BOCA RATON, FLA. — The J.M. Smucker Company had much to share during its presentation at the Consumer Analyst Group of New York (CAGNY) Conference on Feb. 22. The human and pet food manufacturer spoke at length about the divestiture of many of its pet nutrition brands and provided a financial update.
Leading the presentation, President and Chief Executive Officer Mark Smucker shared the company’s two-fold strategy in the pet food space: prioritizing and accelerating its growth in dog snacks and cat food and improving profit margin.
Earlier this year, the company announced plans to sell its Rachael Ray Nutrish, Nature’s Recipe, 9Lives, Kibbles ‘n Bits and Gravy Train brands to Post Holdings, Inc., for $1.2 billion. According to Mark Smucker, the decision to divest these brands was key to helping the company optimize its portfolio by focusing on its best-performing brands.
“With the anticipated pet divestiture, we are advancing this strategy,” he said. “The business will shift from approximately two-third pet food and one-third pet snack to approximately 60% pet snacks and 40% cat food, which significantly improves [our] profit margin and product mix. The brands we will divest account for approximately 20% of total company net sales, but only a mid-single-digit percentage of total company profits.”
Following the completed divestiture, Mark Smucker revealed that the company would be able to reallocate its resources and increase its investments in the growing sector of dog snacks, focusing on a range of offerings from value to premium. According to Mark Smucker, it is the market leader in dog snacks.
“We are the market leader with a 23% dollar share,” he revealed. “Dog snacks has historically been the fastest growing segment in the pet category and delivers significantly higher margins than pet food. Our snacks portfolio has delivered year-over-year net sales growth in 16 of the last 18 quarters, and we anticipate our total dog snacks portfolio to grow to $1 billion in annual net sales over the next several years.”
To accomplish this growth, The J.M. Smucker Company plans to expand its leadership team and leverage its strengths in the dog biscuits and soft and chewy treat segments to drive its core offerings and further innovation. The company will also reinforce its presence in the long-lasting chews and rawhide alternative sectors by targeting younger pet parents and expanding its seasonal, core and premium offerings.
The Milk-Bone brand will lead this growth, according to Mark Smucker, as it is the No. 1 brand in terms of dollar share and continues to benefit from the humanization trend.
“Momentum is strong for the brand as it grew nearly two times the category rate,” he said. “With consumer takeaway up 18% in the last year, Milk-Bone is well positioned to benefit from category tailwinds of the humanization of pets.”
In the feline space, The J.M. Smucker Company has witnessed significant momentum with its Meow Mix brand leading year-over-year net sales growth for 19 of the last 20 quarters.
“Meow Mix is the leader in household penetration and volume share in the dry cat food category,” Mark Smucker detailed. “The brand experienced strong growth over the past year, having outpaced the category growth average in both dollars and volume. We have a significant opportunity to further leverage this momentum in dry food to also drive growth in wet food.”
Though the company will maintain a focus on dry formulations, it plans to transform its position in dry to further its growth in the wet cat food category. Using its strong distribution and relevance in the feline nutrition space, The J.M. Smucker Company plans to expand its core offerings and product innovation for cats.
Leading this effort, the company launched Wet 2.0, a revitalization project that includes enhanced wet formulas for its Meow Mix brand, as well as new messaging and packaging.
“We have a significant opportunity within wet food as only 20% of our Meow Mix business is wet, whereas the category comprises about a 50/50 split between wet and dry,” Mark Smucker said. “With the brand equity of Meow Mix and momentum in dry cat food, we will unlock further growth for the brand in wet food.”
Fiscal year 2022 net sales for the company’s US pet food business are projected to reach $2.8 billion, with pet snacks accounting for 33%, cat food accounting for 32%, and dog food accounting for 31% of net sales.
“Our results through the first half of the fiscal year have been strong and exceeded our expectations,” Mark Smucker shared. “Our performance reflects the strength of our iconic brands, our focus on execution, and the advancement of our strategic priorities. This business momentum continued into our fiscal year 2023 third quarter financial results that were in line with our expectations…”
“With the anticipated pet divestiture, we are advancing [our] strategy,” said Mark Smucker. “The business will shift from approximately two-third pet food and one-third pet snack to approximately 60% pet snacks and 40% cat food, which significantly improves [our] profit margin and product mix.”
The company reaffirmed its full-year 2023 guidance with overall net sales to be up 5.5% to 6.5% compared to the prior year. Comparable net sales are expected to increase about 8% at the midpoint of the company’s guidance range, which includes an estimated 2% unfavorable impact caused by the company’s Jif peanut butter recall in May.
The J.M Smucker Company also reaffirmed its full-year adjusted earnings per share guidance range of $8.35 to $8.75 provided in November. Free cash flow is projected at $550 million.
“…We do not expect the anticipated pet divestiture to have a material impact on our fiscal year 2023 full-year net sales and adjusted earnings per share results, as the transaction is anticipated to close in the late fourth quarter of the current fiscal year,” shared Tucker Marshall, chief financial officer of the company. “Our strategic priorities demonstrate that we are taking the right actions to deliver financial results and ensure long-term growth… The anticipated pet divestiture demonstrates our commitment to strengthen the company's financial business position, reinvest in the business and deliver long-term shareholder value.”
For fiscal year 2024, the company’s headwinds include lapping net sales and lost earnings from its pet divestiture, and inflationary pressure. The pet nutrition divestiture, which is currently undergoing closing conditions and regulatory approval, is expected to create a full-year earnings per share dilution of $0.45.
“We anticipate replacing the domestic earnings per share by repurchasing our stock and paying down debt to maintain a leverage profile of two-and-a-half to three times,” Marshall said. “This anticipated use of transaction proceeds allows the company to replace earnings per share, maintain a strong balance sheet with an investment grade debt rating, and positions the company for future strategic growth opportunities.
“With the anticipated pet divestiture, we will significantly improve the product mix portfolio of our pet business,” he added.
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