The J. M. Smucker Company (NYSE: SJM) Q3 2020 Earnings Call Transcript

The J. M. Smucker Company  (NYSE: SJM) Q3 2020 Earnings Conference Call

February 26, 2020

Corporate Participants:

Aaron Broholm — Vice President, Investor Relations

Mark T. Smucker — President & Chief Executive Officer

Mark R. Belgya — Vice Chair and Chief Financial Officer

Tucker Marshall — Senior Vice President and Deputy Chief Financial Officer

Analysts:

Andrew Lazar — Barclays Capital — Analyst

Kenneth Goldman — J.P. Morgan — Analyst

David Driscoll — DD Research — Analyst

Bryan Spillane — Bank of America Merrill Lynch — Analyst

Chris Growe — Stifel Financial Corp. — Analyst

Faiza Alwy — Deutsche Bank AG — Analyst

Robert Dickerson — Jefferies — Analyst

Pamela Kaufman — Morgan Stanley — Analyst

John Baumgartner — Wells Fargo — Analyst

Robert Moskow — Credit Suisse — Analyst

Alexia Howard — Bernstein — Analyst

Jon Andersen — William Blair — Analyst

Scott Mushkin — R5 Capital — Analyst

Presentation:

Operator

Good morning, and welcome to The J. M. Smucker Company’s Fiscal 2020 Third Quarter Earnings Conference Call. This conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for question and answers after the prepared remarks. Please limit yourselves to two questions during the Q&A session and re-queue if you have additional questions.

I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Aaron Broholm — Vice President, Investor Relations

Good morning, and thank you for joining us for our fiscal 2020 third quarter earnings conference call. After this brief introduction, Mark Smucker President and CEO will give an overview of the quarter’s results and an update on our strategic priorities. Mark Belgya, Vice-Chair and CFO will then provide detailed analysis of the financial results and our fiscal 2020 outlook. Also joining us for our Q&A session following the prepared remarks is Tucker Marshall, Senior Vice President and Deputy CFO.

During today’s call, we will make forward-looking statements that reflect the Company’s 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. I encourage you to read the full disclosure concerning forward-looking statements in this morning’s press release, which is located on our corporate website at jmsmucker.com.

Additionally, please note the Company uses non-GAAP results to evaluate performance internally, as detailed in the press release. We have posted a supplementary slide deck summarizing the quarterly results and fiscal 2020 full-year outlook. The slides can be accessed on our website and will be archived there along with a replay of this call.

If you have additional questions after today’s call, please contact me. I will now turn the call over to Mark Smucker.

Mark T. Smucker — President & Chief Executive Officer

Good morning, everyone, and thank you for joining us. It was great to see many of you last week at CAGNY. We appreciated the opportunity to provide an update on our vision and strategy, the progress being made on our growth imperatives, our purpose, and related ESG efforts. We continue to take decisive actions to improve performance and remain focused on executing against a clear set of priorities.

We will deliver earnings growth and long-term shareholder value by prioritizing resources toward our key growth platforms, continuing increased investments to reinvigorate our brands, enhancing category leadership and executing focused operational and financial discipline. Overall, our third quarter financial results were in line with our expectations, as our anticipated decline in net sales was offset by the benefits of our targeted actions to deliver adjusted EPS growth of 4%.

These actions include an increased focus on consumer-facing marketing, prioritization of resources, and a reduction in discretionary spending. Net sales declined 2% compared to the prior year, reflecting softness in our dog food business, particularly related to our private label products and the Natural Balance brand.

Net sales for the balance of our portfolio were essentially flat with the deflationary commodity costs being passed on to consumers through lower pricing in coffee and peanut butter, mostly offset by volume growth. Highlights from the quarter included strong performance for key brands within our focus categories of pet food and pet snacks, coffee and snacking.

Starting with pet food, our cat food business achieved low single-digit growth, which marked the 9th consecutive quarter of year-over-year sales growth for our cat portfolio, while dog snacks declined slightly overall primarily due to the shift of a large retailer promotional event in the third quarter of the prior year to the fourth quarter of this year.

We were pleased with the performance of our category-leading MilkBone brand, which achieved low single-digit growth and benefited from innovation, which is expanding the brand into new treat segments, including rawhide alternatives. As anticipated, Nutrish pet food net sales declined due to the impact of retailer inventory build related to new distribution in the prior year and competitive activity in the premium dog food category.

As we discussed on last quarter’s call, the team is executing a set of targeted actions to improve the Nutrish brand’s consumer value proposition and reinvigorate performance. During the quarter we saw positive consumer response to these actions as household penetration for the brand improved and consumer takeaway across all channels grew by 5% sequentially from the second quarter, including online and the pet specialty channel.

Looking forward, further actions will be implemented in the fourth quarter, including the new marketing campaign that leverages the equities of Rachael Ray and real food ingredients. While consumption trends are improving, we expect shipments to decline in the fourth quarter as we lap significant distribution expansion in the prior year. We remain on track to return the brand to growth in fiscal 2021.

In coffee, segment profit grew even though net sales were comparable to the prior year as lower green coffee costs are being passed through to consumers. Volume in this segment grew for the sixth consecutive quarter and the Folgers brand achieved its highest volume quarter in over three years. Dunkin’ and Cafe Bustelo continued their growth trend up 4% and 13% respectively, benefiting from expanded distribution, increased household penetration and the impact of new marketing campaigns. K-Cup sales also increased 7% with growth for each brand in the portfolio.

In snacking the Smucker’s Uncrustables brand accelerated to 23% growth in the quarter and we expect similar growth in the fourth quarter. As we shared at CAGNY last week, we are excited about the potential of the Uncrustables brand, its continued trajectory for growth, and the upcoming innovation that will expand the platform beyond peanut butter and jelly into convenient meat and cheese snacks.

As we announced last week, we made the difficult decision to discontinue Jif PowerUps early next fiscal year. Our principles of financial discipline guided this decision to reallocate resources to areas of the portfolio we believe will generate faster and greater financial returns, such as upcoming Jif innovation and the Uncrustables platform.

While PowerUps was successful in attracting new consumers to the Jif brand and will contribute approximately $20 million to net sales this year, the long-term profit projections in the competitive bar category were below our expectations and we believe this is the right long-term decision.

I will now turn to the progress made against our consumer-centric growth imperatives to lead in the best categories, build brands consumers love and be everywhere. Let me start with leading in the best categories. In coffee, this was the first quarter in five years that the category experienced retail sales contraction due to deflation. However, with the number one and number three brands in the category, we grew volume share across all formats including canister, premium bag and K-Cups.

The Dunkin’ and Cafe Bustelo brands continue to perform well with increased household penetration and market share gains this quarter. In snacking, Smucker’s Uncrustables is the fastest growing brand in the frozen snacks category. With the new production facility online and Phase II expansion underway, we will have ample capacity to support demand and achieve our goal to grow net sales for the Uncrustables brand to over $500 million annually in fiscal year 2023 and further expand our leadership in this category.

Turning to our strategic imperative of building brands consumers love. We are excited about our new advertising as we have now launched new campaigns for 10 of our largest brands this fiscal year. Our new advertising campaigns have received accolades across the advertising industry. Commercials for the Jif and 1850 brands received recognition as the Top 100 global ads in 2019.

While it is too early to measure the full impact of the new campaigns, indications from the launches earlier in the fiscal year are strong and correlate with recent market share gains for the Jif and Smucker’s brand. Marketing spend for the quarter was 6.1% of net sales and 6.6% of net sales through the first nine months of the fiscal year. We remain committed to our investments in consumer facing marketing and continue to project marketing spend of 6.5% to 7% of net sales for the full year.

Our third growth imperative is to be everywhere. We know that consumer shop and interact with brands on-demand and across multiple channels. Therefore, we need to be wherever consumer shop and available anytime. Within the e-Commerce channel, we continue to deliver solid growth, particularly in the pet food and coffee categories.

In the third quarter, our sales to pure play e-Commerce retailers continue to grow double-digit, accounting for 5% of total U.S. retail sales. Including click and collect through traditional retailers, our e-Commerce sales account for nearly 8% of our U.S. retail sales. The 1850 brand is performing excellent online with sales quadrupling over the past year. We have also extended the brand into the Canadian and Away From Home channels.

In closing, we remain confident in our strategy and are making progress against our growth imperatives. We will continue taking decisive actions to improve performance and remain focused on a clear set of priorities, including prioritizing resource to focus on key growth opportunities including premium pet food, pet snacks, premium coffee and Uncrustables; continuing investment to reinvigorate our brands; enhancing category leadership by strengthening key consumer and customer-facing activities to build competitive advantage; and finally, practicing strict financial discipline.

This is all in addition to the leadership searches we have underway. We are actively evaluating candidates for the positions announced in mid-November. We are pleased with the quality of candidates and are confident we will fill these critical positions with leaders who will strengthen our organization. Execution on all of these actions is creating momentum for growth and increasing shareholder value.

Finally, I would like to thank all of our dedicated employees for their continued efforts which firmly position the Company for a bright future. I will now turn the call over to Mark Belgya.

Mark R. Belgya — Vice Chair and Chief Financial Officer

Thank you, Mark. Good morning, everyone. Before discussing third quarter results, I wanted to summarize the four financial priorities we outlined last week at CAGNY; First, consistent sales and earnings growth; second, increase free cash flow; third, capital deployment in a balanced manner with approximately 50% reinvested in the business and 50% returned to shareholders, including maintaining an investment grade rating; and fourth, improvement of our return on invested capital.

We are committed to ensuring that the top line growth translates to improved earnings per share performance. As we increase marketing investments to accelerate top line growth, improve asset productivity and sharpen our spending discipline, we will deliver earnings and free cash flow growth. We have been building upon these financial priorities this year with a line of sight for momentum to continue. I encourage you to review our full CAGNY presentation available on our Investor Relations website.

Now, let me turn to third quarter results. Net sales declined 2% reflecting reduced volume mix for dog food, primarily related to private label and Natural Balance. For the balance of our portfolio, lower net pricing on coffee and peanut butter was mostly offset by increased volume mix for coffee and Smucker’s Uncrustables.

Adjusted gross profit decreased $24 million from the prior year or 3%. The gross profit decline resulted from the net impact of lower pricing in excess of lower cost for coffee and peanut butter and the reduced volume mix in dog food. Adjusted operating income declined $10 million compared to the prior year, also, a decrease of 3% as the gross profit decline was partially offset by a reduction in marketing and general and administrative expenses.

Both gross profit and operating income benefited from incremental synergy realization, which has now achieved our $55 million goal. Interest expense decreased $7 million driven by a reduction in outstanding debt resulting from repayments made over the prior 12 months. Other income and expense was $7 million favorable in the quarter due to non-recurring litigation cost in the third quarter last year.

Finally, the adjusted effective income tax rate was 23.1% versus 25.8% in the prior year, reflecting final adjustments from certain new provisions of U.S. tax reform. This resulted in third quarter adjusted earnings per share of $2.35 compared to $2.26 in the prior year, an increase of 4%.

Let me now turn to segment results, beginning with pet. Net sales declined 5% compared to the prior year, driven by both branded and private label dog food. Softness in premium dog food continued as expected with a 13% decline for the Natural Balance brand and a 4% decline for the Nutrish brand.

Sales of private label products continue to be a headwind in the quarter, impacting net sales by 2%. These declines were partially offset by cat food as the Meow Mix brand continues to grow. Both our total cat portfolio and the Meow Mix brand achieved the highest quarterly net sales since we entered the pet category.

Dog snacks declined slightly compared to the prior year, primarily due to a large retailer promotion in the third quarter last fiscal year that will occur in the fourth quarter of this year. However, the MilkBone brand delivered continued growth. Pet food segment profit decreased 1% compared to the prior year. The decrease was driven by lower volume mix, which was mostly offset by an $8 million litigation settlement related to a supplier issue in the prior year and a decrease in marketing, reflecting a reduction of non-working expenses and a timing shift to the fourth quarter from new advertising.

I’ll wrap up the pet segment with an item noted in our press release this morning. Due to the continued sales decline for Natural Balance in the pet specialty channel and our decision to reposition the brand within our pet food portfolio, our GAAP results included a non-cash impairment charge of $52 million attributable to the Natural Balance brand. Going forward, we anticipate ongoing work to optimize the mix of grain in and grain free offerings, a refreshed marketing campaign and sharper price points will improved trends for the brand next fiscal year.

Turning to the coffee segment; net sales were comparable to the prior year, a 5 percentage point impact from lower net price realization reflecting the pass through of lower green coffee cost by way of increased trade spend was mostly offset by favorable volume mix, particularly for Dunkin’ Donuts and Cafe Bustelo brand.

Dunkin grew 4% in the quarter and Cafe Bustelo grew double-digits, with a 13% growth in the quarter. These brands mostly offset a 4% sales decline for the Folgers brand where most of the price reduction was incurred. K-Cup sales increased 7% with growth across each brand in the portfolio. Coffee segment profit increased 3%, mostly reflecting the favorable impact of volume mix and lower marketing expense, which was slightly offset by the net impact of lower pricing and lower input cost.

In Consumer Foods, net sales were comparable to the prior-year. Favorable volume mix driven by increases for the Smucker’s Uncrustables and Jif brands contributed 4 percentage points. This was offset by lower net pricing, primarily attributable to the Jif brand resulting from a list price decline taken in the fourth quarter of the prior year. Uncrustables’ sales growth in the segment was 29% in the quarter and 45% on a two-year stack basis.

Consumer Foods segment profit declined 12%, driven by a net unfavorable impact of lower pricing in excess of lower cost and a $7.5 million equipment write-off related to the discontinuation of Jif PowerUps, partially offset by a benefit from volume mix.

Lastly in International and Away From Home segment, net sales were comparable to the prior-year. Volume mix and net price realization were slightly unfavorable and were more than offset by favorable FX of $1 million. Segment profit decreased 7% due to the impact of lower volume mix and higher SG&A expenses.

Third quarter free cash flow was $465 million, a $132 million increase over the prior year, reflecting an increase in cash provided by operating activities and a reduction in capex, following the completion of the first phase of the Longmont, Colorado facility.

Working capital initiatives contributed a large portion of the improved cash flow in the quarter. The Company made net debt repayments of $320 million in the quarter, ending January with a total debt of just under $5.4 billion. Based on a trailing 12-month EBITDA of just over $1.6 billion, our leverage was 3.3 times. We continue to progress toward our goal of 3 times.

Let me conclude my comments with an update on our full-year outlook. As noted in this morning’s press release and communicated at CAGNY, we maintain our full year guidance. Expectations are for net sales to be down 3% compared to the prior year or down 2% on an organic basis. Adjusted earnings per share is expected to be in the range of $8.10 to $8.30.

Key components include gross margin of approximately 38.2%; SD&A expenses declining approximately 2.5% compared to the prior year; interest expense at $200 million; and an effective tax rate of 24%. Our projections for free cash flow remain $850 million with capex estimated at $300 million to $320 million.

In closing, let me reiterate that we’re pleased with this quarter’s earnings performance and remain focused on delivering on our guidance for the year. I am confident that we have put in place the building blocks to deliver against our financial priorities; consistent earnings growth, free cash flow growth; balanced capital allocation, including de-levering of the balance sheet; and improvement of return on invested capital.

We thank you for your time this morning. We will now open the call to your questions. Operator, please queue up the first question.

Questions and Answers:

Operator

Thank you. The question and answer session will begin at this time. [Operator Instructions] Our first question today is coming from Andrew Lazar from Barclays. Your line is now live.

Andrew Lazar — Barclays Capital — Analyst

Good morning, everybody, and good to see you all last week.

Mark T. Smucker — President & Chief Executive Officer

Thanks, Andrew. Good morning.

Andrew Lazar — Barclays Capital — Analyst

Sure. I guess first off, just keying in on gross margins. They came in somewhat below what we and I think, many had modeled for some of the reasons you talked about Mark around costs in excess of pricing. And I guess, with the expectation for fiscal ’21 for sales to be flat to slightly up and more reinvestment obviously to continue to drive the top line. I guess I’m trying to get a better sense if gross margin in ’21 can be — maybe a bit of a funding mechanism for some of this planned investment or not, and what might drive that? And then, just a follow-up okay.

Mark T. Smucker — President & Chief Executive Officer

Good morning, Andrew.

Andrew Lazar — Barclays Capital — Analyst

Good morning.

Mark T. Smucker — President & Chief Executive Officer

You know I will probably not be able to go deeper in this question only because of what we said last week that where we are in our planning process. And for those that did not hear, we said that our top line — our expectations is it would be flat to maybe slightly up and then we expected earnings per share growth. But we really didn’t go deeper than that.

I guess my only other response would be is, just going through the first nine months of kind of what we’ve called out at the gross profit or gross margin level, there’s been a few things and what jumps out, most notably, is the Longmont overhead situation where because of the start-up, we had significant under-absorption.

We’ll certainly be running much more volume in that plant next year, so that would be an additive. But to go much beyond that or to quantify anything, I don’t think we’re in place to do that.

Andrew Lazar — Barclays Capital — Analyst

Yeah, understand. Understand. And then the — some of the 3Q upside. I’m trying to get a sense of, if there are some — any discrete reasons that you see at this point that some of that would come out of 4Q. I think you had mentioned maybe some shifting of marketing in pet into the fourth quarter. So I’m just trying to get a sense of how much of that upside in EBIT, let’s say, relative to our expectations were, would come out of 4Q for, let’s say, some discrete reasons that you know about versus not. Thank you.

Mark T. Smucker — President & Chief Executive Officer

Yeah, I think that specifically in the fourth quarter, the marketing would be what comes to mind. We certainly were behind last year’s third quarter. Some of that was definitely due to timing and would come through in Q4. I think when you look at other costs, I don’t think there’s anything specifically that I would think would reverse itself to the negative in Q4.

Operator

Thank you. Our next question is coming from Ken Goldman from J.P. Morgan. Your line is now live.

Kenneth Goldman — J.P. Morgan — Analyst

Hi, good morning. Thank you.

Mark T. Smucker — President & Chief Executive Officer

Good morning, Ken.

Kenneth Goldman — J.P. Morgan — Analyst

Hi, good morning. Two from me. First, if I look at the midpoint of your 2020 guidance range, I know it’s a broad sort of set of numbers there, but it does imply a little bit of improvement to your sales growth sequentially from the fourth quarter — to the fourth quarter from the third and a pretty good gross margin too, at least a lot better than what you’ve previously shown in the fourth quarter.

So, I just wanted to know if we could walk through, sort of collect some of the tailwinds that are leading you to what I think is a reasonably optimistic number there. I mean you talked about marketing, you talked about the timing of the dog snacks promo. Just wondering if there’s any other areas where you expect maybe a meaningful sort of push towards our fourth quarter. Maybe it’s the pricing comparison that looks pretty easy. I’m just curious if I’m missing something big there?

Mark R. Belgya — Vice Chair and Chief Financial Officer

Ken, this is Mark Belgya. Yeah, I think the — one of the things on the pricing you mentioned is that we did take the price on Jif last year in the fourth quarter. So we will be lapping that. So in terms of top line, that’s like a one point, although we had a really strong fourth quarter from a volume perspective of peanut butter, so there is going to be some offset. But in terms of that, there is really not a whole lot — kind of back to Andrew’s point that is significantly different versus the third quarter in terms of gross profit items or SD&A.

Kenneth Goldman — J.P. Morgan — Analyst

Okay. I’ll follow up with that offline.

Mark R. Belgya — Vice Chair and Chief Financial Officer

Yeah. And ken, I’m sorry, just one of the thoughts, just — the only other thing that comes into play and it just — unfortunately get buried a little bit in the sales and volume mix, but it’s probably some positive mix on the sales that are coming through. That does tend to benefit us and we think that will continue into Q4.

Kenneth Goldman — J.P. Morgan — Analyst

Okay, so that’s helpful. Thank you. And then I had a question for Tucker, I think you said Tucker is available for that for the Q&A. Right?

Mark T. Smucker — President & Chief Executive Officer

He is. Yes, he is.

Kenneth Goldman — J.P. Morgan — Analyst

Tucker, some of the — as you think about sort of your role as an incoming CFO, obviously long-term targets are part of that. The company still has some growth targets out there for the long term that are, I think many investors would consider fairly aggressive. I realize these are — they don’t kick-in till ’23, but I’m just curious, your level of comfort with some of these numbers, especially given that — I guess, some of these targets were forged maybe a bit before the company became more committed to ROIC in all of its decision. So just curious for your thoughts on like the 2% to 3% top-line, 8% bottom line, items like that.

Tucker Marshall — Senior Vice President and Deputy Chief Financial Officer

Ken, I certainly appreciate the question. Good morning. Just let me begin by a couple of things. One is, I would just begin by saying that we’re focused on delivering this fiscal year and we’re really focused on making sure that we get the right plan for next fiscal year. And then, as we think about the longer-term growth algorithm, we would always consider that over the long term as we consider the business. And, at the appropriate time, we probably would re-address that with you and n the investors.

And as you know that in the fall we have our first Investor Day for this upcoming fiscal year, and so that probably would be the appropriate time to re-address those long-term rates.

Operator

Thank you. Our next question today is coming from David Driscoll from DD Research. You line is now live.

David Driscoll — DD Research — Analyst

Great, thank you. And good morning, everybody.

Mark T. Smucker — President & Chief Executive Officer

Good morning.

David Driscoll — DD Research — Analyst

Hi, I wanted to follow-up just on pet a little bit, Natural Balance and the Pet Specialty channel. And Mark, could you just talk a little bit about the strategy? I know you’re still looking for your permanent head of that unit. But can you talk a little bit about the strategy and when we — when you took some of the other brands into grocery, Natural Balance seemed like it was really well positioned to be a solid brand within that pet specialty channel and even potentially e-Commerce.

So kind of — I guess where it’s confusing for me is, is everybody criticized one of your competitors and thought that pet specialty would be really harsh and you would have a real advantage with Natural Balance, why hasn’t that maybe played out exactly as we all thought it would and how big of a lift is it going to be to get Natural Balance back to the growth rates that maybe we think it can or should be at just given how strong premium is?

Mark T. Smucker — President & Chief Executive Officer

David, it’s Mark Smucker. Thanks for the question. If I may, I’d like to just back up. I will answer your question. But I’d like to just back up to the total pet category. As you know, we’re in the category because it’s a growing category. It’s a great category and our business is really about three legs of the stool. It’s about pet snacks, it’s about cat food, and then it’s about dog food.

And so, just reminding the group that as you all know, the shortfall in the quarter was isolated to premium dog. But there were a number of fantastic positives. And so our strategy is fundamentally about playing offense and making sure that we maintain and drive leadership in pet snacks, which we are the clear leader. It’s the most profitable segment.

And as you heard in the prepared remarks, cat has been doing very well over nine quarters and so we’re winning there. And even in our mainstream dog business that is going well. So just to highlight the fact again that this — that this is an isolated issue. Rob has brought a tremendous amount of focus to the business. And so we are very pleased with the work that he and the pet team is doing.

In Natural Balance, if you think about the channel, it’s a $14 billion channel. Again, we have not been playing offense on that particular brand. We’re getting back to doing that. There is no question that the brand itself has the right to win in the pet specialty channel. And so, yes, it is going to, to take a little bit of time, but as we talked last week, between rebalancing the portfolio, between grain-free and not getting the right packaging architecture, pricing structure and then really getting back to actually marketing the brand. So we really think that we can continue to win in Natural Balance, but it is going to take time. If you look at total pet spesh and e-Com, both of those — we’re growing both of those channels.

Operator

Thank you. Our next question is coming from Bryan Spillane from Bank of America. Your line is now live.

Bryan Spillane — Bank of America Merrill Lynch — Analyst

Hey, good morning, everyone.

Mark T. Smucker — President & Chief Executive Officer

Hey, Brian.

Bryan Spillane — Bank of America Merrill Lynch — Analyst

So just two quick ones from me. First, I guess, given the performance in dog food both Natural Balance and Nutrish, have you lost distribution and I guess what I’m really after is, as we’re thinking about ’21, well there have to be some effort and some resource allocated to maybe rebuilding some distribution that you may have lost this year. Then I have a follow up.

Mark T. Smucker — President & Chief Executive Officer

No. Fundamentally, there hasn’t been any significant losses in distribution. I mean just building on the comment about Natural Balance, it continues to grow in e-Com, which I didn’t quite say in the last comment, but clearly there is good growth there.

So we’re not — we haven’t lost any significant distribution in pet specialty. And in Nutrish, I think the, really the highlight is that we’re lapping a very strong pipeline fill last year and so that is not helping the comp. The comp is not helping the results this quarter,

But again, on Nutrish, all of the actions that we have implemented are bearing fruit as we — as you see, we have started to increase household penetration. And so really just, again, playing offense and making sure that we’re doing that on both brands.

Bryan Spillane — Bank of America Merrill Lynch — Analyst

Okay. And then just last one from me. Just on the deleveraging and free cash flow. If I remember it right, you’ve got a target of wanting to get the leverage down to 2 times by 2023. And I guess with the stock being at the valuation it’s at, you know, is 2 times still the right number?

Is there a possibility that you’d think about maybe slowing that pace of deleveraging and leaning into the stock at some point over the next two years. Just given that you’re generating plenty of cash and it seems like 3 times leverage is, should be something that you could be also comfortable with?

Mark R. Belgya — Vice Chair and Chief Financial Officer

Hi Brian, it’s Mark Belgya. Let me just say a couple of things and then I’ll turn it to Tucker, if he wants to add. So you’re right, we had in prior presentations, talked about a 2 times levered by the year that, as you said ’23. I think that’s probably more mechanical than anything.

I would hone in on more, is what we said, as it relates to a more recent time period and that would be getting to 3 times in the near term, which we project to do at the end of fiscal ‘ 21. And I’ll just ask Tucker to maybe comment on our deployment thoughts going forward which probably closely addresses how we would think about buybacks on a go-forward basis.

Tucker Marshall — Senior Vice President and Deputy Chief Financial Officer

Yeah, Mark, thanks. Just to support what Mark said our goal of getting down to around 3 times would open up strategic capacity to consider share repurchases, and then also, M&A activity, which has been consistent with our — basically our financial policy over time. That would enable us to then get back to more of a balanced deployment model.

Operator

Thank you. Our next question today is coming from Chris Growe from Stifel. Your line is now live.

Chris Growe — Stifel Financial Corp. — Analyst

Hi, good morning.

Mark T. Smucker — President & Chief Executive Officer

Hi, Chris.

Chris Growe — Stifel Financial Corp. — Analyst

I just had a couple of questions for you. If I could ask you first to go back to a question, Andrew asked earlier on the gross margin. I think the overall gross margin outlook for the year is a little lower than where it was before. And I guess — I just want to understand, was that mostly due to the little weaker performance in the third quarter? I mean it looks like based on that outlook, an improved outlook for the fourth quarter. Maybe just some of the factors that have you kind of pushing this up in Q4?

Mark T. Smucker — President & Chief Executive Officer

Yeah, it was — I mean I think we’re at 38.1% for the quarter, which is below even where we’re projected for the whole year at 38.2%. So — and some of that was certainly the top line softness that we experienced in the quarter.

As, I think, someone mentioned earlier, in the fourth quarter, the sales would project a little bit more positive, so that should help also turn the gross profit. But it really, it comes to the reasons where we talked about cost and pricing and then just the volume shortfalls in the areas we called out in pet.

Chris Growe — Stifel Financial Corp. — Analyst

Okay. And just one follow-up question if I could on the pet food division, where you talked about an increase in promotional spending. Is that reflective, and I know we obviously have gone through Nutrish and Natural Balance and some of the challenges in the portfolio today. Is that trade spending producing the sort of volume effect that you expect? Was that related to competition in terms of — you’re seeing a competitive increase?

Mark T. Smucker — President & Chief Executive Officer

I’m sorry. Were you asking about treats, Chris?

Chris Growe — Stifel Financial Corp. — Analyst

Sorry, I was talking about pet food in general, I thought the increase in trade spending was in pet food?

Mark T. Smucker — President & Chief Executive Officer

Yeah, I mean there is — there would be some that is related to some of the — getting the value proposition right. Particularly on Nutrish, which we’ve done. I think — and we spoke to that a little bit last week at CAGNY. So yes, there would be a bit of incremental there, just using that as a lever to make sure that we’re getting the right — the right pricing in the category.

Operator

Thank you. Our next question today is coming from Faiza Alwy from Deutsche Bank. Your line is now live.

Faiza Alwy — Deutsche Bank AG — Analyst

Great, thank you. Good morning. So I wanted to — Hi, I wanted to talk about the Nutrish brand a little bit more. So I know you talked about innovation and new marketing, but then you also talked about maybe sharpening the price point a little bit there. So, I guess what we’re seeing is that some of the higher priced sub-brands within Rachael Ray and Nutrish have been losing distribution and then the entry level point has been increasing.

So I just wanted to talk about how you’re thinking about that as you — as you look at 2021, do you expect the brand really consolidate around the entry level price point sort of the under $2 level — $2 level or do you expect sort of a holistic decrease across — price decrease across all the sub-brands?

Mark T. Smucker — President & Chief Executive Officer

The answer to that very — this is Mark Smucker. The answer to that very last question is, no, we wouldn’t expect pricing to get lower. Obviously we’re not experiencing deflation in the pet category. Just highlighting again that Nutrish in total is a very important brand to our portfolio.

Obviously, the actions, again, that we have taken are starting to bear fruit, which is great. The sub lines have played an important part in rounding out the brand, but clearly there is a core there which you — which you highlighted of the base Nutrish SKUs and that is — it is very important for us to continue to support those base SKUs.

So, by no means are we abandoning the sub lines. They each play a unique position within the portfolio and within the brand specifically. But we are making sure that that base, those core Nutrish SKUs are healthy.

Faiza Alwy — Deutsche Bank AG — Analyst

Okay, thank you. And then I was just — I wanted to clarify a little bit around fiscal ‘ 21. So I think you were very clear around what you expect sales to be. But I think last week at CAGNY, there was a little bit of confusion around how you’re thinking about profitability in 2021. So I was wondering — just wanted to give you the opportunity to maybe clarify how you were thinking about that.

Tucker Marshall — Senior Vice President and Deputy Chief Financial Officer

Yeah, good morning. This is Tucker. I guess, just in terms of that clarification. What we specifically said is that we are committed to ensuring that the top line translates to earnings growth and the three points that we said in there were one; maintaining our marketing investments around current year levels; two is, is just the advancement of ongoing profit or margin management cost programs.

And then lastly is just continuing to address improved asset productivity. And then lastly, I would just say I think it’s best for us to further the conversation around next fiscal year on our fourth quarter earnings call.

Operator

Thank you. Our next question is coming from Rob Dickerson from Jefferies. Your line is now live.

Robert Dickerson — Jefferies — Analyst

Great, thank you so much. So I guess first question is really just on the grain-free space in general. Obviously, there is this kind of elephant in the room, which is the FDA’s investigation to link to DCM. I just bring it up because I feel like — I think it was one of the Mark’s when it was stated on the call said, you know, and then also innovation in grain-free. It sounded like it was actually emphasized.

So I’m just — given I’m a bit distant from discussion with retailers in overall, let’s say, trends within the trade. I’m just curious if you can provide any color on kind of what you think the perspective is at this point given we haven’t heard from the FDA in a while.

And obviously you know consumption seems like it’s been dented a little bit, but some people seem to also kind of be blowing it off to an extent. So just any color you can provide would be very helpful.

Mark T. Smucker — President & Chief Executive Officer

Sure Rob, it’s Mark Smucker. I would just start by saying you know, quality is one of our basic beliefs and so we obviously adhere to unwavering safety and quality standards. The FDA has really made no clear link between DCM and the root cause of any specific diet, because it isn’t known. Now obviously, we’re going to continue to cooperate with the FDA and the Pet Food Institute to make sure that that we can support any of the research that’s happening.

You’ve seen that consumers have made some assumptions about what the link might be and we have seen a slight decrease in sales for grain-free particularly in the pet specialty channel, but our brands were each less than 2% of the mentioned cases in the FDA report. And then I guess finally, success is really about being close to the consumer, and so we will continue to listen to the consumer and make adjustments within each brand or our portfolio as necessary.

And we are launching or getting ready to with new — with-grain products to make sure, particularly in those brands that have been mentioned that we are striking the right balance between grain-in and grain-our products.

Robert Dickerson — Jefferies — Analyst

Okay that makes sense. A natural balance, so to speak. And then secondly, just in Retail Consumer Foods. I’m — the assumption is margin profitability on Uncrustables is probably fairly impressive while at the same time, we’ve seen some margin contraction over the past couple of years even when including a divestment of baking.

So if we’re thinking forward, not just to ’21, but just in general, do you feel as if kind of coming out of that baking divestment and now that you have already ramped your marketing spend and adjusting the mix that — kind of that level of profitability, call it, that low 20%, so to speak, 20%, 21% kind of feels like a proper run rate for that division, all in? And that’s it, thank you.

Mark R. Belgya — Vice Chair and Chief Financial Officer

Yeah, hey Rob, it’s Mark Belgya. Yeah, I think that’s right. I mean if you look at this quarter, it was down probably about 150 basis points from that average, because of the write-off of the Jif PowerUp equipment. But I think you’re right. I think we’ve got a marketing run rate that’s probably comparable. I mean certainly components will change over time.

And then, as I mentioned earlier, as we run more product through the plant in Colorado and we get that over or under-absorption corrected, that’ll help. But I think your overall assumption is pretty, pretty good for now.

Operator

Thank you. Our next question is coming from Pam Kaufman from Morgan Stanley, your line is now live.

Pamela Kaufman — Morgan Stanley — Analyst

Hi, good morning.

Mark T. Smucker — President & Chief Executive Officer

Good morning.

Pamela Kaufman — Morgan Stanley — Analyst

I wanted to ask about coffee margins which were at peak levels this quarter. How much of the expansion is related to lower green coffee prices versus lower marketing spend in the segment? And how sustainable do you view this level of profitability to be?

Mark T. Smucker — President & Chief Executive Officer

Hey Pam, it’s Mark Smucker. We do get this question a lot and we’ve been pretty consistent in saying that it is a — it is a commodity category with — where we pass through ups and downs to our customers and consumers. So there can be some volatility in the margins, but we have been consistent in saying and have a high degree of confidence that we can maintain margins around that 30%-ish in any given year. You could see fluctuations. But we don’t see any significant erosion in that.

I guess the other point is, as we continue to drive growth in the premium and K-Cup segments, there is a little bit less propensity in the premium and K-Cup segments for volatility, as much volatility, and so that will help to maintain margins on a relatively stable basis.

Pamela Kaufman — Morgan Stanley — Analyst

Thanks. And can you comment on the timing shift in the promotional event you mentioned in the pet segment that shifted into the fourth quarter? How much did this impact the third quarter and what do you expect the contribution to be next quarter?

Mark R. Belgya — Vice Chair and Chief Financial Officer

Pam, this is Mark Belgya. It was — we called it out, it affected the treats performance, if I recall from the scripted comments it — well, it was significant enough to call out for the impact on treats because MilkBone was actually up for the quarter. It was not overly significant to the whole pet business. So there will be, as you noted, a pickup. But it will not be significant in Q4.

Operator

Thank you. Our next question today is coming from John Baumgartner from Wells Fargo. Your line is now live.

John Baumgartner — Wells Fargo — Analyst

Good morning, thanks for the question.

Mark T. Smucker — President & Chief Executive Officer

Hi John.

John Baumgartner — Wells Fargo — Analyst

Maybe — Mark Smucker, I wanted to focus a bit on the innovation. You know the PowerUps were launched with a lot of confidence that you found an opportunity to extend that brand more broadly across snacking. That’s been discontinued after about two years. You know the Folgers 1850, that’s down a solid double-digit, losing distribution. And I understand, not every new product launch is successful. But I’m curious, just wanted to focus on what you’ve learned from this recent slate of innovation in terms of the test market versus the everyday market? And any changes to the innovation approach from here.

And I guess, maybe related to that. You seem to be doubling down on Uncrustables to lean into the snacking part of the portfolio. Does the Jif experience have you thinking differently about the potential to extend your other consumer brands going forward? Thanks.

Mark T. Smucker — President & Chief Executive Officer

John, thanks for the question. So as you pointed out, not all innovations are successful. From a top line perspective, we actually would view the PowerUps was successful. Obviously, bringing new consumers into the brand and so forth. But as we got further into the launch and recognized some of the challenges that we might have going forward, that’s really would cause us to really implement our financial discipline and recognizing that we could probably divert some of that support into a brand like Uncrustables.

So — but from a macro perspective, innovation is going to continue to be important. It is not the only driver of top line growth, we have to continue, as we’ve said, to invest in, in some of our larger, more legacy brands but innovation will play a role in both growth brands as well as some of the mainstay brands as well. And that is really about striking the right balance between, in some cases, platform and in other cases more line extension-driven innovation.

So an example, in pet as we have continue to see some very nice growth on the MilkBone brand, the innovation there, for example, is meeting our expectation. That is performing as we expected. So it’s just — I think the PowerUps example is one where we chose to make it — to take a very decisive action for the benefit of the broader business and it was the right decision.

John Baumgartner — Wells Fargo — Analyst

Okay, thank you, Mark.

Operator

Thank you. Our next question today is coming from Robert Moskow from Credit Suisse. Your line is now live.

Robert Moskow — Credit Suisse — Analyst

Hi, just a few clean-up questions, I guess. Coffee in fourth quarter last year, I thought that there was inventory build in the trade and then it came out in first quarter of fiscal ’20. Will you have a tough comparison in the fourth quarter of this year to that last year?

And then the next question was, pet snacks in general, this is more of an observation. You have a great brand with MilkBone and pet snacks is a big priority. But your disclosure on how that group of brands is doing is a little inconsistent, like sometimes we get a number and sometimes we don’t. Is it possible that you might, going forward, give us like pet snacks altogether, what kind of growth it’s generating, especially since it’s such a priority and high margin?

Mark R. Belgya — Vice Chair and Chief Financial Officer

Hey Rob. It’s Mark Belgya. Yeah. Last year’s fourth quarter, your recollection is correct. We had a strong Q4, but I’ll tell you with the performance that we have seen, notably Dunkin’ and Bustelo we still think that the growth will continue in the quarter. But you are right, I think we — as we called out in Q1 of this fiscal, we felt the impact of that. And then, Mark, did you get the second quarter?

Mark T. Smucker — President & Chief Executive Officer

He was asking about pet snacks and how we report pet snacks. We’ve been a little bit inconsistent. Rob, can you just repeat the question please.

Robert Moskow — Credit Suisse — Analyst

Yes, sorry. Sometimes I think you give us the total pet snacks growth number, sometimes you don’t. It’s a big priority for your Company. Can you — would you consider being more consistent in giving us a total pet snacks growth number going forward?

Mark T. Smucker — President & Chief Executive Officer

Yeah, I think it’s a fair ask. We do kind of default at time to MilkBone. But certainly, we have other brands in that. So that — we’ll take that under consideration. Thank you.

Robert Moskow — Credit Suisse — Analyst

Okay. I’ll hop off. Thanks.

Operator

Thank you. Our next question is coming from Alexia Howard from Bernstein. Your line is now live.

Alexia Howard — Bernstein — Analyst

Good morning, everyone.

Mark T. Smucker — President & Chief Executive Officer

Good morning.

Alexia Howard — Bernstein — Analyst

Hi, there. So just two questions. First of all, we’ve talked a bit about innovation during the call. Could you tell us where you’re at the moment in terms of new products as a percent of sales? I don’t know whether you measure that over the past three years or over the past year? And maybe whether that’s been increasing or staying stable over time and where you would hope it to get to over the longer term?

And then the follow-up question that I have that I think is a little quicker is, with African swine fever kicking in and probably over the next several months putting meat input costs up, is that something that you’re planning for? How do you anticipate that playing out in the pet food segment? Thank you, and I’ll pass it on.

Mark R. Belgya — Vice Chair and Chief Financial Officer

Hi Alexia, it’s Mark Belgya. To answer your first question, if you look at how we define new products, that would be products that have been introduced over the last three years. Of current sales, it represents about 5% and that’s I think have been fairly consistent. We certainly — a few years back, when we introduced some of the Dunkin’ particularly the K-Cups, that was probably maybe a couple of percentage points higher, but 5% is a pretty good number for us.

And then, as it relates to the second question. Again, I think I’ll just defer a little bit to one of the earlier questions as it relates to forward looking. We would look at all cost and comment on those when we talk to you folks in June. Certainly if it was significant enough to take actions or something in the interim, that might be different. But for right now we’ll include that just in our overall cost perspective, when we talk about F-’21 in June.

Alexia Howard — Bernstein — Analyst

Great, thank you very much. I’ll pass it on.

Mark T. Smucker — President & Chief Executive Officer

Thank you.

Operator

Thank you. Our final question today is coming from Jon Andersen from William Blair. Your line is now live.

Jon Andersen — William Blair — Analyst

Hey, good morning everybody. Thanks for the question. Appreciate it.

Mark T. Smucker — President & Chief Executive Officer

Hey Jon, good morning.

Jon Andersen — William Blair — Analyst

Hi, a couple of quick ones. Just coming back to Uncrustables, as you look to drive the business north of $500 million of sales, can you talk about the levers that get you there? Is this more about distribution at retail? Is it more about new product types or forms of the Uncrustables product? Is it about Away From Home? Just trying to get some — a little bit more granularity on what drives you to that level of sales?

Mark T. Smucker — President & Chief Executive Officer

Yeah Jon, it’s Mark Smucker. You touched on many of the levers. I think, what I would highlight is, we have so much runway on Uncrustables. One of our smaller competitors that has similar product is actually, from what we understand, exiting the business. And just given the fact that we brought the Colorado plant on line; that really supports the runway.

And so, as you know, we have not — just in core peanut butter and jelly, we have not spent dollars on marketing until basically now. And so, that product has continued to grow as convenience and other factors that the consumer wants really have driven that. And so there is a tremendous amount of runway on core.

We are continuing to invest in the Colorado facility to make sure that we can support the $0.5 billion target. And then, yes, innovation will play a role. But, I would just stress the amount of runway, just on core PB&J at this point.

Jon Andersen — William Blair — Analyst

Super helpful. The — one other question I had was on K-Cups. Can you talk a little bit more about where your portfolio sits today? And is the K-Cups category, in aggregate, still growing with the changes that you made, I think to some of your partnership arrangements? Is there pricing stability in the category now? Just trying to understand how kind of — how that segment of the coffee market is playing out right now to the growth and stability and profitability? Thanks.

Mark T. Smucker — President & Chief Executive Officer

Yes. K-Cups is still obviously very important. It is — in dollars, it’s not quite half. It’s probably 40%, 45% of the dollars in the At Home category. As you know, the growth has slowed. I think actually in the latest 52 weeks, the growth of K-Cups has been about 1% to 2%. This is the first quarter where we’ve actually seen the total coffee category have a slight contraction in dollars, primarily driven by just deflation and the lower commodity costs.

But K-Cup is growing. It continues to grow. We are very pleased with our portfolio. If you look at across all of the brands in the portfolio, we did see growth in the quarter on all of the brands and that includes, of course, Folgers and Bustelo, 1850, Dunkin’ and so it — and gaining share.

So, continue to be important. The partnership with Keurig has been great. As you know, we have benefited from — over the last couple of years, from some lower tolling rates, if you will, and that has been beneficial. Pricing is generally stable. I think, it is — the competitive environment has — the dust has settled, so to speak. And I think that we’re in a more stable environment in that part of the category.

Operator

Thank you. Our next question is coming from Scott Mushkin from R5 Capital. Your line is now live.

Scott Mushkin — R5 Capital — Analyst

Hey, guys. Thanks for sneaking me in. I got kicked off the call and I had to come back in. So, I wanted to kind of just ask a little bit more about the other businesses. And just about the standing shelf space and placement allocations at retailers and kind of the key peanut butter, jelly and coffee brands.

I guess, we’re continuing to see a little bit of private label making further in-roads, maybe not on volume but certainly on a shelf space allocation and placement. And we’re seeing the same thing a little bit with premium and local and gourmet offerings. So, I was just wondering if you could talk about things that you guys can do to make sure your core brands don’t erode. Thanks.

Mark T. Smucker — President & Chief Executive Officer

Scott, it’s Mark Smucker. I think the first comment starts with having number one brands and the number — and leading brands like Jif Smucker’s, Folgers, etc. have a right to exist and a right to play in each of the categories. And so, you may see some growth of private label, and to a much lesser degree some of the gourmet brands, you may see some shifting around in the shelf set.

But generally speaking, it would be, this — number three brands that are going to probably suffer the most than first. So, we’re maintaining category leadership, continuing to partner with the retailers, leveraging the fact that private label typically compares themselves to the leading brands, all tend to, in general terms, work in our favor.

Scott Mushkin — R5 Capital — Analyst

All right, thanks guys. Appreciate you sneaking me in.

Operator

Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Mark T. Smucker — President & Chief Executive Officer

Wanted to thank everyone for taking the time today. Appreciate seeing you all at CAGNY and really feel very good about where the business is and our ability to continue to grow and focus where we need to. And again, thank you to our fantastic employees for all their efforts.

Operator

[Operator Closing Remarks]