Smucker cuts sales outlook amid pricing pressure

Smucker cuts sales outlook amid pricing pressure

JM Smucker has lowered its full-year sales expectations after booking a drop in first-quarter sales and earnings as lower pricing more than offset a resilient volume performance.

Smucker said today (20 August) that it now anticipates full-year sales to increase at a rate "slightly less" than the 5% guidance provided at the start of the year. The company maintained its EPS guidance range of $5.95 to $6.05.

Operating income in the three months to 31 July slid 10% to US$191.6m while net income dipped 8% to $116m. Excluding certain one-off costs, operating income edged up 3% to $222m, Smucker stressed.

Net sales were down 2% in the period, falling to $1.32bn.

Grocery retail sales fell 3% as a decline in pricing and flat volumes of the Crisco brand more than offset higher Jif and Smucker's branded sales. Operating profit at the segment strengthened, however, thanks to lower commodity costs. Segment operating income rose by 19%, the company revealed.

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The J. M. Smucker Company Announces Fiscal 2015 First Quarter Results

- Solid volume growth achieved across a number of major brands
- EPS decreased due to the impact of derivatives; Non-GAAP EPS up 11 percent
- 2015 non-GAAP EPS outlook reaffirmed

ORRVILLE, Ohio, Aug. 20, 2014 /PRNewswire/ -- The J. M. Smucker Company (NYSE: SJM) today announced results for the first quarter ended July 31, 2014, of its 2015 fiscal year.  Results for the quarter ended July 31, 2014, include the operations of Enray Inc. ("Enray") since the completion of the acquisition on August 20, 2013, and the impact of the Company's licensing and distribution agreement with Cumberland Packing Corp. ("Cumberland"), which commenced on July 1, 2013.

Executive Summary



Three Months Ended July 31,



2014


2013


% Increase
(Decrease)



(Dollars in millions, except per share data)








Net sales

$      1,323.8


$      1,350.9


(2%)

Operating income

$         191.6


$         213.3


(10%)


% of net sales

14.5%


15.8%



Net income:







Net income

$         116.0


$         126.6


(8%)


Net income per common share - assuming dilution

$           1.14


$           1.19


(4%)







Operating income excluding certain items affecting comparability

$         222.0


$         216.0


3%


% of net sales

16.8%


16.0%



Income excluding certain items affecting comparability:







Income

$         136.1


$         128.4


6%


Income per common share - assuming dilution

$           1.34


$           1.21


11%

  • First quarter net sales decreased 2 percent in 2015, compared to 2014, reflecting lower net price realization, particularly related to coffee, and the continued impact of the Company's exit of its private label hot beverage business in its International, Foodservice, and Natural Foods segment during 2014.
  • Operating income excluding the impact of restructuring and merger and integration costs and unallocated derivative gains and losses ("certain items affecting comparability") increased 3 percent in the first quarter of 2015, compared to 2014, primarily attributed to an increase in gross profit. 
  • Income excluding certain items affecting comparability increased 6 percent in the first quarter of 2015, compared to 2014, due to the increase in operating income and a decrease in interest expense. 
  • First quarter income per diluted share, excluding certain items affecting comparability, increased 11 percent in 2015, compared to 2014, and benefited from the Company's share repurchase activities over the past year which reduced weighted average shares outstanding by 4 percent.    

"We are pleased with the start to our fiscal year as we achieved record non-GAAP earnings per share for the quarter," said Richard Smucker, Chief Executive Officer.  "Our team continues to focus on profitably building our brands, driving innovation, and optimizing our supply chain. There is little doubt that the operating environment is challenging. However, our brands are well positioned to perform in this competitive market."

"Our ability to adjust tactics in response to changing market conditions has served us well," added Vince Byrd, President and Chief Operating Officer.  "In the quarter, volume gains were achieved across a number of our major U.S. retail brands and categories.  Looking ahead, we have strong merchandising and marketing programs in place for the back-to-school and holiday periods. We remain optimistic for another year of profitable growth."

Net Sales



Three Months Ended July 31,



2014


2013


Increase 
(Decrease)


%



(Dollars in millions)










Net sales

$   1,323.8


$    1,350.9


$             (27.1)


(2%)

Adjust for certain noncomparable items:









Acquisition

(17.5)


-


(17.5)


(1%)


Distribution agreement

(6.1)


-


(6.1)


0%


Foreign currency exchange

4.5


-


4.5


0%

Net sales adjusted for certain noncomparable items (A)

$   1,304.7


$    1,350.9


$             (46.2)


(3%)



















(A) Net sales adjusted for certain noncomparable items is a non-GAAP measure used in evaluating performance internally. This measure provides useful information to investors because it enables comparison of results on a year-over-year basis. Net sales adjusted for certain noncomparable items in the table above excludes the impact of the Enray acquisition, the incremental impact of the Cumberland distribution agreement, and foreign currency exchange.

Net sales decreased 2 percent in the first quarter of 2015, compared to the first quarter of 2014. Net price realization was lower and represented 3 percentage points of net sales decrease, primarily driven by increased promotional activities in the U.S. Retail Coffee segment.  A combined $23.6 millionfrom the acquired Enray business and the Cumberland distribution agreement contributed to net sales in the first quarter of 2015.  Sales mix was favorable in the first quarter of 2015, compared to the first quarter of 2014, and contributed 1 percentage point to net sales.

Volume gains realized in Crisco® oils, Jif® peanut butter, and Folgers® coffee were offset by declines in Pillsbury® baking mixes, flour, and frostings, Santa Cruz Organic® beverages, and the continued impact of the private label hot beverage business exits in the International, Foodservice, and Natural Foodssegment.

Margins


Three Months Ended July 31,


2014


2013


(% of net sales)





Gross profit

36.2%


36.5%

Selling, distribution, and administrative expenses:




Marketing 

5.8%


5.8%

Selling

3.8%


3.4%

Distribution

3.0%


2.9%

General and administrative

6.6%


6.4%

Total selling, distribution, and administrative expenses

19.1%


18.5%

Amortization

1.9%


1.8%

Other special projects costs

0.6%


0.4%

Other operating expense (income) - net

0.0%


(0.1%)

Operating income

14.5%


15.8%


Amounts may not add due to rounding.

Gross profit decreased $14.2 million, or 3 percent, in the first quarter of 2015, compared to 2014, driven by a $26.0 million unfavorable change in the impact of unallocated derivative gains and losses.  The unallocated derivative impact was a loss of $21.4 million in the first quarter of 2015, compared to a gain of$4.6 million in the first quarter of 2014.  Excluding certain items affecting comparability, which primarily consisted of the unallocated derivative impact, gross profit increased $10.7 million, or 2 percent, and from 36.3 percent of net sales to 37.8 percent during the comparable period.

Effective in fiscal 2015, the Company elected to no longer qualify commodity and foreign currency exchange derivatives for hedge accounting treatment, thus resulting in immediate recognition of gains and losses on these derivatives in its earnings. These amounts are recorded in cost of products sold as unallocated derivative gains and losses until the related inventory is sold.  The Company excludes unallocated derivative gains and losses from its segment profit and non-GAAP profit measures (see "Non-GAAP Measures" for additional information).  By comparison, in past fiscal years hedge accounting treatment was elected for qualifying commodity derivatives which resulted in these gains and losses being deferred and included as a component of accumulated other comprehensive income or loss until the related inventory was sold.  In the first quarter of 2014, $6.0 million of losses on commodity derivatives were deferred under this method.

Overall commodity costs were lower, primarily for peanuts, coffee, and oils, and were partially offset by overall lower net price realization contributing much of the increase in gross profit excluding certain items affecting comparability. The impact of favorable mix and the additions of Enray and Cumberland contributed to gross profit in the first quarter of 2015.

Selling, distribution, and administrative expenses increased $3.2 million, or 1 percent, in the first quarter of 2015, compared to the first quarter of 2014, and increased as a percentage of net sales from 18.5 percent to 19.1 percent.  Selling and general and administrative expenses increased 9 percent and 2 percent, respectively, in the first quarter of 2015, compared to 2014.  Marketing and distribution expenses decreased slightly during the same period.

Operating income decreased $21.7 million in the first quarter of 2015, compared to 2014, reflecting the unallocated derivative impact.  Excluding certain items affecting comparability in both periods, operating income increased $6.0 million, or 3 percent, and improved from 16.0 percent of net sales in the first quarter of 2014 to 16.8 percent in the first quarter of 2015. 

Interest Expense and Income Taxes

Net interest expense decreased $6.4 million in the first quarter of 2015, compared to 2014, reflecting the impact of an interest rate swap the Company entered into during the second quarter of the prior fiscal year, converting a portion of its debt from a fixed- to a variable-rate basis.

Income taxes decreased $3.4 million in the first quarter of 2015, compared to 2014, as an increase in the effective tax rate was offset by a decrease in income before income taxes.  The effective tax rate increased from 33.2 percent in the first quarter of 2014 to 33.9 percent in the first quarter of 2015.

Segment Performance




Three Months Ended July 31,




2014


2013


% Increase 
(Decrease)




(Dollars in millions)









Net sales:







U.S. Retail Coffee 

$      502.7


$     514.4


(2%)


U.S. Retail Consumer Foods

$      522.8


$     536.4


(3%)


International, Foodservice, and Natural Foods 

$      298.3


$     300.1


(1%)









Segment profit:







U.S. Retail Coffee 

$      137.6


$     142.6


(4%)


U.S. Retail Consumer Foods

$      113.2


$       95.5


19%


International, Foodservice, and Natural Foods

$        35.4


$       43.1


(18%)









Segment profit margin:







U.S. Retail Coffee 

27.4%


27.7%




U.S. Retail Consumer Foods

21.6%


17.8%




International, Foodservice, and Natural Foods

11.9%


14.4%



U.S. Retail Coffee

The U.S. Retail Coffee segment volume increased 2 percent in the first quarter of 2015, compared to the first quarter of 2014, led by an increase of 2 percent in the Folgers® brand.  The Cafe Bustelo® brand and Dunkin' Donuts® packaged coffee volumes were also up in the quarter, 24 percent and 3 percent, respectively.  Volume of K-Cup® packs increased 8 percent, while net sales decreased 1 percent in the first quarter of 2015, compared to the first quarter of 2014.  Segment net sales decreased 2 percent in the first quarter of 2015, compared to the first quarter of 2014, reflecting lower net price realization and sales mix.  The Company implemented a 9 percent list price increase for the majority of its packaged coffee products during the quarter and also increased promotional spending to maintain competitive pricing.  The Company expects the price increase to be more fully realized in the second quarter of 2015 as it intends to offset the realization of expected higher green coffee costs. 

The U.S. Retail Coffee segment profit decreased $5.0 million, or 4 percent, in the first quarter of 2015, compared to a strong first quarter of 2014.  The Company recognized lower green coffee costs in the first quarter of 2015, compared to 2014; however, lower net price realization offset the benefit.  Segment profit was unfavorably impacted by K-Cup® pack profitability, mix, and higher selling expenses while volume contributed favorably. 

U.S. Retail Consumer Foods

The U.S. Retail Consumer Foods segment volume was flat in the first quarter of 2015, compared to the first quarter of 2014.  Segment net sales decreased 3 percent in the first quarter of 2015, compared to 2014, reflecting lower net price realization primarily for the Crisco® brand. 

Jif® brand volume and net sales increased 4 percent and 3 percent, respectively, in the first quarter of 2015, compared to the first quarter of 2014. Smucker's® Uncrustables® frozen sandwiches were up 12 percent and 11 percent in volume and net sales, respectively.  Volume of Smucker's® fruit spreads increased 2 percent while net sales decreased 2 percent.  Crisco® brand volume increased 14 percent, while net sales decreased 1 percent, impacted by a 9 percent list price decrease taken in the fourth quarter of 2014 and increased promotional support.  Volume for the overall Pillsbury® brand decreased 10 percent, and was the primary contributor to the overall flat segment volume, and net sales decreased 11 percent.

The U.S. Retail Consumer Foods segment profit increased $17.7 million, or 19 percent, in the first quarter of 2015, compared to the first quarter of 2014, driven by the net benefit of overall lower commodity costs.

International, Foodservice, and Natural Foods

Net sales in the International, Foodservice, and Natural Foods segment decreased 1 percent in the first quarter of 2015, compared to 2014.  Excluding the impacts of Enray, Cumberland, and foreign currency exchange, segment net sales and volume both decreased 7 percent.  The volume decline reflects the exited portions of the Company's private label foodservice hot beverage business and decreases in Santa Cruz Organic® beverages and the Robin Hood®and Five Roses® brands in Canada. Gains were achieved in the R.W. Knudsen Family® brand.  Overall net price realization was lower driven by foodservice coffee while sales mix was favorable. 

Segment profit decreased $7.7 million, or 18 percent, in the first quarter of 2015, compared to 2014.  Higher costs were realized for products sold inCanada that were sourced from the U.S. due to the impact of a weaker Canadian dollar compared to a year ago, and for foodservice coffee, which combined with overall lower net price realization, reduced segment profit compared to the same period a year ago.  The lost profit on the exited foodservice business and the additions of Enray and Cumberland were not significant to segment profit in the first quarter of 2015.

Cash and Financing

Cash used for operating activities was $8.1 million during the first quarter of 2015, compared to cash provided by operating activities of $82.1 million during the first quarter of 2014.  The change in operating cash flow was primarily attributed to a greater use of cash for working capital in the first quarter of 2015, compared to 2014, reflecting higher green coffee costs in ending inventory as well as timing factors related to trade receivables.

On August 1, 2014, the Company entered into a commercial paper program under which it can issue short-term, unsecured commercial paper not to exceed $1.0 billion at any time. The commercial paper program is backed by the Company's revolving credit facility and reduces what it can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper will be used as a continuing source of short-term financing for general corporate purposes, including the anticipated acquisition of Sahale Snacks, Inc., which is expected to close in September 2014.

Outlook

For fiscal 2015, the Company expects net sales to increase, compared to 2014, at a rate slightly less than the 5 percent provided at the beginning of the year. This estimate includes approximately $25.0 million of expected net sales contribution from its pending acquisition of Sahale Snacks, Inc.  Despite the modest decline in sales growth, the Company maintains its non-GAAP income per diluted share range of $5.95 to $6.05, excluding certain items affecting comparability of approximately $0.15 per diluted share.

Original source: JM Smucker Co