US: Smucker raises outlook as profits rise

The J. M. Smucker Company Announces Fiscal 2013 Second Quarter Results and Updates Full Year Guidance

-- Acquisition and favorable sales mix drive an 8 percent net sales increase

-- EPS up 21 percent; EPS up 12 percent excluding special project costs

-- Strong cash generated from operations

-- Company increases EPS outlook for fiscal 2013

ORRVILLE, Ohio, Nov. 16, 2012 /PRNewswire/ -- The J. M. Smucker Company (NYSE: SJM) today announced results for the second quarter ended October 31, 2012, of its 2013 fiscal year.  Results for the quarter and six months ended October 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


                                                                                   Three Months Ended October 31,                 Six Months Ended October 31,
                                                                                   ------------------------------                 ----------------------------
                                                                                         2012                   2011                        % Increase                2012             2011    % Increase
                                                                                                                                            (Decrease)                                         (Decrease)
                                                                                                                                            ---------                                          ---------
                                                                                                        (Dollars in millions, except per share data)

    Net sales                                                                 $1,628.7         $1,513.9                        8%                          $2,998.4         $2,702.8        11%
    Operating income                                                            $247.5           $211.6                       17%                            $438.1           $392.3        12%
                                                     % of net sales                      15.2%                  14.0%                                                 14.6%            14.5%
    Net income:
                                                     Income                            $148.8                 $127.2                                   17%          $259.7           $238.8                9%
                                                     Income per diluted share           $1.36                  $1.12                                   21%           $2.36            $2.09               13%

    Operating income excluding special project costs                            $261.5           $241.6                        8%                            $479.8           $447.3         7%
                                                     % of net sales                      16.1%                  16.0%                                                 16.0%            16.5%
    Net income excluding special project costs:
                                                     Income                            $158.1                 $147.0                                    8%          $287.4           $275.2                4%
                                                     Income per diluted share           $1.45                  $1.29                                   12%           $2.62            $2.41                9%





    --  The acquired Sara Lee foodservice business contributed $90.7 million and
        $177.5 million to net sales for the three and six months ended October
        31, 2012, respectively.
    --  Operating income and net income excluding the impact of restructuring,
        merger and integration, and certain pension settlement costs ("special
        project costs") each increased 8 percent in the second quarter.
        Included in these amounts for the second quarter last year was a pre-tax
        loss on divestiture of approximately $11.3 million.
    --  Second quarter net income excluding special project costs per diluted
        share increased 12 percent, which includes the benefit from the
        Company's share repurchase activities over the past year.
"We delivered another strong quarter of solid sales and earnings growth," commented Richard Smucker, Chief Executive Officer.  "Our long-term strategy continues to serve us well in consistently delivering results.  Our iconic brands are trusted and have demonstrated their strength and resilience.  We have a team of highly talented employees that are fully committed to our culture and to implementing our strategy.  All of which point to our Company being well-positioned for continued profitable growth."

"Overall consumer spending appears to be on the upswing which is welcome news for the industry," added Vince Byrd, President and Chief Operating Officer.  "The tactical adjustments we made to address market conditions are working.  We have optimized price points, closed price gaps, and strengthened merchandising.  Consumers continue to respond positively to these actions and to our brand-building initiatives, product innovations, and new brand additions.  We are well-poised for the holiday season and another year of growth."



Net Sales


                                                                           Three Months Ended October 31,                            Six Months Ended October 31,
                                                                           ------------------------------                            ----------------------------
                                                                                     2012            2011       Increase (Decrease)        %                 2012             2011       Increase (Decrease)         %
                                                                                     ----            ----       ------------------         ---               ----             ----       ------------------          ---
                                                                                                              (Dollars in millions)

    Net sales                                                                    $1,628.7        $1,513.9                    $114.8              8%      $2,998.4         $2,702.8                    $295.7              11%
    Adjust for certain noncomparable items:
                                                                Acquisition               (90.7)             -                      (90.7)          (6%)          (177.5)             -                      (177.5)          (7%)
                                                                Divestiture                   -           (3.0)                       3.0             0%               -           (8.0)                        8.0             0%
                                                                Foreign exchange           (2.1)             -                       (2.1)          (0%)             3.4              -                         3.4             0%
    Net sales adjusted for noncomparable impact of acquisition,
     divestiture, and foreign exchange                                           $1,535.9        $1,510.9                     $24.9              2%      $2,824.4         $2,694.8                    $129.6               5%
                                                                                 ========        ========                     =====            ===       ========         ========                    ======             ===

    Amounts may not add due to rounding.

Net sales increased 8 percent in the second quarter of 2013, compared to the second quarter of 2012, due to the impact of the acquired Sara Lee foodservice business and favorable sales mix.  Overall net price realization was slightly lower as price declines on coffee offset increases taken on peanut butter over the past year.  Volume gains realized in Folgers® coffee, Robin Hood® and Five Roses® flour in Canada, and Dunkin' Donuts® packaged coffee were offset by decreases in Pillsbury® baking mixes, Crisco® shortening and oils, Jif® peanut butter, and Smucker's® fruit spreads.  Overall volume, based on weight and excluding acquisition, decreased 2 percent in the second quarter of 2013, compared to the second quarter of 2012.  Favorable sales mix in the quarter was driven by volume growth in the Company's coffee brands, including K-Cups®, which are higher priced per pound, compared to other products within the Company's portfolio.

Margins


                    Three Months Ended                Six Months Ended
                        October 31,                      October 31,
                        -----------                      -----------
                      2012                  2011                 2012  2011
                      ----                  ----                 ----  ----
                                     (% of net sales)

    Gross profit      33.3%                 32.9%                33.7% 34.4%
    Selling,
     distribution,
     and
     administrative
     expenses:
    Marketing          5.1%                  4.9%                 5.2%  5.3%
    Selling            3.2%                  3.1%                 3.3%  3.3%
    Distribution       2.5%                  2.7%                 2.6%  2.9%
    General and
     administrative    5.0%                  4.9%                 5.2%  5.3%
    Total selling,
     distribution,
     and
     administrative
     expenses         15.8%                 15.6%                16.3% 16.8%
    Amortization       1.5%                  1.4%                 1.6%  1.5%
    Other
     restructuring,
     merger and
     integration,
     and special
     projects costs    0.7%                  1.1%                 1.2%  1.2%
    Loss on
     divestiture       0.0%                  0.7%                 0.0%  0.4%
    Other operating
     expense -net      0.1%                  0.1%                 0.0%  0.0%
    Operating
     income           15.2%                 14.0%                14.6% 14.5%
                      ====                  ====                 ====  ====

    Amounts may not
     add due to
     rounding.


Gross profit increased $43.2 million, or 9 percent, in the second quarter of 2013, compared to 2012.  Excluding special project costs, gross profit increased $33.0 million, or 6 percent, driven by the acquired Sara Lee foodservice business and strong coffee growth.  Gross margin was 33.4 percent in the second quarter of 2013, compared to 33.8 percent in the second quarter of 2012, excluding special project costs.

Overall commodity costs were slightly lower during the second quarter of 2013, compared to the second quarter of 2012, as lower green coffee costs offset higher costs for peanuts and certain other commodities.  However, the benefit to gross profit of overall lower costs was mostly offset by lower overall net price realization.  Unrealized mark-to-market adjustments on derivative contracts did not contribute to the change in year-over-year gross profit and were a loss of $10.3 million in the second quarter of 2013, compared to a loss of $10.2 million in the second quarter of 2012.

Selling, distribution, and administrative expenses increased 9 percent in the second quarter of 2013, compared to the second quarter of 2012, driven in part by the acquired Sara Lee foodservice business, and increased as a percentage of net sales from 15.6 percent to 15.8 percent.    Marketing, selling, and general and administrative expenses increased 11 percent, 10 percent, and 9 percent, respectively.

Higher amortization expense was recognized in the second quarter of 2013, compared to 2012, primarily related to the intangible assets associated with the Sara Lee foodservice business acquisition.

Operating income increased $35.9 million in the second quarter of 2013, compared to 2012.  Excluding special project costs in both periods, operating income increased $19.9 million, or 8 percent, and increased from 16.0 percent of net sales in 2012 to 16.1 percent in 2013.  Both operating income measures include a loss on divestiture of $11.3 million in 2012.

Interest and Income Taxes

Interest expense increased $4.8 million in the second 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 $9.4 million, or 14 percent, in the second quarter of 2013, compared to 2012, reflecting an increase in income before income taxes offset slightly by a lower effective tax rate.  The effective tax rate was 33.6 percent in the second quarter of 2013, compared to 34.1 percent in 2012.

Segment Performance

                                                                                                                         Three Months Ended October 31,                           Six Months Ended October 31,
                                                                                                                         ------------------------------                           ----------------------------
                                                                                                                            2012                      2011                  % Increase (Decrease)                          2012                      2011                      % Increase (Decrease)
                                                                                                                            ----                      ----                   --------------------                          ----                      ----                       --------------------
                                                                                                                                                         (Dollars in millions)

    Net sales:
                                                                 U.S. Retail Coffee                                       $622.5                    $617.5                                          1%                 $1,143.3                  $1,117.6                                          2%
                                                                 U.S. Retail Consumer Foods                                619.3                     615.2                                          1%                  1,147.8                   1,074.7                                          7%
                                                                  International, Foodservice, and Natural
                                                                  Foods                                                    387.0                     281.2                                         38%                    707.4                     510.5                                         39%

    Segment profit:
                                                                 U.S. Retail Coffee                                       $158.2                    $140.0                                         13%                   $284.6                    $279.7                                          2%
                                                                 U.S. Retail Consumer Foods                                111.1                     116.0                                        (4%)                    219.0                     195.0                                         12%
                                                                  International, Foodservice, and Natural
                                                                  Foods                                                     58.2                      39.0                                         49%                     98.9                      77.5                                         28%

    Segment profit margin:
                                                                 U.S. Retail Coffee                                         25.4%                     22.7%                                                                24.9%                     25.0%
                                                                 U.S. Retail Consumer Foods                                 17.9%                     18.8%                                                                19.1%                     18.1%
                                                                  International, Foodservice, and Natural
                                                                  Foods                                                     15.0%                     13.9%                                                                14.0%                     15.2%

U.S. Retail Coffee

The U.S. Retail Coffee segment net sales increased 1 percent in the second quarter of 2013, compared to the second quarter of 2012, as increased volume and favorable sales mix driven primarily by K-Cups® offset the impact of price declines taken since the second quarter of 2012.  Segment volume increased 6 percent in the second quarter of 2013, compared to the second quarter of 2012, as the Folgers® brand increased 6 percent and Dunkin' Donuts® packaged coffee increased 11 percent.  Net sales of Folgers Gourmet Selections® and Millstone®K-Cups® remained strong and increased $36.4 million, compared to the second 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 increased $18.3 million, or 13 percent, in the second quarter of 2013, compared to the second quarter of 2012, as favorable mix and volume growth exceeded a significant increase in marketing expenses.  The impact of lower green coffee costs was more than offset by price declines but did not significantly impact segment profit.  Unrealized mark-to-market adjustments, which represented a loss of $4.5 million in the second quarter of 2013, compared to a loss of $10.1 million in the second quarter of 2012, contributed $5.6 million to the segment profit increase.

U.S. Retail Consumer Foods

The U.S. Retail Consumer Foods segment net sales also increased 1 percent in the second quarter of 2013, compared to 2012, as the impact of higher net price realization offset a 6 percent decline in segment volume and unfavorable sales mix.  Jif® brand net sales increased 20 percent in the second quarter of 2013, compared to 2012, primarily reflecting price increases taken since the second quarter of 2012.  Volume of the Jif® brand decreased 6 percent compared to the strong quarter last year which benefited from early consumer buy-in in advance of a 30 percent price increase in the third quarter of 2012.  Smucker's® fruit spreads net sales and volume were down 11 percent during the same period.  Net sales and volume of Smucker's® Uncrustables® frozen sandwiches increased 13 percent and 11 percent, respectively, in the second quarter of 2013, compared to 2012, benefiting from new distribution at certain retailers.

Crisco® brand net sales and volume decreased 12 percent and 8 percent, respectively, in the second quarter of 2013, compared to 2012, resulting from declines at a key retailer.  For the same period, net sales for the Pillsbury® brand increased 2 percent, while volume decreased 5 percent mostly reflecting the tonnage impact of the previously announced cake mix downsizing.  Canned milk net sales and volume increased 2 percent and 5 percent, respectively, during the second quarter of 2013, compared to 2012.

The U.S. Retail Consumer Foods segment profit decreased $4.8 million, or 4 percent, in the second quarter of 2013, compared to the second quarter of 2012. Unrealized mark-to-market adjustments, which were a loss of $5.0 million in the second quarter of 2013, compared to a loss of $0.4 million in the second quarter of 2012, represented $4.6 million of the segment profit decrease.  Overall raw material costs recognized were higher in the quarter most significantly for peanuts but were essentially offset by higher net price realization, and a decrease in marketing and other support costs.  A portion of planned marketing expenditures in the second quarter of 2013 was redirected to promotional spending, and contributed to the decrease in marketing expense.

International, Foodservice, and Natural Foods

Net sales in the International, Foodservice, and Natural Foods segment increased 38 percent in the second quarter of 2013, compared to 2012, driven by the acquired Sara Lee foodservice business, which contributed $90.7 million, or 32 percentage points, of the net sales growth.  Excluding the impact of acquisition, divestiture, and foreign exchange, segment net sales increased 6 percent over the same period last year.  Volume was up 4 percent with gains realized in the Robin Hood® and Five Roses® Canadian flour brands as well as nonbranded beverages.

Segment profit increased $19.2 million in the second quarter of 2013, compared to 2012, which included an $11.3 million loss on divestiture.  Excluding this loss, segment profit increased $7.9 million, or 16 percent, primarily due to the contribution of the Sara Lee foodservice business.  Unrealized mark-to-market adjustments were a loss of $2.4 million in the second quarter of 2013, compared to a loss of $0.1 million in the second quarter of 2012.



Other Financial Results and Measures


                                          Three Months Ended October 31,                Six Months Ended October 31,
                                          ------------------------------                ----------------------------
                                                         2012         2011                  %  Increase (Decrease)        2012          2011     %  Increase (Decrease)
                                                         ----         ----                  ---------------------         ----          ----     ---------------------
                                                                          (Dollars in millions)

    Net cash provided by operating
     activities                                   $182.9       $118.2               55%                            $359.6        $59.9       n/m

    Free cash flow                                $130.7        $50.1              161%                            $261.2       $(75.8)      n/m

    EBITDA                                        $310.5       $273.8               13%                            $565.2       $514.0        10%
                                   % of net sales        19.1%        18.1%                                               18.8%         19.0%


Cash provided by operating activities increased $64.7 million in the second quarter of 2013, compared to the second quarter of 2012, and resulted in an increase in cash provided by operating activities of $299.7 million for the first six months of 2013, primarily due to a lower amount of cash required to fund inventory during the period, compared to 2012.  Capital expenditures decreased $37.2 million in the first six months of 2013, compared to 2012, and combined with the increase in cash provided by operating activities resulted in a $336.9 million increase in free cash flow over the same period.

During the second quarter of 2013, the Company repurchased 2.0 million common shares for approximately $170.9 million under the Company's August 2012 Rule 10b5-1 trading plan, completing the purchase of shares included under the plan.  At October 31, 2012, the Company had approximately 1.9 million common shares remaining available for repurchase under the Board of Directors' authorization.

Outlook

For fiscal 2013, the Company expects net sales to increase approximately 7 percent, compared to 2012, including an incremental eight-month contribution from the Sara Lee foodservice business.  Non-GAAP net income per diluted share is expected to range from $5.12 to $5.22, excluding special project costs of approximately $0.40 per diluted share.  Previously, the range was $5.00 to $5.10 per diluted share excluding special project costs.

Original source: JM Smucker