Smucker sales soar 15 percent in Q1

Smucker sales soar 15 percent in Q1

Net sales increase includes the contribution of $86.7 million from the acquired Sara Lee foodservice business.

The J. M. Smucker Company (NYSE:SJM) announced results for the first quarter ended July 31, 2012, of its 2013 fiscal year. Results for the quarter ended July 31, 2012, include the operations of the North American foodservice coffee and hot beverage business acquired from Sara Lee Corporation ("Sara Lee foodservice business") since the completion of the acquisition on January 3, 2012.

Executive Summary

  • The net sales increase includes the contribution of $86.7 million from the acquired Sara Lee foodservice business. Volume growth also contributed to the net sales increase in the first quarter of 2013, compared to 2012.
  • Operating income excluding the impact of restructuring, merger and integration, and certain pension settlement costs ("special project costs") increased 6 percent, as the benefit of net price realization and a $15.6 million increase in favorable unrealized mark-to-market adjustment on derivative contracts was somewhat offset by higher commodity costs and selling, distribution, and administrative expenses.
  • Net income excluding special project costs increased 1 percent as higher interest expense and an increase in the effective tax rate reduced the operating income increase.
  • Net income excluding special project costs per diluted share increased 4 percent, which reflects the benefit from the Company's share repurchase activities over the past year.

"We are pleased with the solid start to the fiscal year with growth in volume, sales, and cash flow," commented Richard Smucker, Chief Executive Officer. "While the environment remains challenging, we continue to drive long-term growth through brand-building, product innovation, acquisitions, and productivity initiatives while maintaining a healthy balance between volume, market share, and profitability. Our results demonstrate the strength and resiliency of our iconic brands, our ability to adjust rapidly in the marketplace, and the commitment of our team to our strategy."

"We remain focused on our long-term strategy and have made tactical adjustments to address challenging market conditions," commented Vince Byrd, President and Chief Operating Officer. "We have made significant progress in optimizing price points, closing price gaps, and enhancing merchandising activities at retail. Consumers continue to respond positively to these actions, to the new products flowing from our robust innovation pipeline, and to the brands we have recently acquired. We believe we are well-poised for the important back-to-school and holiday seasons and for another successful year of growth."

Net sales
Net sales increased 15 percent in the first quarter of 2013, compared to the first quarter of 2012, as the impact of acquisition, volume, price, and mix were all positive. The acquired Sara Lee foodservice business contributed 7 percentage points of the net sales growth. Favorable sales mix and higher net realized prices each contributed to growth. Price increases taken on peanut butter since May 2011 were somewhat offset by net declines in coffee prices over the same period. Overall volume, excluding acquisition, increased 2 percent in the first quarter of 2013, compared to the first quarter of 2012, primarily driven by Jif® peanut butter and Folgers® coffee.

Margins
Gross profit increased $38.7 million, or 9 percent, in the first quarter of 2013, compared to 2012. Excluding special project costs, gross profit increased $32.2 million, or 7 percent, driven by the acquired Sara Lee foodservice business and a $15.6 million increase in the benefit of unrealized mark-to-market adjustments on derivative contracts, which increased to a gain of $19.7 million in the first quarter of 2013 from a gain of $4.1 million in the first quarter of 2012.

Although the impact by product category varied, overall commodity costs were higher during the first quarter of 2013, compared to the first quarter of 2012, and were not fully offset by price realization. Gross margin contracted from 37.1 percent in the first quarter of 2012 to 34.6 percent in the first quarter of 2013, excluding special project costs.

Selling, distribution, and administrative ("SD&A") expenses increased 7 percent in the first quarter of 2013, compared to the first quarter of 2012, and decreased as a percentage of net sales from 18.2 percent to 17.0 percent. Selling expenses increased 16 percent, generally in line with the increase in net sales and driven in part by the acquired Sara Lee foodservice business. General and administrative and marketing expenses increased 8 percent and 6 percent, respectively, while distribution expenses decreased 2 percent due to the consolidation within the Company's retail direct-to-store delivery system.

Higher amortization expense was recognized in the first quarter of 2013, compared to 2012, primarily related to the intangible assets associated with the recent acquisition.

Operating income increased $9.8 million in the first quarter of 2013, compared to 2012. Excluding special project costs in both periods, operating income increased $12.6 million, or 6 percent, and declined from 17.3 percent of net sales in 2012 to 15.9 percent in 2013.

Interest and income taxes
Interest expense increased $8.5 million in the first quarter of 2013, compared to 2012, primarily representing the cost of higher average debt outstanding, due to the Company's October 2011 public debt issuance.

Income taxes increased $1.1 million, or 2 percent, in the first quarter of 2013, compared to 2012, reflecting both an increase in income before income taxes and a higher effective tax rate. The effective tax rate was 33.7 percent in the first quarter of 2013, compared to 33.2 percent in 2012.

Segment Performance

U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased 4 percent in the first quarter of 2013, compared to the first quarter of 2012, as increased volume and favorable sales mix driven by K-Cups® were somewhat offset by lower net price realization reflecting price declines since the first quarter of 2012. Segment volume increased 5 percent in the first quarter of 2013, compared to the first quarter of 2012, as the Folgers® brand increased 4 percent and Dunkin' Donuts® packaged coffee increased 11 percent. Overall segment results also benefited from approximately two weeks of incremental Cafe Bustelo® brand net sales included in fiscal 2013 related to the acquisition of Rowland Coffee Roasters, Inc. on May 16, 2011. Net sales of Folgers Gourmet Selections® and Millstone® K-Cups® remained strong and increased $30.7 million, compared to the first quarter of 2012. K-Cups® represented 6 percentage points of segment net sales growth, while contributing only 1 percentage point growth to volume.

The U.S. Retail Coffee segment profit decreased $13.3 million, or 10 percent, in the first quarter of 2013, compared to a strong first quarter of 2012, which benefited from the timing of higher prices in advance of the higher costs subsequently recognized in fiscal 2012. Additionally, in the current quarter, the timing of price decreases and higher green coffee costs realized impacted results unfavorably. The timing impact was somewhat offset by the benefit of sales mix, lower selling and distribution expenses, and favorable unrealized mark-to-market adjustments. The benefit of unrealized mark-to-market adjustments on derivative contracts was a gain of $8.1 million in the first quarter of 2013, compared to a gain of $7.0 million in the first quarter of 2012. The Company's current pricing reflects its expectation that lower green coffee costs will be recognized in upcoming quarters.

U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales increased 15 percent in the first quarter of 2013, compared to 2012, due primarily to the impact of price increases and sales mix as segment volume was flat. Excluding the previously announced cake mix downsizing, segment volume increased 1 percent. Jif® brand net sales increased 48 percent in the first quarter of 2013, compared to 2012, primarily reflecting price increases taken in fiscal 2012. Volume of the Jif® brand increased 8 percent compared to the prior year. Jif® peanut butter volume in the first quarter of 2012 was impacted by temporary item rationalizations and a reduction of promotional activity due to the expected availability of peanut supply. Smucker's® fruit spreads net sales were flat and volume was down 2 percent during the same period. Net sales and volume of Smuckers® Uncrustables® frozen sandwiches increased 31 percent and 25 percent, respectively, in the first quarter of 2013, compared to 2012.

Crisco® brand net sales were flat and volume increased 2 percent in the first quarter of 2013, compared to 2012. For the same period, net sales for the Pillsbury® brand increased 10 percent, while volume was flat as increases in frostings and flour were offset by declines in baking mixes, which reflects the tonnage impact of downsizing. Canned milk net sales and volume decreased 4 percent and 1 percent, respectively, during the first quarter of 2013, compared to 2012.

The U.S. Retail Consumer Foods segment profit increased $28.8 million, or 36 percent, in the first quarter of 2013, compared to the first quarter of 2012, led by peanut butter and the benefit of unrealized mark-to-market adjustments on derivative contracts. The benefit of unrealized mark-to-market adjustments on derivative contracts increased $7.7 million to a gain of $6.6 million in the first quarter of 2013, compared to a loss of $1.1 million in the first quarter of 2012. Segment profit margin was 20.4 percent in the first quarter of 2013, compared to 17.2 percent in 2012.

International, Foodservice, and Natural Foods
Net sales in the International, Foodservice, and Natural Foods segment increased 40 percent in the first quarter of 2013, compared to 2012, driven by the acquired Sara Lee foodservice business, which contributed $86.7 million, or 38 percentage points, of the net sales growth. Excluding the impact of acquisition, divestiture, and foreign exchange, segment net sales increased 7 percent over the same period last year. Volume was up 4 percent with gains realized in the Robin Hood®, Golden Temple®, and Five Roses® Canadian flour brands as well as Santa Cruz Organic® beverages, more than offsetting declines in Bick's® pickles.

Segment profit increased $2.1 million, or 6 percent, in the first quarter of 2013, compared to 2012, due to a $4.5 million increase in the benefit of unrealized mark-to-market adjustments on derivative contracts, which increased to a gain of $4.4 million in the first quarter of 2013, compared to a loss of $0.1 million in the first quarter of 2012. The Sara Lee foodservice business contributed to segment profit but was more than offset by higher supply chain costs and marketing expense.

Other financial results and measures
Cash provided by operating activities was $166.7 million in the first quarter of 2013, compared to cash used by operating activities of $58.2 million during the first quarter of 2012. The $225.0 million increase in cash generated in the first quarter of 2013 is primarily due to a lower amount of cash required to fund inventory in the first quarter of 2013, compared to 2012. Reflecting the anticipation of strong cash generation during the fiscal year, the Company announced an 8 percent increase in the dividend rate during the quarter, payable on September 4, 2012.

Outlook
For fiscal 2013, the Company continues to expect net sales to increase approximately 7 percent, compared to 2012, including an incremental eight-month contribution from the Sara Lee foodservice business. Non-GAAP income per diluted share is expected to range from $5.00 to $5.10, excluding special project costs of approximately $0.50 per diluted share. Based on current expectations, the Company believes non-GAAP income per diluted share should be at the higher end of its estimate range.

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