Highlights From SJM's Q2 Conference Call: Acquisition of Folger's Really Paying Off; Comfortable Raising FY Outlook

November 20, 2009 1:43 PM EST

J. M. Smucker Company (NYSE: SJM) reports Q2 EPS of $1.18, 14 cents better than the analyst estimate of $1.04. Revenue for the quarter was $1.28 billion, which compares to the estimate of $1.24 billion. Shares are currently up over 5%.

Highlights From SJM's Q2 Conference Call:

• Sees FY10 sales of $4.5 billion and EPS of $3.95 - $4.05 ex-items. Consensus sees $4.55 billion and $3.83, respectively.
  
• (Chairman and Co-Chief Executive Officer) We delivered the highest quarterly sales and earnings results in our history.
  
• Sales are up 52%, mainly due to the addition of Folgers. Profits were up in each business segment. Non-GAAP earnings per share were up 21%. And cash from operations exceeded 210 million.
  
• As we celebrate the one-year anniversary of completing the Folgers merger, the Coffee business performance continues to exceed our expectations. We experienced another strong quarter in Coffee in both sales and profit.
  
• Operating margin continued to expand significantly, driven by the profitability of the Coffee business. In addition, many of our core businesses also realized margin gains due to the lower commodity cost and synergy benefits.
  
• We continued to invest in our brands, as evidenced by an increase in marketing expenses of over 70% for the quarter, partly in support of the fall bake and holiday period.
  
• In the consumer segment volume was essentially flat with gains and peanut butter, pancake mixes and syrups, offsetting declines in fruit spreads.
  
• Sales in consumer were unfavorably impacted by the mix of products sold.
  
• In line with eating at home and back to baking trends, our Oils and Baking segment delivered good volume growth with both Crisco and Pillsbury brands increasing. Sales for this segment were down as expected primarily on price decreases taken in various categories.
  
• Based on category data for the 12-week period, our Pillsbury frostings are now the number one brand in volume sales.
  
• Sales in the Special market segment increased 15% due to the addition of Folgers. Volume gains were realized in Canada primarily in the baking and pickles category.
  
• (CFO)Sales for the quarter increased 436 million or 52% excluding coffee sales were down 6% for the quarter. Volume was 1% and was more than offset by a 7% decline due to price and mix with price the key driver.
  
• If you also exclude amortization in both years, earnings per were a $32 this quarter and a $3 last year and increase of 28%.
  
• Operating income increased a $146 million for the quarter excluding charges and increase as a percent of sales from 11% to 18.7%. Higher amortization expense in the current quarter negatively impacted margin by approximately a 130 basis points.
  
• Gross profit increased $249 million over the second quarter of last year and was a primary driver of the industries in operating income. Gross margin improve from 28.9% last year to 38.5% this quarter.
  
• Coffee contributed approximately 90% of the increase and continue to be impacted by favorable green coffee cost, volume-related plant efficiencies and product mix.
  
• SG&A expenses increased approximately $83 million, mainly reflecting the addition of Folgers, an increase as a percent of net sales from 17.8% to 18.2%
  
• Marketing and selling expenses totaled 10.1% of net sales compared to 9.6% last year.
  
• As scheduled earlier this month, we paid off $350 million Folgers bank debt and $200 million of senior notes assumed in a multi suites deal in 2004. This was completed using a combination of cash and borrowings against our existing $180 million credit revolver. Following the pay down outstanding borrowings on the revolver were approximately $100 million.
  
• We continue to anticipate a full-year tax rate of 34 to 34.5%.
  
• The U.S. Retail Coffee segment contributed $445 million to net sales for the second quarter of 2010 compared to the same three month period last year prior to the transaction volume was up 5%.
  
• Folgers contributed three-quarters of the growth with Dunkin' Donuts coffee accounting for the remainder. The coffee segmented $149 million to profit and achieved a 33.4% margin.
  
• We continue to believe that current margins in U.S Retail Coffee segment are in excess of longer term expectations. However, now that we've own the business for 12 months, we believe certain factors have changed since our original estimate of 28%.
  
• Sales in our U.S retail consumer segment were down 4% primarily due to mix as volume was flat for the quarter.
  
• Volume and sales gains were realized in peanut butter, pancake mixes and syrups.
  
• Volume and sales were down in fruit spreads due to mix, while potatoes, Uncrustables sandwiches and specialty foods also declined.
  
• Segment profit increased 4%, mainly due to lower distribution and operating cost. Segment margin improved by 190 basis points compared to last year's second quarter.
  
• In the U.S. Retail Oils and Baking segment, sales declined 9% compared to last year, primarily reflecting impact of price increases taken earlier this calendar year and higher promotional spending Crisco oils.
  
• Segment volume was up 3% with Pillsbury and Crisco brands up 14 and 12%, respectively. These gains were primarily offset by declines in canned milk. Segment profit increased 55%.
  
• Total sales in the Special Markets segment increased 15%, as the addition of Folgers and a 6% volume gain in Canada more than offset the impact of volume declines in the foodservice and natural foods business areas.
  
• Excluding coffee, Special Markets' net sales would have been approximately 5% less than last year's second quarter. Profit in the Special Markets segment was again strong, increasing 56% for the quarter, mainly due to the addition of Folgers and lower costs.
  
• (CEO) We are comfortable raising our outlook for the year. We continue to expect net sales of approximately 4.5 billion. We anticipate income per diluted share excluding merger and integration cost in the range of $3.95 to $4.05, an increase from the high-end of our $3.65 to $3.80 range that we have
  previously had.
  
• Amortization of approximately $0.40 per share is included in our forecast. Excluding amortization, our new forecast is $4.35 to $4.45 per share.
  
• (Q&A) My first question has to do with the comments Mark that you made about some creep up in some of the commodities of lead. And I just wanted to get a sense from you as to given your willingness to move pricing around more aggressive than some of your peers how do you think it plays out, if you have to go back to the trade and talk about price increases? (A) I think what I'll do is frankly - better is I have, first of all Paul started off on the oil because most of the impact we're talking is in his area.(A)Hey Eric, this Wagstaff. And again regarding oils we have seen about 10% increase in the cost of oil going since last time we've talked to second quarter or first quarter. As you know, we are covered through our fall bake time period and that would be with all of our key commodities. As we've looked at pricing, we are looking as pricing as they come first the calendar year and that's typical what we would do. Again, I think we've been relatively transparent in all of our key commodities and how we price it with our customers. So I think we'd be comfortable if the commodities are at a rate that you need to make an increase or decrease that we would do that.
  
• And then, I guess, maybe just as my follow-up, within coffee you had gone to a EDLP type strategy. My sense is with 5% year-over-year volume growth that you continue to take share unless the category is growing a lot more rapidly than I thought. Can you just kind of talk about the competitive landscape in coffee. Has Maxwell House followed your strategy? And was there any impact to your business during the quarter because of that approach?(A)Yeah, let me again, clarify for everyone on the phone, what we did is basically took a very significant portion of our trade spend and put it into everyday price. So if an account was actually already an EDLP account, there was most likely no effect, but if you're a high or low account, your everyday price was reduced and then your promotional price may not be as deep as it had been historically. So that's the first point. Secondly, as you know, we announced that and then started to implement that back in the first quarter, and our major competitor did not follow. Until about two weeks ago that we received confirmation that for the most part, they have followed that strategy almost penny for penny and that will be implemented as we understand some time in our third quarter or after the beginning of the new calendar year. Did that contribute to our growth? I would say that, yes, it probably did. Folgers grew over 4% during the second quarter, as it did in the first quarter. But I wouldn't contribute it all to that. I think there are a number f factors from our sales team, our marketing efforts, multi-branding promotional activities, etcetera, that probably contributed to that growth.

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