The J. M. Smucker Company (SJM) Earnings

Management highlights

- **Overall Portfolio Strategy**: Management maintains a positive outlook on overall business momentum, noting the company's differentiated, cohesive portfolio of complementary categories delivers consistent results. The company remains focused on three core strategic priorities: driving organic volume growth across key platforms, improving profitability to accelerate earnings growth, and maintaining disciplined capital deployment. - **Key Brand Updates**: Uncrustables is transitioning its entire portfolio to a fridge-friendly format, expected to be fully completed by mid-year 2027. The brand is positioned for ongoing growth via expanded distribution, higher household penetration, and new product innovation (including higher-protein morning offerings). For coffee, Bustelo is noted as a high-growth brand that has crossed the $500 million sales threshold, and the company remains the category leader across all value segments. For spreads, the company leads both conventional and natural/organic peanut butter categories, with recent limited-ingredient product launches targeted at growing consumer demand for cleaner formulations. For Hostess, the company completed manufacturing footprint consolidation (recovering from a prior quarter fire faster than expected) and has completed SKU rationalization to strengthen the portfolio, with the breakfast donut category continuing strong performance. - **Transformation and Productivity**: The company's Transformation Office is building a multi-year pipeline of cost savings focused on two core areas: improving efficiency across the supply chain (procurement, manufacturing, and distribution) and leveraging technology to reduce company-wide costs. The company targets annual gross cost savings equal to a couple of percentage points of revenue annually, to offset inflation, reinvest in growth, and return capital to shareholders. - **Capital Deployment**: Management maintains clear capital priorities: after funding roughly $325 million in flat annual capital expenditures, the company prioritizes sustaining and growing its quarterly dividend, paying down debt to reach a 3x leverage target, and will evaluate potential share repurchases once the leverage target is achieved.

Guidance

- **Overall Full-Year FY27 Guidance**: Management expects 85 basis point year-over-year EPS growth, with total net sales expected to decline 3% to 4% year-over-year, with flattish sales in Q1 FY27 and deflation-driven declines emerging from Q2 onward. - **Cost Outlook**: Full-year FY27 is expected to see mid-single-digit overall deflation driven primarily by green coffee prices. Excluding green coffee and tariffs, the company expects low single-digit cost inflation across packaging, ingredients, and transportation, which has already been fully embedded in the current guidance range. Productivity savings and strategic pricing actions are expected to offset this inflation. - **Segment Specific Guidance**: Coffee is expected to deliver most of the company's FY27 segment profit growth, with retail coffee margins returning to the high 20% range starting in Q2 FY27. Sweet Bake Snacks (Hostess) is expected to deliver ~30% year-over-year segment profit growth. Frozen Handheld and Spreads segment profit is expected to be down year-over-year as Uncrustables growth is offset by spreads pressure and increased strategic marketing investments behind Uncrustables. Pet segment profit growth is expected to be muted by inflation and marketing investments, with low single-digit top line growth. Away-from-home operating profit is expected to be flat year-over-year. - **Marketing Investment**: Total marketing spend for FY27 is planned at ~5.7% of net sales, totaling almost $500 million (up $30 million year-over-year), with fairly balanced spend across all four quarters starting in Q1. - **Free Cash Flow and Leverage**: The company expects ~$1 billion in free cash flow for FY27, with $325 million in capital expenditures (flat year-over-year). Management targets paying down an additional $500 million in debt to reach a ~3x net leverage ratio by the end of FY27, down from 3.8x at the end of FY26. - The full guidance does not include any assumed benefits from potential previously-paid tariff refunds, and any potential share repurchases are also excluded from the current guidance.

Segment performance

Segment performance details were not explicitly provided in the Q&A transcript in absolute or percentage contribution terms. However, the following directional performance was noted: - **Coffee**: Bustelo exceeded $500 million in annual sales, and the segment is expected to deliver significant segment profit growth in FY27 driven by green coffee deflation and lapping prior unmitigated tariffs. Retail coffee segment margins are expected to return to the high 20% range starting in Q2 FY27. - **Frozen Handheld and Spreads**: Uncrustables reached $1 billion in annual sales, with ongoing mid-single-digit volume growth expected in FY27. The broader spreads segment is experiencing modest pressure, leading to overall flat to slightly down year-over-year segment profit for the full segment as the company increases strategic marketing investments behind Uncrustables. Q4 FY26 profitability for the segment came in ahead of consensus expectations driven by strong Uncrustables momentum. - **Sweet Bake Snacks (Hostess)**: The Donetsk brand grew 13% and now represents 40% of the segment portfolio. The segment is expected to deliver ~30% year-over-year segment profit growth in FY27 following manufacturing footprint consolidation and SKU rationalization, as the company focuses on stabilizing the business and improving profitability after prior operational challenges. - **Pet**: The segment (including Meow Mix and Milk-Bone) saw Q4 FY26 profitability come in ahead of expectations, with continued volume momentum. Low single-digit top line growth is expected in FY27, with profit partially offset by ongoing inflation and increased marketing investments. Away-from-home operating profit is expected to be flat year-over-year in FY27.

Risks & headwinds

- Macroeconomic uncertainty and ongoing geopolitical tensions in the Middle East create risk that cost inflation (particularly for energy-sensitive inputs like transportation and packaging) could come in higher than the current low single-digit forecast, which would pressure margins unless offset by additional productivity or pricing actions. - Continued cautious consumer spending creates uncertainty around volume elasticity as coffee commodity prices decline; management built prudence into volume forecasts to account for this uncertainty. - The scope and timing of potential tariff refunds for previously paid duties remains uncertain, so no benefit has been included in guidance, presenting upside risk if refunds are approved but no material impact to baseline projections. - The Sweet Bake Snacks (Hostess) segment has faced operational and visibility challenges in recent quarters, and while management has stabilized operations, achieving the expected 30% profit growth depends on continued successful execution of cost controls and trade management.

Analyst Q&A

• Q: What visibility do you have for your low single-digit non-coffee inflation outlook, and what is the risk inflation comes in higher? What offsets do you have?

  A: Management notes the current guidance already embeds the best estimate for low single-digit non-coffee inflation, driven by packaging, ingredients, and transportation costs. Primary upside risk to inflation comes from ongoing Middle East geopolitical tensions. The company will manage upside cost changes via adjusted procurement, hedging strategy, ongoing productivity savings, and targeted pricing actions, and expects to absorb any modest changes within the current guidance range.

• Q: Why are you not forecasting stronger coffee volume growth now that you expect price declines from lower green coffee costs?

  A: Management took a prudent modeling approach to volume elasticities, even after seeing stronger-than-expected elasticities during the prior inflationary period. Given ongoing broad consumer caution, management chose to build conservative volume assumptions rather than bake in high growth expectations, as the company begins passing lower costs to consumers initially via increased trade spending.

• Q: Could you share more detail on the portfolio review for Hostess, and how management is thinking about further portfolio actions?

  A: Management notes the company always evaluates portfolio composition as an ongoing strategic process, but the current focus for Sweet Bake Snacks (Hostess) is entirely on stabilizing the business and improving profitability. Recent progress includes SKU rationalization, faster-than-expected recovery from a prior quarter plant fire, and strong growth in the Donetsk brand which now makes up 40% of the segment portfolio. Management expects it will take time to return to top line growth, and is focused on near-term profitability improvements rather than potential divestiture at this stage.

• Q: What is the timing for passing lower green coffee prices through to list prices, and will this be across the entire coffee portfolio?

  A: Currently the company is focusing on passing lower costs through increased trade spending. List price reductions will only be implemented after the company takes physical inventory of lower-cost green coffee, with no fixed timing committed. The overall deflation impact will hit the top line starting in Q2 FY27, consistent with the full year guidance of 3-4% net sales decline. The company is taking a measured approach to balance fair pricing for consumers and customers with delivering the expected profit recovery outlined in guidance.

• Q: What is your outlook for potential tariff refunds, and could they flow to the bottom line if approved?

  A: The company is pursuing refunds for previously paid tariffs, but the scope and timing of any potential refunds remains highly uncertain. No benefit from refunds has been included in the FY27 guidance, and management cannot provide any guardrails for magnitude or timing at this stage. The company will provide updates as the situation progresses.