All right, welcome back. We can just find our seats. We'll kick off our next presentation. So welcome back, everybody, to our fireside chat with The J.M. Smucker Company. With me today are Chairman, President, and CEO Mark Smucker and CFO Tucker Marshall. Welcome, gentlemen. Really great to be back with you both today. I'm gonna hand it over to Mark and then Tucker for a couple of opening comments, and then we'll sit down for some Q&A. Over to you, Mark.
Thank you. Thanks, Andrew. We have about 15 minutes of prepared remarks, and we'll obviously switch over to the Q&A. But first of all, it's great to be back at Barclays this year, and we appreciate the opportunity to participate, so thanks for having us, as always. Tucker and I will both provide a few brief comments, and we will reserve the balance of our time for questions from Andrew. And as always, please note that certain information provided today is forward-looking, based on current views and assumptions. Also, we use non-GAAP results for the purpose of evaluating performance internally, and details for both items can be found in the slides for today's presentation, available on our investor relations website. Last week, we released our first quarter financial results, which reflected a positive start to our fiscal year.
Momentum continues across our businesses, including volume growth in each of our U.S. retail segments and our international and away-from-home business. Consumer demand for our iconic brands, combined with our focus on execution, marketing investments, and disciplined cost management, drove double-digit comparable sales and earnings growth in the quarter. Our first quarter results and business momentum gave us confidence to raise our adjusted earnings per share guidance, which reflects an increase compared to our prior outlook and demonstrates year-over-year growth.
Brand health remains strong and consumer loyalty remains high, as demonstrated by our continued market share performance. Brands that are growing or maintaining dollar share accounted for 79% of our U.S. retail sales in the first quarter, and on a volume share basis, brands growing and maintaining share accounted for 83% of U.S. retail sales. Our share performance reflects the strength of our brands and businesses and the execution against our compelling strategy of leading in the coffee, consumer foods, dog snacks, and cat food categories.
In addition to share growth, we continue to demonstrate leadership. Over 95% of our U.S. retail sales come from categories where we hold either the number one or number two branded position. Our leading brands and the breadth of our offerings provide consumers with options ranging from value to premium. Since our company was founded over 125 years ago, the consumer has remained at the center of everything we do, and today, guides our vision to engage, delight, and inspire consumers by building brands they love and leading in growing categories.
To achieve growth, we must maintain a relentless focus on them and establishing an organization that is positioned to consistently deliver on their needs. This is achieved through our strategic priorities, which include superior execution, improving profitability and cost discipline, transforming our portfolio, advancing corporate responsibility, sustainability, and inclusion, diversity, and equity, and nurturing and evolving our culture. Our focus on the fundamentals has made us a more agile company and continues to make us uniquely positioned for sustainable long-term growth.
Over the last several years, we have worked diligently to streamline our business and improve margin mix through divestitures and reallocate resources to more strategic, faster-growing opportunities. As we continue to evaluate opportunities to improve our portfolio, we're prioritizing key enablers of future top-line growth. In our consumer foods business, demand continues for Uncrustables sandwiches. We expect the total brand to grow net sales to $1 billion by fiscal year 2026. This growth will be supported by multiple initiatives, including new distribution opportunities and various demand drivers.
We have begun to expand distribution in new channels, such as our launch into Canada and expansion in the away-from-home channel during the first quarter. We plan to increase capacity through our third manufacturing site in McCalla, Alabama, where construction is on track and operations are expected to begin in calendar year 2025. We are very excited to introduce the Bread Brothers in our first-ever national advertising campaign for the Uncrustables brand. Here's a sneak peek of the commercials that we'll be launching later this fiscal year. We will also have some Uncrustables available at the end of this presentation, so please feel free to grab some before you leave.
Yeah. Mm-hmm.
We were torn apart at birth. That's dramatic. This is the story of the best part of the sandwich and his crust. One has evolved. So I said, "No, you're the one who's jelly. Yeah, hilarious. The other. Oh, come on! Something's missing. Icon? No, it comes naturally. That's it. Ugh, Lunch Icon. Yeah, right. Uncrustables are the best part of the sandwich. Sorry, crust. In a freezer aisle near you.
Uncrustables growth has been tremendous, and we are the fastest-growing leading brand in the frozen snacks and sandwiches retail category. Uncrustables has the top two SKUs in the category, the number one repeat rate, and an average dollar velocity that is 3x the entire freezer average. Yet, there is still significant runway that remains across a number of metrics, most notably household penetration, distribution, and awareness. We expect over $100 million of net sales growth this year and total sales of approximately $800 million. In our pet business, we have prioritized our focus on dog snacks and cat food, where we have leading market share positions, further demonstrated by a recent divestiture of certain pet food brands.
The business has shifted from approximately 2/3 pet food and 1/3 pet snacks to approximately 60% pet snacks and 40% cat food, which significantly improves the profit margin and product mix. We are already starting to see these benefits as margins improved by nearly 200 basis points in the first quarter compared to the prior year. We anticipate further margin improvement over time after we fulfill contract manufacturing requirements and mitigate stranded overhead costs related to the recent divestiture. We are well-positioned to allocate resources and increase investments into the fast-growing and high-margin dog snacks category, where we have brands and offerings ranging from value to premium.
In our coffee portfolio, we continue to see growth in our leading brands of Folgers, Dunkin', and Café Bustelo, which outpaced the category in our first quarter. We expect our strong momentum in coffee to continue as we increase marketing investments behind our brands and explore opportunities in the fast-growing liquid and cold coffee segments. This includes the recent launch of Dunkin' Cold Brew Concentrates, which has seen positive retailer acceptance.
The concentrate is currently available in black and pumpkin spice flavors and provides convenience as it relates to no brewing equipment and allows for easy customization of the coffee. Let's take a look. In summary, the investments in our brands, reshaping of our portfolio, and our focus on operational excellence are driving top-line growth and give us confidence in sustaining momentum for the business. Our strategy is working, and we are well-positioned to deliver long-term growth and increase shareholder value. I'll now turn it over to Tucker.
Good afternoon, everyone. It's great to join you for this year's conference. We are pleased with the start of our fiscal year. We're growing and maintaining share in resilient categories with our iconic brands. The solid financial foundation we have created allows us to reinvest in those brands while delivering growth in both sales and earnings. We will continue to build on our strength through our financial priorities, which are the building blocks to delivering increased shareholder value. These priorities allow us to remain dedicated to our long-term strategy while operating with financial discipline in support of our shared goal of value creation for all stakeholders. We will achieve this by active and transparent communication, execution to credible financial targets, prioritizing the highest return opportunities, maintaining productivity, focus, and cost control, and a balanced capital deployment model.
Our focus on these priorities enabled us to deliver a successful first quarter, which included volume growth in each business segment, as well as margin and profit growth. We reaffirmed our top-line guidance and expect comparable net sales growth of approximately 9% at the midpoint of the guidance range compared to the prior year. Our comparable net sales guidance primarily reflects volume growth benefits across all three of our U.S. retail segments and our international and away-from-home business. We increased our full-year adjusted gross margin expectations to approximately 37%, which reflects our outlook for some cost favorability versus our original expectations. The increase in gross margin expectations, along with higher interest income and a lower tax rate versus our original expectations, gave us confidence to raise full-year adjusted earnings per share guidance.
At the midpoint of the guidance range, this reflects an increase of approximately 8% compared to the prior year, inclusive of an approximate 7% headwind related to the net impact of stranded overhead from the pet food divestiture. Turning to our longer-term expectations, our strategic framework and financial priorities give us confidence to achieve our long-term financial objectives. Those objectives include low single-digit net sales growth, mid-single-digit operating income growth, high single-digit adjusted earnings per share growth, and t otal shareholder return of approximately 10% or greater when considering our dividend policy.
Long term, we anticipate a low single-digit top-line growth as a result of our strengthened portfolio and projected growth rates in our respective categories. We also continue to see positive momentum for our brands through improved market share trends and focused growth initiatives within each of our business segments. We anticipate adjusted operating income growth will outpace sales growth, with increase at a mid-single-digit percentage over our strategic horizon. Operating income growth and margin improvement over time will be supported by the following: improved volume mix as we reshaped our portfolio by strategically divesting businesses and prioritizing resources to our fastest growth opportunities that are margin accretive, moderation of cost inflation, and stabilization of our supply chain and manufacturing environments, benefits from our Transformation Office as we embark on our multiyear productivity program, and the mitigation of stranded overhead costs from the pet divestiture.
Below operating income, we expect our capital deployment model to drive a high single-digit % growth for adjusted earnings per share. A year ago, at this conference, we introduced our transformation effort focused on productivity initiatives and profit growth opportunities across the company. Since then, we have established a three-year roadmap of initiatives to support the delivery of our long-term growth, margin growth and profitability, along with reinvestments into the business. Anticipated investment benefits include gross profit margin enhancement, as we expect to return to historical levels of at least 38% over time and support of our operating income target of mid-single-digit growth over the long term.
The Transformation Office will support the elimination of stranded overhead costs related to the pet food divestiture over the next several years. The Transformation Office is driving ownership and accountability for the execution of cost and productivity initiatives. Initial opportunities are primarily focused on net revenue optimization strategies, along with operations and supply chain initiatives, among others. We look forward to sharing future updates on our transformation journey, as it will be a key component to delivering our near and long-term growth ambition.
Our company has consistently demonstrated the ability to generate strong cash flow that provides a balanced approach to capital deployment. While maintaining an investment-grade debt rating, we anticipate allocating approximately 50% of cash from operations for future growth through capital expenditures and strategic investments, including the ability to pursue acquisitions. We anticipate returning approximately 50% of cash to shareholders through dividends and share repurchases, along with reduction of debt over time.
Over the past three fiscal years, we have invested $1.2 billion in capital expenditures while returning $3.9 billion in debt repayments, dividends, and share repurchases. Our leverage position and debt structure provide the financial flexibility for a balanced approach to capital deployment. This includes maintaining an investment-grade debt rating and having access to capital at preferred rates. Based on a trailing twelve-month EBITDA of approximately $1.7 billion, our leverage ratio stands at 2.6 x. Our goal remains to generate $1 billion in free cash flow annually, which will be used to support the growth of our business and create shareholder value.
Our long-term strategic target for capital expenditures is approximately 3.5% of net sales. However, capital expenditures will remain elevated in the near term, primarily due to investments related to Uncrustables sandwich capacity expansion. We will continue to focus on maintaining momentum while making strategic investments to strengthen our business and brands. Our strategy has guided us to deliver strong results and a one, three, and five-year total shareholder return that has outpaced our peers. I am confident in our strategy and believe we are in a strong position to deliver sustainable and consistent long-term growth for our shareholders. Thank you. Andrew, I'll hand it to you.
Great. Thanks, Mark and Tucker. Appreciate it. Maybe before diving into some of the segments, just an overall question or two. I guess, first of all, excluding the tailwinds related to the contract manufacturing sales and the lapping of the Jif recall in the prior year, Smucker was looking for about 4% year-over-year, like true underlying or organic sales growth, which I think includes about a three-point contribution from volume growth in fiscal 2024. And this is obviously not in light of the volume performance that we've seen really across the group more recently, which has been a bit weaker. I guess, what are the key drivers to delivering this level of volume growth, and what gave the company, I guess, the confidence to reaffirm that outlook o n last week's earnings call, given the broader industry backdrop?
Sure, Andrew. The first thing I would say is, you know, we spent the last two or three years really getting super focused on our portfolio and making sure that we're focusing on, and keeping the brands and the businesses that are going to drive growth. T hat's exactly what we've done. They're great categories, they're resilient categories. They have a relatively low incidence of store brands or private label, and we play across the entire spectrum, so value to premium.
If you look at each of whether it's coffee or pet snacks, we really play across that value spectrum. So as the consumer shifts, we are very well positioned to capitalize on those shifts when there are shifts. And that has allowed us, you know, 80-ish% of our brands are growing or maintaining share. All of that being supported by our really outstanding execution through the commercial channels, as well as our continued investments in each of the brands, I think has really allowed us to do that.
Right. And I know that, even though some of the, some of the industry trends we've seen here recently have been less of an impact on, on your volumes, what are you seeing perhaps in just the broader sort of packaged food universe at this stage, from a consumer behavior standpoint, maybe in the last month or two? Anything starting to shift here or there, even though I know some of your brands, like Uncrustables and others, have a tremendous amount of growth opportunity ahead of them that's sort of idiosyncratic from the broader group?
Yeah, I think, you know, sort of if you just focusing on our categories, if you look at a couple examples, one would be Milk-Bone, right? So Milk-Bone is generally a pretty mainstream. The core biscuits are very strong, but even our premium offerings within Milk-Bone have benefited. So we are seeing consumers behave somewhat normally. Where there is trading, like in Milk-Bone, we're actually seeing consumers trade into Milk-Bone because there, it is a more affordable offering.
Even our Jif brand, now that we've recovered our volume since last year from the recall, we are actually seeing underlying growth on peanut butter as well, in part because it's an affordable protein. In some cases, it can replace other more expensive forms of protein. I think it fundamentally comes back to the categories we're in and the brands that we have or own within those categories, position us to capture those shifts.
Got it. And maybe just to level set us a little bit, given all the portfolio change that's occurred, the last couple of years, I guess, how do you view the contribution from each of your consumer coffee and sort of pet segments in delivering on the company's low single-digit organic sales growth target over time?
You know, Andrew, we very much see the Uncrustables brand as a key growth driver, and that will be a large support to our low single digit top line growth. And then as you think about our pet portfolio, the Milk-Bone brand, as we continue to advance its momentum and premiumization. And then as we see continued strength of the cat food brand, Meow Mix, both in dry as we return supply and also as we advance growth in the wet side. And then lastly, as you'll see continued momentum in the coffee portfolio, primarily through the Dunkin' and Café Bustelo brands, but then also as we continue to step into new liquid formats, as the one we just recently aired as the Dunkin' Concentrate.
Yeah. Okay, great. With staying with pet for the moment. I guess with dog food having been largely divested, the focus in pet is now squarely on treats and cat food. I guess to start, could you remind investors of what sort of the key growth drivers of each of these two core businesses are?
Yeah. So Milk-Bone. Well, if you think about dog snacks, you have Pup-Peroni and Milk-Bone are the primary brands. Milk-Bone is the growth driver. When we did the original pet acquisition several years ago, our focus was on dog snacks as sort of the crown jewel. We've sort of recaptured and reprioritized or reinstated our strategy to really focus there. And so the success, as I mentioned earlier, in dog snacks, is really driven by both the mainstream core Milk-Bone biscuit, while also premiumizing into multiple segments. So whether that's the sort of long lasting chews, which is meant to occupy your dog. Actually, there's some new creative that you've probably seen on TV or online on that. There's dental, there's the various different versions of the biscuits, whether they're stacked or dipped.
So they're just continuing to bring out new news in dog snacks to continue to drive the core and more, if you will, has really played well for us. And then with cat food, we've obviously have a very strong position with Meow Mix in dry cat, which continues to improve as our supply improves, but we also have lots of runway in wet cat, and so we will continue to focus there over the next couple of years.
I know on the last conference call and then this morning a little bit, you talked a bit about around the edges, maybe a little bit of trading down from premium to more value in dog treats. And I'm appreciating Milk-Bone options span the range, right? From premium to mainstream. But I guess generally speaking, I guess we've heard a lot more chatter as well across the pet food space in general, that consumers maybe are starting to trade down a little bit from premiu m.
And I feel like investors have long thought that premium pet food was sort of one of those more impenetrable sort of areas, where no matter what goes on with the consumer, that's an area where, you know, consumers just don't change. I guess, are you seeing that change a little bit now in earnest, maybe for the first time in quite a while, or am I overreaching with that commentary?
You know, we're obviously not looking at dog food anymore. So I don't have a lot of insights as much in the dog food space. But again, going back to this Milk-Bone comment, even our premium Milk-Bone business continues to see growth. So we have had good performance across the Milk-Bone brand, premium to value. Again, this trade-in has continued to occur, and so that has clearly benefited us. And so, you know, despite the fact that we like our brands, we're in great categories, without support and continuing to invest in these brands and do the right things with our retail customers, we won't succeed. And so it's a combination of being in the right place, but also making sure that we're nurturing these businesses.
Okay. And then, you know, moving down to the profit side, I guess, following the divestiture of dog food, I guess, what do you now see as the sort of appropriate margin profile for your pet segment longer term, once it sort of gets back the stranded costs and such? And I guess, how much of this margin opportunity is due to the divestiture versus maybe the opportunity to organically drive margins from here?
Andrew, from a big picture perspective, over time, we would envision that our pet segment get to a low 20s to maybe mid-20s segment profit margin. Again, that'll take us some time. We did see about 200 basis points improvement in our first quarter. We do have approximately a 300 basis point headwind due to the co-manufacturing agreement, but we'll largely complete that responsibility by the end of this fiscal year. And then as we continue to address stranded overhead over time, that will give us the confidence behind the business momentum to be in that low to mid-20s.
Okay. Let me shifting gears to coffee a bit. A lot of dynamics at play in the coffee category. I think on the recent conference call last week, you mentioned that price gaps with premium are narrowing and trading down behavior, I think the word you used was moderating as well. I guess, can you talk a bit more about each of these as it relates to your key brands and formats in the category? And how is Smucker thinking about the performance of its coffee business over the remainder of the fiscal year with respect to sort of price, volume, and market share?
Okay, maybe I'll start. So we have seen a bit of moderation. We've talked on the call last week about getting our price points a bit sharper, which was supported by some of the relief that we've seen in the commodity pricing, so that's been good. You're right, Andrew, 100% about price gaps, particularly in the premium segment, which we consider bagged coffee. So Dunkin', obviously, our competitors there are significant. But getting those price gaps right is important, and we've done that, and so we would expect to continue to see performance there. Bustelo is the fastest growing brand in the category. It continues to get traction with generally non-Latino millennials, continue to be a primary driver of the growth there because of its authentic Latin heritage.
All the while, as you point out, trying to make sure that we are expanding where the consumer is going, notably liquid, concentrates, more cold executions. We believe because of our position in the coffee aisle, the dry coffee aisle, that we have a right to win there. And since consumers continue to customize, and try to recreate maybe their favorite coffee shop beverages at home, those multi-serve, you know, a bottle which has, what have you, 20 servings in it, has. We believe there's a significant opportunity there to capture that consumer as they continue to create those quote, "coffee cocktails at home." So a lot of positive on the coffee category. We feel very bullish on our ability to continue to perform there.
Okay. And you noted some of the actions to get sharper on price points with the commodity cost favorability. It's early, but maybe what kind of impact have you seen so far from some of these actions, you know, on volume and share as idea?
From a big picture standpoint, you know, the momentum in our coffee portfolio continues with, you know, at-home leadership with Folgers, Dunkin', and Café Bustelo. And on a year-over-year basis, the overall top line for coffee will be slightly flat to down. And that's largely due to the pricing and the deflation that we have recognized in terms of improved price points and sharpening it for the consumer. But we are seeing underlying volume momentum, particularly as you think about Folgers, Dunkin' and Café Bustelo. So we do expect continued momentum there.
Okay. What role can M&A play in this effort to expand into some of these newer coffee formats? I guess, do you feel as though you have the brands to compete in these new formats and would instead look for more capability additions, or brand additions in this sort of, you know, cold brew concentrate space, a possibility of interest as well?
So first, Andrew, we definitely feel that our brands can play in those spaces. And obviously, the launch of Dunkin' and then then the, in a couple of quarters, the launch of the Bustelo liquid products is, you know, further along that strategy. Nevertheless, as we talked about M&A, generally, we have said a couple things pretty consistently. We are interested, if we find the right assets at the right price, expanding our, in our existing categories, primarily coffee, and pet, notably pet snacks. Those would probably be the first places we would like to go if we could. Less so in, say, frozen, because obviously we have a tiger by the tail with Uncrustables and wanna continue to focus on Uncrustables.
A s we think about other new categories, we've said a bit cautiously, we are interested in new categories. So long as we're able to find the right asset in a growing category, and we have confidence that we can continue to grow a leading asset, those would be of interest. But at this point, you know, we have to remain focused on what's within our four walls and growing that business.
Great. In, I think on the call last week, you talked about your expectation for Uncrustables to actually accelerate as we move forward through your fiscal year from what we saw in fiscal Q1. Can you remind us what's driving that planned acceleration?
We have an outlook for this fiscal year to be approximately $800 million top-line brand across our entire portfolio. We anticipate over the next couple of fiscal years, adding $100 million at each fiscal year. What's really driving that is advancement of supply against demand and also exploring new channels and advancing household penetration in the core sandwich of peanut butter and jelly. We continue to see very strong momentum across that brand and expect it to be, you know, a 20%+ grower this fiscal year.
You recently announced your intention to shift away from sort of more episodic, sort of cost-saving programs to more of a continuous productivity model, through a Transformation Office. I guess, how have these cost-saving efforts gone so far? I mean, what are sort of the key areas of opportunities, and do you have an estimate for the magnitude of savings you can expect to deliver from a productivity program? I know it's, it's part and parcel of your broader sort of margin effort, but I, I think sometimes it can be hard to get a sense of just how meaningful this is, without at least having a sense of maybe what are the key specific buckets that you're attacking, how big that opportunity is.
Yeah. T he company has always embraced a continuous improvement mindset, and really, the Transformation Office is bringing holistically together that mindset by establishing new ways of working and new mindsets to continue to think about a multi-year journey to save and to drive cost savings and productivity initiatives. We have nine key work streams. We continue to advance those work streams in a very positive way, and we really believe that the contribution is twofold. One, it's enabling us to reinvest in our business and our brands, and the second contribution is enabling us to deliver against our long-term growth algorithm. And when you think of that growth algorithm, we have two points of both single digits, but let's just call it two points of top-line growth.
In order to get to mid-single digits, if you're around five points of growth down there, you need three. In order to get those three, you're gonna need that support of your continuous improvement program, which is largely coming through the Transformation Office. So when you think of OI growth, you can kinda get a sense of what two to three points might be in contribution on an annual basis. Then also, a key thing about our Transformation Office is it enables us to support any portfolio reshape, whether they be acquisitions or divestitures, synergy realization, or also addressing stranded costs. In this instance, it's supporting us to address stranded costs over time.
Maybe lastly, before we go to the breakout, Smucker will receive cash proceeds of about $466 million in the fiscal third quarter from the sale of the Post stock. And you anticipate using some of the proceeds to pay down debt. Leverage is already sort of 2.6 x, really towards the low end of the company's long-term target. So I guess, where do you anticipate leverage to be by the end of fiscal 2024? And with relatively low leverage levels, what are your priorities around capital allocation in the near term, and, you know, does that leverage prop the company to think about other capital allocation options?
F rom an overarching standpoint, there's no change to our capital allocation model as a result of receiving the $466 million of cash proceeds from the sale of our shares in Post Holdings. What we wanna do is, from a liability management, make sure that we're paying down debt. We think we'd be around 2 x, maybe just slightly above that. But then really what that enables us to do is continue to advance our priorities through capital expenditures, you know, where and when appropriate, strategic investments through acquisitions, as Mark acknowledged. But then also just a commitment to growing the dividend over time and buying back stock. We've done that pretty consistently over the last three years, where you've seen a balance of reinvestment of $1.2 billion in our facilities and growth, but also a return of $3.9 billion to shareholders.
Good. All right, why don't we cut it off there and head to the breakout? Please join me in thanking Mark and Tucker for being here today.