, as key measures for purposes of evaluating performance internally. The Company believes that investors' understanding of its performance is enhanced by disclosing these performance measures. Furthermore, these non-GAAP financial measures are used by management in preparation of the annual budget and for the monthly analyses of its operating results. The Board of Directors also utilizes certain non-GAAP financial measures as components for measuring performance for incentive compensation purposes.

Non-GAAP financial measures exclude certain items affecting comparability that can significantly affect the year-over-year assessment of operating results, which include amortization expense and impairment charges related to intangible assets; certain divestiture, acquisition, integration, and restructuring costs ("special project costs"); gains and losses on divestitures; the net change in cumulative unallocated gains and losses on commodity and foreign currency exchange derivative activities ("change in net cumulative unallocated derivative gains and losses"); and other infrequently occurring items that do not directly reflect ongoing operating results. Income taxes, as adjusted is calculated using an adjusted effective income tax rate that is applied to adjusted income before income taxes and reflects the exclusion of the previously discussed items, as well as any adjustments for one-time tax-related activities, when they occur. While this adjusted effective income tax rate does not generally differ materially from the GAAP effective income tax rate, certain exclusions from non-GAAP results, such as unfavorable tax impacts associated with the acquisition of Hostess Brands, can significantly impact the adjusted effective income tax rate.

These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with U.S. GAAP. Rather, the presentation of these non-GAAP financial measures supplements other metrics used by management to internally evaluate its businesses and facilitate the comparison of past and present operations and liquidity. These non-GAAP financial measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments. A reconciliation of certain non-GAAP financial measures to the comparable GAAP financial measure for the current and prior year periods is included in the "Unaudited Non-GAAP Financial Measures" tables. The Company has also provided a reconciliation of non-GAAP financial measures for its fiscal year 2024 outlook.

The following tables provide a reconciliation of the Company's fiscal 2024 guidance for estimated adjusted earnings per share and free cash flow.

SOURCE The J.M. Smucker Co.

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