Participants

Crystal Beiting; Investor Relations; J M Smucker Co

Tucker Marshall; Chief Financial Officer; J M Smucker Co

Mark Smucker; Chairman of the Board, President, Chief Executive Officer; J M Smucker Co

Andrew Lazar; Analyst; Barclays

Kenneth Goldman; Analyst; J.P. Morgan

Peter Galbo; Analyst; Bank of America

Chris Carey; Analyst; Wells Fargo Securities, LLC

Robert Moscow; Analyst; TD Cowen

Thomas Palmer; Analyst; Citi

Alexia Howard; Analyst; Sanford C. Bernstein & Co.

Scott Marks; Analyst; Jefferies

Max Gumport; Analyst; BNP Paribas Exane

Presentation

Operator

Good morning, and welcome to the J.M. Smucker Company's fiscal 2025 third quarter earnings Question-and-Answer session. This conference call is being recorded. (Operator Instructions) I'll now turn the conference call over to Crystal Beiting, Vice President, Investor Relations and Financial Planning and Analysis. Thank you. You may begin.

Crystal Beiting

Good morning, and thank you for joining our fiscal 2025 third quarter earnings question-and-answer session. I hope everyone had a chance to review our results as detailed in this morning's press release and management's prepared remarks, which are available on our corporate website at jmsmucker.com. We will also post an audio replay of this call at the conclusion of this morning's Q&A session.
During today's call, we may 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, we use non-GAAP results 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.
Participating on this call are Mark Smucker, Chair of the Board, President and Chief Executive Officer; and Tucker Marshall, Chief Financial Officer. We will now open the call for questions. Operator, please queue up the first question.

Question and Answer Session

Operator

(Operator Instructions) Andrew Lazar, Barclays.

Andrew Lazar

Maybe to start, comparable sales in fiscal 3Q declined a bit more than 1%. And by our math, comparable sales need to rise by a bit more than 1% in your fiscal 4Q to hit the revised '25 sales target. Obviously, you see improvement in pet as the disruptions are now behind you, but it seems that sweet baked snacks will probably decline at a somewhat similar rate maybe as the third quarter. So I guess I'm trying to get a better sense of where else you're seeing improvement that underpins the expected sequential sales improvement in 4Q?

Tucker Marshall

Andrew, you did lay that out correctly. We do align with your math. But I do want to share that we do see the sequential improvement on a comparable basis, largely driven within our pet portfolio. As you have noted, along with better-than-expected outlook within our coffee portfolio as well.

Andrew Lazar

Got it. And then I was hoping, Tucker, maybe you could just maybe help us unpack and maybe help quantify a little bit the individual buckets that drove the fiscal '25 comparable sales guidance revision. I know there are a couple of puts and takes in there.

Tucker Marshall

Yes, Andrew. Our guidance revision from 8% at the midpoint on a reported basis down to 7.25% at the midpoint of the new guidance range. That change reflects about $60 million. And really, what it relates to our two things: First, it largely is driven by the miss in our second -- or third quarter, excuse me, the net $20 million miss and then also a call down in Hostess by approximately $20 million in our fourth quarter as well.

Operator

Ken Goldman, JPMorgan.

Kenneth Goldman

You've talked about how you're still very optimistic on Hostess in the category, but you also took a -- and I know this is accounting, but you took an $800 million write-down today on goodwill as well as a $200 million impairment charge. And that's approaching 20% of the price you paid for Hostess. So I wanted to back up a second. Over the years, you've had some very successful acquisitions, right, including Folgers, cat food, pet treats. You've done a great job with Cafe Bustelo. Obviously, a lot of things are working quite well.
But I think it's also fair for some investors to kind of ask about -- a little bit about the process of some of your acquisitions. And no one bet 1,000. But as you progress further with your ownership of this Hostess asset, just taking that step back, how comfortable are you with the general M&A process that Smucker adheres to? And are there any tweaks you would consider making to your strategy in light of maybe Hostess taking a little bit longer to work than what you might have thought?

Mark Smucker

It's Mark. Thanks for the question. We remain very confident in the Hostess acquisition, right? We still believe that it was the right acquisition driven by, obviously, an iconic brand, it's a leading brand, the underlying trends in snacking and specific sweet snacking still bode well for the category. I think as we talked at CAGNY last week, it's fair to say that we recognize that the performance has not been where we wanted, primarily driven by two things.
One, the category temporarily being down driven by a bit more selective consumer. And then although the integration or the cutover itself went very well, acknowledging that we've had some executional missteps that are less related to the integration and more related to distribution, merchandising and just the way that we executed our normal playbook not being quite up to our own standards.
That said, obviously, going back to our confidence in the brand, we outlined five -- and in the prepared remarks as well as last week, five very specific actions that we're taking to stabilize the brand. And obviously, this morning announcing some new leadership changes, which are really intended to accelerate the pace of implementation on those five pillars that we discussed, very confident in that team and that leadership to continue to drive that and use our proven commercial playbook to continue to stabilize that business.
So although we haven't given time frames and so forth in terms of returning to growth, we still do feel very bullish about the brand. And obviously, part of that was the portfolio evolution of getting more focused on Hostess, divesting the value brand as well as Voortman. So still feel very good about it. I appreciate the question, and we'll continue to report back to our shareholders on the progress of those five pillars and how the leadership is delivering against it.

Kenneth Goldman

And thank you, Mark, for that transparency. I really do appreciate it. Tucker, if I can ask a different question quickly. You talked last week at CAGNY, how fiscal '26, too early to obviously give any numbers, but you said you're hoping for or you would expect it to be above Algo before the impact of elasticity related to green coffee inflation.
I think there were some questions coming out about, again, in light of -- or with respect to the fact that you can't give exact numbers, would you expect to be more on algo, below algo, all in? Or is it just too early to say at this point?

Tucker Marshall

It's too early to call it, right? We're in the early innings of our planning phase for next fiscal year. What we wanted to do last week at CAGNY was outlining the elements that we were considering. And we did share that we could see a path to an above algorithm year for adjusted earnings per share. However, due to green coffee inflation, and the impact associated with price elasticity of demand, it will be a meaningful headwind as we enter into FY26. And it's just too early to call whether there'll be a level of earnings growth or not.

Mark Smucker

And if I may, just on coffee. I think it's important to just remember that despite the fact that we're at these record high coffee costs, we've been pleased with the performance of the coffee business in total and the consumer response to obviously, pricing, but of course, our support of the brand, our merchandising, our marketing as well and just reminding ourselves that at-home coffee is still very healthy in terms of consumption and also being by far the most affordable way to consume coffee compared to all other channels or other formats. So I think just given the fact that we play across the value spectrum, and we do offer the consumer a range of choice and value, we still feel very good about the coffee category overall.

Operator

Peter Galbo, Bank of America.

Peter Galbo

Mark, Tucker, just going back to the comments from last week, around coffee, you noted that you'll have to kind of -- or you think you'll have to take additional pricing actions. Just curious if there's anything more you can share with us post the June and October price increases when we might think about seeing an additional price increase in any parameters you want to put around potential magnitude just as we begin to contemplate both the fourth quarter and '26?

Mark Smucker

Yes. Peter, we haven't laid out any specific timing. But as you will recall, we take pricing when our physical costs dictate that. So we're using all of our hedging instruments and so forth. But really, it isn't until we take the coffee into inventory as green that we would start to price for that. So although we haven't laid out when other pricing is going to happen, we do expect it's going to happen in the next fiscal year, probably in the first half.

Peter Galbo

Got it. And Tucker, just to go back on the impairment and Hostess, I guess I just want to understand kind of the dynamics of obviously taking the impairment relative to the 4% top line long-term number you've laid out for Sweet Baked Snacks, whether that's changed at all or whether just your thoughts around profitability for that business longer term have changed that necessitated kind of the impairment because obviously, something there has changed over the longer term, I would think, to discount the cash flows that much more back. So any additional color there would be helpful.

Tucker Marshall

Yes. Peter, the impairment charges that we announced today and recognized really relate to the recent underperformance of the Hostess brand and the overall portfolio. As you know, we stepped into this fiscal year with an outlook for $1.4 billion of top line for that portfolio. And we shared in our prepared remarks that the outlook is now $1.2 billion and the Voortman impact or the Voortman divestiture is only $65 million of that change.
It's just a demonstration of the impacts that we're seeing not only in the category but also across execution that Mark spoke to. Our focus today is the leadership changes that we've announced also along with stabilizing the business or the portfolio through those five key pillars and eventually returning the portfolio to growth over time. Currently, we have not walked away from our long-term outlook of 4% for the business. But right now, the focus is on stabilization and advancing through those pillars.

Operator

Chris Carey, Wells Fargo.

Chris Carey

I'm going to have a confirmation like question to confirm Ken Goldman's question and then a second follow-up. So just on the response to Ken's question around fiscal '26, are you -- the comment that you made when you say a level of earnings growth, are you saying you're unclear as to whether you will grow earnings in fiscal '26 or you're unclear as to how much you will grow earnings in fiscal '26?
So maybe an unfair question in a way because I don't think you said one way or the other, but I just couldn't tell as in that response, you were saying you were unclear if you're were to grow earnings or just how much. So any context there might be helpful. And then I have a follow-up.

Tucker Marshall

Chris, it's difficult to call FY26 outlook today. We can certainly do that on our fourth quarter earnings call as we walk through our -- and complete our planning process. What I want to acknowledge is, is that at CAGNY, we outlined the elements that we were considering for our earnings and for our top line.
And in that, we saw the opportunity to be above algorithm growth for FY26. But what we've also shared is that the green coffee commodity continues to trade at record highs and will be a meaningful headwind to our financial outlook for next fiscal year, and that's where we stand today.

Chris Carey

Okay. Yes, I realize that was kind of unfair question, but I figured I'd ask. Regarding the coffee business, in your prepared remarks, you said that elasticities were actually trending in line or better than your expectations. I think in the quarter, it was a bit worse than the 0.5. Can you maybe just unpack that comment and what you're seeing? And I thought coffee margins were also quite a bit better than expectations in the quarter. Have you just not been hit yet by some of this inflation that we're seeing? Or is the pricing covering? Just any context there as well.

Mark Smucker

Chris, it's Mark. First, I would just go back to the comments I made earlier about how the coffee -- at-home coffee performs at being a very affordable at a fraction of the cost of other channels, right? So versus, say, a coffee shop or an energy drink, for example, coffee is -- brewed cup of coffee even at K-Cup is a fraction of the cost. So it is very affordable and consumers continue to consume coffee, and we remain very confident in our ability to continue to invest in the brands offer the consumer a range of options from value to premium and choice. And we do expect, from a coffee commodity perspective that these things are cyclical and although we are at higher costs, we do expect the commodity over time to normalize.
Yes, if I might just add one comment is that we manage through as a leader, where we always as we think about taking price, we want to recover dollar for dollar on a profit basis. And to the extent that we support margins, it's pulling the other levers that are available to us, such as price pack architecture, our hedging strategy, formulation, flexibility, those types of things. So from a pricing perspective, again, it's just recovering dollar for dollar, but then supporting our margin through those other levers.

Operator

Robert Moskow, TD Cowen.

Robert Moscow

I guess, I'll ask fiscal '26 in a different way and Tucker, maybe you could answer it differently or not. But I would imagine by division, coffee profits most likely down year-over-year in '26 because of the higher cost. Pet food probably up, I think, because you have these stranded overhead reductions. And then Sweet Baked Snacks, I mean, I would imagine you could have profit growth because of these synergies.
But then again, I don't know if it's going to get reinvested. And I also don't know if the synergies all flow through to that segment or not. So if there's any way you could maybe just address more broadly on those three I'd appreciate it.

Tucker Marshall

Yes, Rob, it's difficult to give you the puts and takes by business for our financial plan for next fiscal year when we haven't completed that journey. But what I can offer is, is that your framework is a framework, and you'll have to make your own estimates or assumptions.
Two is, I would just acknowledge that stranded overhead does impact pet, but it impacts other elements of the total company. And I would acknowledge, too, that not all synergies flow directly to the Sweet Baked Snack segment, some will flow into the corporate area as well. We did share on the synergy front that we are tracking toward the $100 million objective by the end of fiscal year '26. We will probably exit this fiscal year with about $70 million toward that $100 million run rate leaving about $30 million in '26. So hopefully, those are just some additional points that will help your modeling.

Robert Moscow

It does. And maybe a follow-up. For fourth quarter, the guidance implies a pre-substantial decline in profit year-over-year. Is a lot of this happening in coffee because of the price-cost relationship? Or is it more spread out by division?

Tucker Marshall

Yes. So I think it's a couple of things. As you walk through that, I just was checking the charts. Yes, you will see that coffee in the fourth quarter will step into its highest cost basket out of the four quarters. You will see continued investment in frozen handheld and spreads, and you see the continued call down in Sweet Baked Snacks.

Operator

Tom Palmer, Citi.

Thomas Palmer

Maybe I could just open following up what you just said on frozen handhelds and spreads. I think at the start of the year, you discussed around $50 million or $0.35 earnings in kind of earnings overhang from start-up costs and other investments. A year ago, when you were going through the preproduction costs, I think we've gotten some quantification by quarter. Just any help in terms of what we saw in the third quarter in terms of those investments? And then maybe how to think about the fourth quarter?

Tucker Marshall

Sure. So you are correct, Tom. We did call out at the beginning of this fiscal year, $0.35 headwind or investment within that portfolio really broken down into thirds: One was supporting promotion and merchandising; Two, is supporting incremental marketing on the portfolio; and then three was just the ongoing McCalla manufacturing expenses, whether they be pre-production expenses or just the overhead absorption.
As you think about sort of the quarters, the fourth quarter really came in line with the prior year, maybe slightly better because pre-prod did come in a little -- preproduction expenses, excuse me, did come in a bit favorable. As you think about the fourth quarter, we're probably just slightly better year-over-year, but we will continue to see the elevated marketing as we support the brand.

Thomas Palmer

Okay. And then on the Pet segment, you had the comment about low single-digit growth in the third quarter, excluding both the contract manufacturing and the disruptions. I just want to clarify the disruptions, do they linger into 4Q? Or should it be a clean quarter? And then to what extent, if at all, did the disruptions caused you to pull back on merchandising and other brand support that might ramp in 4Q?

Tucker Marshall

You are correct. We did call out a $30 million supply chain disruption, primarily impacting our US retail pet food segment. That did hit us in the third quarter, as I've noted. It is behind us. We do view it as onetime in nature. We are working through being back on shelf in stock, full distribution, primarily on the Milk-Bone brand that did happen in the third quarter. There is some element of that in the fourth quarter, but nothing material or significant to call out. And I just would acknowledge that there's really no sequential or delay or incremental investment that we're going to see in the fourth quarter on pet.

Operator

Alexia Howard, Bernstein.

Alexia Howard

Can I ask just coming back to Hostess, how can you be sure from the data that you're seeing that this is indeed due to price elasticity and value-seeking behavior. I think you mentioned selective behavior is pressuring the category and not due to some more permanent shift of the demand curves perhaps due to GLP-1s or consumer interest in longevity and concerns about heavily processed foods and disease.
Just curious about what it is about the data that makes you confident that this is just a temporary problem rather than something a little bit more long term?

Mark Smucker

Sure, Alexia. We -- from a GLP-1 standpoint, we update our data at least monthly, right? And we look at trends and all the impacts on snacking generally and sweet snacking specifically. And we continue to not see material impact to the category. So I would guide you back to the comments just around a more cautious consumer convenience channel being down in general. Gas prices have been elevated, and so people are just having a bit less extra discretionary change in their pocket. I think that is clearly part of it.
And so we don't see -- we are not attributing to that-- to the decline in the category to the GLP-1, and we do acknowledge our own executional missteps, which we are, obviously, in the process of changing and improving. I would also just highlight that Donettes continue to perform very well, and the breakfast occasion is performing well as well. So just to highlight that.

Alexia Howard

And just as a quick follow-up. The declines in Jif and fruit spreads, can we just get a quick update on what's causing that and how quickly that might be resolved.

Mark Smucker

Yes, sure. Jif is performing very well. We had a little bit of a down quarter. I would just remind you that we've had a really strong first half of the year and so there's just a little bit of timing there. But we expect the Jif brand to continue to perform as it has. So I wouldn't expect anything out of the ordinary, and you'll see that the share prices or the share performance has been pretty consistent. So feeling good about peanut butter in general.
And then on fruit spreads, as I think we've mentioned, we've had a bit of competitive activity and we are now turning on back on some pretty strong marketing and advertising. And so we'd expect to see some stabilization in the fruit spreads category as well in our brand.

Operator

(Operator Instructions) Scott Marks, Jefferies.

Scott Marks

Scott Marks here on for Rob Dickerson. First one I wanted to ask, just turning back to the sweet snack category. I guess, given the current dynamics, everything that you've spoken to today and certainly over the past few weeks, have you seen any maybe pushback from retailers just in terms of (technical difficulty) the new channels you're speaking to, any hesitancy from those folks to add more from the sweet snack category?

Mark Smucker

No, Scott, we haven't. In fact, we're working pretty closely with our retailers to continue to improve the shelf set. And one of the things that continues to drive performance in Sweet Baked Snacks is innovation, limited time offerings, and we have a strong pipeline of that continuing to come online as we move forward and into obviously the new fiscal year. So honestly, our conversations and as we get into the new mod resets in the coming months, we feel pretty confident about how we'll show up on shelf.

Scott Marks

Got it. Appreciate that. And then second question for me. I know there's been obviously a lot of discussion about coffee. Obviously, the inflation has been evident and tied into inflation that we see also in cocoa recently. And just in terms of some questions about sustainability of supply and stability of cocoa growing regions, let's say.
Do you feel there's anything to that with regards to the coffee commodity just in terms of maybe concerns about sustainability or need to kind of expand production more globally? Just wondering if you can speak to that and what's been happening.

Mark Smucker

If I understand your question, I think this really comes down to just the cyclical nature of the commodity, right. And what you're seeing in the commodity is simply fundamentals. We've had a supply deficit. This is the fifth year in a row where there's been a relative undersupply world demand for coffee continues to be strong.
But we do view that as we've been in the coffee category for almost -- or 15 years, the commodity is cyclical. And we do expect just as historical, that over time, the commodity will moderate and there's been a significant amount of progress with ourselves participating both in supporting small holder farmers in helping them improve their crops in various regions around the world as well as breeding programs that are looking at coffee plants that are actually more resistant to climate change, and there's been some good progress there as well.
So I think the right steps are being taken from a crop standpoint across the industry and we would expect some normalization in the crop over time.

Operator

Max Gumport, BNP Paribas.

Max Gumport

Last quarter, you discussed some expectation for coffee segment profit margin to be in mid- to low 20% range in the second half of this year. You just printed a 28% margin. Could you help frame what led to that much better-than-expected results? I think there was a callout on favorable property taxes, which I'm not sure would have been anticipated. But really, I'm looking for more color on the interplay of pricing, commodity inflation, elasticity, deleverage and then other cost savings.

Tucker Marshall

Max, Coffee had a nice quarter, third quarter from a top line perspective and that did materialize in the margin. And the margin did come in slightly better than we anticipated, and that's largely due to the way that price elasticities are holding in, and we're delivering volume mix. It's also the way that we continue to manage the cost structure of the overall business or portfolio. And so you're just seeing that favorability come through in the third quarter.
We would just remind you that as you step into the fourth quarter, that will come down as we basically now have the highest cost basket in our fourth quarter. So we will see that come down for -- from the third to the fourth quarter sequentially. And that's largely just driven, again, due to the underlying green coffee commodity costs and also our continued price elasticity of demand factor.

Max Gumport

And then just going back to the $1 billion impairment charge for Sweet Baked Snacks. So it sounds like you mentioned that your $1.4 billion sales target for this year has come down to $1.2 billion. But I'm trying to get a better and also that you're still sticking to the 4% long-term growth rate so I'm trying to get a better sense for that, what is driving the $1 billion impairment charge? It doesn't feel to me like a $200 million cut to sales in one year would be the driver of that. And I think it's really much more based on your long-term free cash flow expectations for this business. So could you provide a bit more context on what has changed that has led to that impairment charge today? (technical difficulty)

Tucker Marshall

Yes, Max. So the impairment charges are broken down into two components: The first component is the business unit charge. And the business unit charge really is impacted by the top line performance. So as you see the diminishing top line performance, it obviously impacts profit and the impairment charge associated with the business unit is at the profit level.
Two is, is that we're not anticipating to recover that base. So we will be stabilizing from this reduced base and then growing at some point over time. And currently, we do remain focused on the long-term 4% growth. And then at the brand level, that is all driven by sales. And so the sales performance is also getting caught up into that component of the impairment charge as well. Hopefully, that helps.

Operator

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

Mark Smucker

Well, thank you all for your time and joining our call this morning. It was great to see many of you at CAGNY last week, where we were excited to share our strategy and why we are confident in the future of the company. And I think that came through loud and clear.
Our legacy business continued to deliver positive results in our third quarter, building on our strong year-to-date performance and we are taking action to return the Hostess brand to growth, including the leadership change we announced today and the progress we are making on advancing our Sweet Baked Snack strategy.
We are delivering positive results in a dynamic, operating and consumer environment, and I am confident in our strategy and believe that we continue to be in a strong position to deliver long-term growth and increase shareholder value based on the continued momentum that you've seen and our ongoing portfolio reshape.
All of this would not be possible without our outstanding employees. So as always, I would like to thank them for their continued hard work and dedication to our company. I hope you all have a great day. Thank you.

Operator

Everyone, that does conclude today's conference call. You may now disconnect, and have a wonderful day. We thank you for your participation today.