The J.M. Smucker Co. Announces Fiscal 2023 Second Quarter Results

ORRVILLE, Ohio, Nov. 21, 2022 /PRNewswire/ -- The J.M. Smucker Co. (NYSE: SJM) today announced results for the second quarter ended October 31, 2022, of its 2023 fiscal year. Financial results for the second quarter of fiscal year 2023 reflect the divestitures of the natural beverage and grains businesses on January 31, 2022, and the private label dry pet food business on December 1, 2021. All comparisons are to the second quarter of the prior fiscal year, unless otherwise noted.

EXECUTIVE SUMMARY

• Net sales increased $155.1 million, or 8 percent. Net sales excluding divestitures and foreign currency exchange increased 11 percent.
• Net income per diluted share was $1.79. Adjusted earnings per share was $2.40, a decrease of 1 percent.
• Cash provided by operations was $205.0 million, an increase of 24 percent. Free cash flow was $102.9 million, compared to $105.9 million in the prior year.
• The Company increased its full-year fiscal 2023 financial outlook for net sales and adjusted earnings per share.

CHIEF EXECUTIVE OFFICER REMARKS

"Our second quarter results reflect the ongoing strength of our business, continued demand for our leading brands, and the ability of our team to execute with excellence," said Mark Smucker, Chair of the Board, President and Chief Executive Officer. "We delivered organic top-line growth across all of our businesses, driven by the strength of our portfolio, and our ability to recover cost inflation and manage our supply chain environment."

SECOND QUARTER CONSOLIDATED RESULTS

Net Sales

Net sales increased 8 percent. Excluding noncomparable net sales in the prior year of $65.0 million from the divested natural beverage and grains and private label dry pet food businesses, as well as $7.0 million of unfavorable foreign currency exchange, net sales increased $227.1 million, or 11 percent.

The increase in comparable net sales was primarily driven by a 17 percentage point increase from net price realization, primarily 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.

Operating Income

Gross profit decreased $10.4 million, or 1 percent. The decrease reflects a reduced contribution from volume/mix and the noncomparable impact of the divested natural beverage and grains businesses, partially offset by a favorable net impact of higher net price realization and increased commodity and ingredient, manufacturing, transportation, and packaging costs, inclusive of costs related to a voluntary recall of Jif® peanut butter products in May 2022. Operating income decreased $18.4 million, or 6 percent, primarily reflecting the decrease in gross profit and a $6.6 million increase in selling, distribution, and administrative ("SD&A") expenses.

Adjusted gross profit increased $0.1 million. The difference between adjusted gross profit and generally accepted accounting principles ("GAAP") results reflects the exclusion of the change in net cumulative unallocated derivative gains and losses and special project costs. Adjusted operating income, which further reflects the exclusion of amortization and other special project costs as compared to GAAP operating income, decreased $8.3 million, or 2 percent.

Interest Expense and Income Taxes

Net interest expense decreased $0.6 million, primarily due to the net favorable impact of debt repayments and issuances in the prior fiscal year.

The effective income tax rate was 24.4 percent compared to 23.4 percent in the prior year, reflecting a higher state income tax rate in the current year. The adjusted effective income tax rate was 24.4 percent, compared to 23.5 percent in the prior year.

Cash Flow and Debt

Cash provided by operating activities was $205.0 million, compared to $165.1 million in the prior year, primarily reflecting lower cash required to fund working capital. Free cash flow was $102.9 million, compared to $105.9 million in the prior year, as a $42.9 million increase in capital expenditures offset the increase in cash provided by operating activities. Net debt repayments in the quarter totaled $88.8 million.

FULL-YEAR OUTLOOK

The Company updated its full-year fiscal 2023 guidance as summarized below:

Ongoing cost inflation, volatility in 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 product recall will impact our financial results for the fiscal year. The Company continues to focus on managing the elements it can control, including taking the necessary steps to minimize the impact of cost inflation, the product recall, and any potential business disruption. This guidance reflects performance expectations based on the Company's current understanding of the overall environment, inclusive of the estimated unfavorable impact of the product recall.

Net sales are expected to increase 5.5 to 6.5 percent compared to the prior year. Excluding noncomparable net sales in the prior year for the divested private label dry pet food and natural beverage and grains businesses, net sales are expected to increase approximately 8.0 percent at the mid-point of the guidance range. This reflects higher net pricing to recover cost inflation across multiple categories, partially offset by the anticipated volume/mix impact of price elasticity of demand, and an estimated 2 percent unfavorable impact related to manufacturing downtime and customer returns and fees from the Jif® peanut butter product recall.

Adjusted earnings per share is expected to range from $8.35 to $8.75, including an estimated $0.80 unfavorable impact related to the Jif® peanut butter product recall. This range reflects the benefits of higher net pricing actions and shares repurchased in the prior fiscal year being more than offset by cost inflation, the anticipated volume/mix impact of price elasticity of demand, the unfavorable impact of the Jif® peanut butter product recall, and increased SD&A expenses. This guidance assumes an adjusted gross profit margin of 33.5 percent, an adjusted effective income tax rate of 24.1 percent, and 106.9 million common shares outstanding. Free cash flow is expected to be approximately $550 million, inclusive of the estimated unfavorable impact related to the Jif® peanut butter product recall, with capital expenditures of $550 million.

SECOND QUARTER SEGMENT RESULTS

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

U.S. Retail Pet Foods

Net sales increased $63.6 million, or 9 percent. Excluding $27.8 million of noncomparable net sales in the prior year related to the divested private label dry pet food business, net sales increased $91.4 million, or 14 percent. Higher net price realization increased net sales by 16 percentage points, primarily reflecting list price increases across the portfolio. Volume/mix decreased net sales by 3 percentage points, primarily driven by decreases for dog food.

Segment profit increased $20.5 million, primarily reflecting a favorable net impact of higher net price realization and increased commodity and ingredient, transportation, and packaging costs.

U.S. Retail Coffee

Net sales increased $64.7 million, or 10 percent. Net price realization increased net sales by 23 percentage points, primarily reflecting list price increases across the portfolio, partially offset by a reduced contribution from volume/mix of 13 percentage points driven by the Folgers® and Dunkin'® brands.

Segment profit decreased $20.1 million, primarily reflecting the decreased contribution from volume/mix and higher marketing spend, partially offset by a favorable net impact of higher net price realization and increased commodity and manufacturing costs.

U.S. Retail Consumer Foods

Net sales decreased $9.0 million, or 2 percent. Excluding $35.7 million of noncomparable net sales in the prior year related to the divested natural beverage and grains businesses, net sales increased $26.7 million, or 7 percent. Higher net price realization increased net sales by 9 percentage points, primarily reflecting list price increases across the portfolio. 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 Smucker's® Uncrustables® frozen sandwiches.

Segment profit decreased $10.7 million, primarily reflecting higher manufacturing, commodity and ingredient, and packaging costs, inclusive of costs related to the Jif® peanut butter product recall, and the noncomparable segment profit in the prior year related to the divested natural beverage and grains businesses, partially offset by higher net price realization, lower marketing spend and favorable volume/mix.

International and Away From Home

Net sales increased $35.8 million, or 14 percent. Excluding $1.5 million of noncomparable net sales in the prior year related to the divested natural beverage and grains businesses and $7.0 million of unfavorable foreign currency exchange, net sales increased $44.3 million, or 17 percent. Excluding the impact of the divested businesses and foreign currency exchange, net sales increased 19 percent and 15 percent for the Away from Home and International operating segments, respectively. Net price realization contributed an 18 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products and baking mixes and ingredients, partially offset by a decreased contribution from volume/mix of 1 percentage point.

Segment profit increased $1.1 million, primarily reflecting a favorable net impact of higher net price realization and increased commodity costs, partially offset by a decreased contribution from volume/mix.

At approximately 7:00 a.m. Eastern Time today, the Company will post to its website at investors.jmsmucker.com a pre-recorded management discussion of its fiscal 2023 second quarter financial results, a transcript of the discussion, and supplemental materials. At 9:00 a.m. Eastern 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.

Financial Results Discussion and Webcast

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 impact of the COVID-19 pandemic on the Company's business, industry, suppliers, customers, consumers, employees, and communities; disruptions or inefficiencies in the Company's operations or supply chain, including any impact caused by product recalls (including the recent Jif® peanut butter product recall), political instability, terrorism, armed hostilities (including the ongoing conflict between Russia and Ukraine), extreme weather conditions, natural disasters, pandemics (including the COVID-19 pandemic), work stoppages or labor shortages (including the potential national rail strike), 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 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, including any impact of the COVID-19 pandemic; 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, dividend payments, and share repurchases; 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 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.

Each generation of consumers leaves their mark on culture by establishing new expectations for food and the companies that make it. At The J.M. Smucker Co., it is our privilege to be at the heart of this dynamic with a diverse portfolio that appeals to each generation of people and pets and is found in more than 80 percent of U.S. homes and countless restaurants. This includes a mix of iconic brands consumers have always loved such as Folgers®, Jif® and Milk-Bone® and new favorites like Café Bustelo®, Smucker's® Uncrustables® and Rachael Ray® Nutrish®. By continuing to immerse ourselves in consumer preferences and acting responsibly, we will continue growing our business and the positive impact we have on society. For more information, please visit jmsmucker.com.

The J.M. Smucker Co. is the owner of all trademarks referenced herein, except for the following, which are used under license: Dunkin'® is a trademark of DD IP Holder LLC, and Rachael Ray® is a trademark of Ray Marks II 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. 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 divestitures and foreign currency exchange; adjusted gross profit; adjusted operating income; adjusted income; adjusted earnings per share; earnings before interest, taxes, depreciation, amortization, and impairment charges related to intangible assets ("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 one-time 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 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 2023 outlook.

The following tables provide a reconciliation of the Company's fiscal 2023 guidance for estimated adjusted earnings per share and free cash flow.

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SOURCE The J.M. Smucker Co.