J.M. Smucker Company announces third quarter results
The J. M. Smucker Company today announced results for the third quarter ended January 31, 2012, of its 2012 fiscal year. Results for the quarter and nine months ended January 31, 2012, include the operations of Rowland Coffee Roasters, Inc. ("Rowland Coffee") and the North American foodservice coffee and hot beverage business acquired from Sara Lee Corporation ("Sara Lee business") since the completion of each acquisition onMay 16, 2011 and January 3, 2012, respectively.
"Although sales increased 12 percent for the quarter, we were disappointed with overall volume and its impact on earnings," commented Vince Byrd, President and Chief Operating Officer. "Despite having strong merchandising programs in place for the holiday period, our volume was lower than expected as a result of our higher price points coupled with lower consumer demand across the food industry. Looking forward, we are encouraged that our share of market remains strong and that commodity costs are moderating, providing opportunities to adjust pricing and promotional activities to better meet the needs of our consumers."
"While it was a difficult quarter, we remain confident in the strength of our #1 brands and our strategy to position the Company for continued growth," continued Richard Smucker, Chief Executive Officer. "Our focus remains on the long term and making strides in growing through product innovations, acquisitions, brand building, and productivity initiatives. We see economic indicators improving, and believe this will further consumer confidence, ultimately allowing consumers to adjust to market conditions."
Net sales increased 12 percent in the third quarter of 2012, as compared to the third quarter of 2011, driven primarily by the impact of prior pricing actions and acquisitions. The addition of the Rowland Coffee brands earlier in the fiscal year and the Sara Lee business during the most recent quarter contributed $33.0 million and $26.9 million to net sales in the third quarter of 2012, respectively, and combined represented 5 percentage points of the net sales increase. The overall impact of sales mix was favorable primarily due to K-Cups.
Overall volume, as measured in tonnage, was down 10 percent in the third quarter of 2012, compared to the third quarter of 2011, primarily driven by Crisco shortening and oils, Folgers coffee, and Jif peanut butter. Shipments measured by units were down 8 percent. While the Company entered the Fall Bake and Holiday period with a solid mix of merchandising and marketing programs, consumer takeaway across the food industry was lower during the quarter than in the prior year. Additionally, the Company's volume decline was attributed to four primary reasons:
Gross profit decreased $8.7 million, or 2 percent, in the third quarter of 2012, compared to 2011, and decreased $12.4 million, excluding special project costs, primarily due to lower sales volume. During the third quarter of 2012, costs were higher for green coffee, edible oils, peanuts, and flour, compared to the third quarter of 2011. However, the net impact on gross profit resulting from the recognition of these higher costs and related pricing actions was mixed due to timing. The net impact of timing was favorable for peanut butter and more than offset the unfavorable impact for coffee. The net favorable impact of a $3.5 million change in unrealized mark-to-market adjustments on derivative contracts, primarily for coffee, in the third quarter of 2012, compared to 2011, also impacted gross profit. Gross margin contracted from 37.4 percent in the third quarter of 2011 to 32.6 percent in the third quarter of 2012, excluding special project costs.
The Company expects that it will continue to recognize higher green coffee costs through its fourth quarter, compared to the prior year, although to a lesser degree than in the third quarter. Peanut costs are expected to be significantly higher in the fourth quarter than in the third quarter of 2012 as the inventory of lower-cost peanuts is depleted.
Selling, distribution, and administrative ("SD&A") expenses in the third quarter of 2012 increased 5 percent, compared to the third quarter of 2011, but decreased as a percentage of net sales from 16.3 percent to 15.3 percent. Marketing expenses in the third quarter of 2012 increased 4 percent compared to the third quarter of 2011. Over the same period, selling and general and administrative expenses increased 12 percent and 7 percent, respectively, while distribution expenses decreased 3 percent. The addition of the Rowland Coffee and Sara Lee businesses represented over 70 percent of the overall increase in SD&A expenses. Higher amortization expense was recognized in the third quarter of 2012, compared to 2011, primarily related to the intangible assets associated with the Company's recent acquisitions.
Operating income decreased $12.6 million, or 6 percent, in the third quarter of 2012, compared to 2011. Excluding special project costs in both periods, operating income decreased $8.1 million, or 3 percent, and declined from 18.4 percent of net sales in 2011 to 15.9 percent in 2012. Both of these operating income measures include a $17.2 million impairment charge in 2011.
Interest expense increased $5.5 million in the third quarter of 2012, compared to 2011, representing the costs of higher debt outstanding, reflecting the Company's October 2011 public issuance, somewhat offset by the benefit of the Company's interest rate swap activities and higher capitalized interest associated with the Company's capital expenditures.
Income taxes decreased $3.4 million in the third quarter of 2012, reflecting an $18.5 million decrease in income before income taxes and the offsetting impact of an increase in the effective tax rate to 34.1 percent, compared to 32.6 percent in the third quarter of 2011. The increase in the effective tax rate in the third quarter of 2012 is primarily due to an increase in state income tax expense and a lower domestic manufacturing deduction, compared to the third quarter of 2011.
Effective May 1, 2011, the Company's reportable segments have been modified to align segment financial results with the responsibilities of segment management, consistent with the executive appointments announced in March 2011. Also effective May 1, 2011, certain specialty brands which were previously included in the U.S. Retail Consumer Foods segment are included in the International, Foodservice, and Natural Foods segment ("product realignments"). Segment performance for 2011 has been reclassified for these product realignments and the organizational changes described above.
The U.S. Retail Consumer Foods reportable segment is a combination of the former U.S. Retail Consumer Market and U.S. Retail Oils and Baking Market reportable segments, adjusted for product realignments. The former Special Markets segment has been renamed International, Foodservice, and Natural Foods segment and also reflects product realignments. The Company's method of calculating segment profit remains consistent with 2011.
The U.S. Retail Coffee segment net sales increased 15 percent in the third quarter of 2012, compared to the third quarter of 2011, reflecting the net realization of price increases taken over the last 12 months. The acquisition of Rowland Coffee contributed approximately $28.5 million to segment net sales, representing 5 percentage points of the segment net sales increase. Segment volume decreased 11 percent for the third quarter of 2012, compared to the third quarter of 2011, excluding Rowland Coffee. Volume declined for the Folgers® brand in line with the overall segment in the third quarter of 2012, compared to 2011, and was primarily attributed to consumer response to higher price points on shelf and aggressive private label price points at key retailers. Dunkin' Donuts® packaged coffee volume was up 4 percent. Contributing to favorable sales mix in the third quarter of 2012, net sales of Folgers Gourmet Selections® and Millstone® K-Cups®, increased $38.2 million, compared to the third quarter of 2011, and represented 7 percentage points of segment net sales growth, while contributing only 1 percentage point growth to volume.
U.S. Retail Coffee segment profit decreased $19.7 million, or 12 percent, in the third quarter of 2012, compared to a record level in the third quarter of 2011, primarily due to lower sales volume. In addition, overall pricing, while higher in the third quarter of 2012, compared to 2011, did not fully offset higher green coffee costs recognized.
The U.S. Retail Consumer Foods segment net sales increased 7 percent in the third quarter of 2012, compared to 2011, as the impact of price increases offset an 11 percent decline in volume. Jif® peanut butter net sales increased 17 percent in the third quarter of 2012, compared to 2011, reflecting the recent 30 percent price increase and a 13 percent volume decline. The Company attributed an overall decline in peanut butter volume to a combination of consumer pantry loading in advance of the recent price increase, aggressive price points by certain competitors during the period, and overall higher price points. Smucker's® fruit spreads net sales were flat and volume was down 8 percent during the same period. Crisco® brand net sales decreased 6 percent and volume was down 29 percent in the third quarter of 2012, compared to 2011, reflecting the impact of substantial price competition of private label offerings by certain retailers. For the same period, net sales and volume for the Pillsbury® brand increased 28 percent and 7 percent, respectively, with gains mostly in baking mixes. Canned milk net sales increased 8 percent and volume was flat during the third quarter of 2012, compared to 2011.
The U.S. Retail Consumer Foods segment profit increased $4.5 million, or 4 percent, in the third quarter of 2012, compared to the third quarter of 2011. Segment profit grew as the net impact of higher commodity costs was offset by pricing actions, benefiting primarily from timing related to peanut butter. The Company expects peanut costs to be significantly higher in the fourth quarter than in the third quarter of 2012 as the inventory of lower-cost peanuts is depleted. Segment selling, distribution, and marketing expenses were also up, but generally in line with the increase in net sales. Segment profit margin was 19.2 percent in the third quarter of 2012, compared to 19.7 percent in 2011.
Net sales in the International, Foodservice, and Natural Foods segment increased 14 percent in the third quarter of 2012, compared to 2011. Excluding the impact of acquisitions, divestiture, and foreign exchange, segment net sales increased 5 percent over the same period. Price increases and favorable sales mix more than offset a 9 percent decline in volume. Volume gains in Folgers® coffee were more than offset by declines in natural beverages, Bick's® pickles, and Five Roses® flour.
Segment profit increased $9.1 million in the third quarter of 2012, compared to 2011 which included an impairment charge of $17.2 million related to intangible assets of the Europe's Best® business. Excluding the impact of the impairment charge in the third quarter of 2011, segment profit decreased $8.0 million, primarily due to lower sales volume. Also, costs were higher and not fully offset by price increases, notably in coffee and natural beverages. Segment profit margin was 14.3 percent in the third quarter of 2012, compared to 12.5 percent in the third quarter of 2011 which included a 7.2 percentage point impact of the impairment charge. As expected, the recently acquired Sara Lee business did not contribute to segment profit in the third quarter of 2012.
The significant cash generated in the third quarter of 2012 is consistent with the Company's expectation, whereby cash provided by operations in the second half of its fiscal year typically exceeds the amount in the first half of the year, upon completion of the Company's key Fall Bake and Holiday period. The Company typically expects a significant use of cash to fund working capital requirements during the first half of each fiscal year, primarily due to seasonal fruit and vegetable procurement, the buildup of inventories to support the Fall Bake and Holiday period, and the additional increase of coffee inventory in advance of the Atlantic hurricane season.
During the third quarter of 2012, the Company repurchased 555,700 common shares under its Board of Directors' authorization for approximately $41.1 million. At January 31, 2012, the Company had 6.9 million common shares remaining for repurchase under its Board authorization, including 5 million additional common shares authorized by the Board during its January 2012 meeting.