ORRVILLE, OHIO — The J.M. Smucker Company’s year-over-year earnings in the second quarter of fiscal 2024 look bleak at first glance, but the company expects to come out stronger on the other side of recent divestitures and acquisitions as it continues to fine-tune its portfolio.
The company reported its second quarter earnings on Dec. 5 for the three-month period ended Oct. 31.
Pet food sales fell 39% to $464 million in the second quarter, including negative impacts from its pet food divestiture in early 2023, through which it sold several dog and cat food brands to Post Holdings for approximately $1.2 billion. Divested brands include Rachael Ray Nutrish, Nature’s Recipe, 9Lives, Kibbles ‘n Bits and Gravy Train. In the year ended April 30, 2022, these brands generated sales of $1.5 billion, according to the company.
Excluding lost sales related to the divestiture, net sales for the company’s US Retail Pet Foods segment were up 20% to $76.6 million in the second quarter, according to The J.M. Smucker Company.
“Higher net price realization increased net sales by eight percentage points, driven by list price increases in the prior year across the portfolio to recover higher costs,” said Tucker Marshall, chief financial officer.
Favorable volume/mix in the second quarter benefitted net sales for the pet segment by 12%, including a $38.4 million benefit from co-manufacturing sales related to the divestiture, as well as growth in dog snacks led by its Milk-Bone brand and in cat food driven by Meow Mix.
“We now expect the contract manufacturing sales related to the divested pet food brands to contribute approximately $145 million in net sales, which is $15 million less than our previous estimate, and $40 million dollars less than our original estimate at the beginning of the fiscal year,” Marshall explained.
Sales for Milk-Bone were up 10% over the quarter. According to the company, the brand also continued to outpace the category and grow dollar share over the last nine consecutive quarters. These gains were supported by Milk-Bone’s core offerings and its newer, premium-positioned products.
Sales for the Meow Mix cat food brand were up 14% over the quarter, despite continued production capacity constraints for dry cat food. According to the company, production constraints have moderated, and the company expects the brand to achieve double-digit net sales growth in the third and fourth quarters of fiscal 2024.
“Our pet segment results this quarter highlight the benefits of our recent pet food divestiture, as profit margins improved over the prior year, driven by product mix,” said Mark Smucker, chair of the board, president and chief executive officer, in the company’s second-quarter earnings call on Dec. 5. “We anticipate margins will further improve over time after we fulfill contract manufacturing requirements and remove stranded overhead costs related to the divestiture.”
Increased distribution costs over the quarter were offset by higher net price realization of 8% and favorable volume/mix of 12%. Considering these impacts and noncomparable segment profit from 2022 related to the pet food divestiture, segment profit was down 19% year-over-year to $97.2 million.
Overall, The J.M. Smucker Company reported net sales of $1.94 billion in the second quarter, down 12% year-over-year. The decline was in part attributed to noncomparable net sales of $385 million related to the pet food divestiture.
Gross profit was reported at $724.2 million, up 3% year-over-year, and was also negatively impacted by the pet food divestiture. Operating income was up 2% to $298.9 million, reflecting a decline in SG&A expenses over the quarter.
“Our second quarter results reflect the continued demand for our iconic brands, our focus on executing with excellence, and the talent of our employees,” Smucker stated. “Our continued business momentum gives us confidence in our ability to achieve our sales and earnings expectations for this fiscal year.
“We are confident in our ability to capitalize on synergies and growth opportunities across snacking, while also continuing to support our other growth platforms in coffee and pet,” he added. “Our transformed portfolio improves our ability to deliver long-term sustainable growth and shareholder value.”
Following these results and the company’s recent acquisition of Hostess Brands, The J.M. Smucker Company has updated its full-year fiscal 2024 guidance to reflect softer projections for net sales, adjusted earnings per share and free cash flow, and an increase to capital expenditures.
The company now expects net sales growth between 8.5% and 9%, down from previous predictions of between 8.5% and 9.5%. Adjusted earnings per share is expected to range from $9.25 per share to $9.65 per share, down slightly from previous expectations ranging from $9.45 to $9.85. Free cash flow expectations have been adjusted to $530 million for the full year, down from the company’s previous projection of $650 million. The company now expects $610 million in capital expenditures, up from its previous projection of $550 million.
“The change in free cash flow and capital expenditure guidance, compared to previous expectations, is primarily due to $135 million of transaction and integration costs and $60 million of capital expenditures associated with the Hostess acquisition,” Marshall said.
Including the Hostess Brands acquisition and impacts from the pet food divestiture, the company expects 2024 net sales to fall between 3% and 3.5% year-over-year.
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