Highlights From SJM's Q4 Conference Call: Tops Estimates by One Penny, Guides In-line for FY12

J.M. Smucker Co. (NYSE: SJM) reported Q4 EPS of $1.00, $0.01 better than the analyst estimate of $0.99. Revenue for the quarter came in at $1.19 billion versus the consensus estimate of $1.17 billion. Shares are trading up 2.13% today.

Highlights From SJM's Q4 Conference Call:

• J.M. Smucker Co. sees FY2012 EPS of $5.00-$5.15, versus the consensus of $5.12. Sees sales up about 20%.
  
• (Timothy P. Smucker) Sales grew 5% to $4.8 billion, while non-GAAP endings per share increased 7% to $4.69.
  
• Our total Coffee business continued its strong performance with sales growth of 14% for the year. Innovation contributed significantly to the company's growth including new products such as Folgers Gourmet Selections and Millstone brand K-Cups, Jif Natural, Dunkin' Donuts seasonal varieties and Pillsbury sugar-free baking products.
  
• We repurchased 5.7 million common shares representing over 4% of shares outstanding, also benefiting from two increases in the quarterly dividend rate, dividends paid per share increased by a total of 17% for the fiscal year.
  
• Let me provide a few comments on each of our business segments starting with the coffee segment, which realized another strong year. Sales and segment profit for 2011 grew 14% and 11% respectively, driven by the folders in Dunkin' Donut brands along with the cake cuts product lines. Dunkin' Donuts package coffee continue to gain market share, volume was up 6% for the year and sales reach nearly 300 million. We expect volume growth for the brand to continue in 2012.
  
• New product launches contributed significantly to coffee's organic growth in 2011, including the role out of cake hubs. The cake hub product lines contributed 3% to coffee sales for the year, despite the September launch and we remain excited about future growth opportunities.
  
• Cafe Bustelo and Cafe Pilon are both hispanic leading brands with distribution concentrated in the northeastern US and southern Florida. The addition of these brands provide an exciting opportunity to establish strong presence in coffee with hispanic consumers in the US, allowing us to meet the needs of the fastest growing demographic in the country.
  
• Our volume in the peanut butter category grew by 5% in 2011, adding to the growth we haven't achieved since acquiring the Jif business in 2000 -- in June of 2002. The increase was led by the strong performance of Jif Natural, which more than doubled its volume from the prior-year and continue to drive category growth.
  
• Looking forward, a price increase on peanut butter was pass through last month to cover incremental costs associated with the short peanut crop of 2010. We remain well positioned to support the continued growth of both core and new products as we enter into fiscal 2012.
  
• In the Oils and Baking segment, Crisco realized a 5% volume gain for the year, following our efforts to narrow the price gap on shell. Baking, although the aggressive promotional environment presented the number of challenges throughout the year, the Pillsbury brand included 2011 with a strong fourth quarter.
  
• Finally, the Special Market segment completed a strong year with sales in segment profit up across all business areas. In Canada, we gained market share in most key categories, with a sales growth that was led by the strong performance of Folgers coffee.
  
• Our U. S. Foodservice business grew sales and volume during the year, despite the continuing decline in the overall industry, reflecting gains in Folgers coffee and Smucker's uncrustables.
  
• (Mark R. Belgya) Operating income excluding charges grew 4%.
  
• Net sales increased a $180 million or 11% primarily reflecting the impact of price taking during the year. Volume contributed 2% of the sales growth with gains realized by majority of our brands including Pillsbury, Jiff and Folgers.
  
• The effective income tax rate for the quarter was 36.7%, compared to low 27.9% in the prior year. The effective tax rate for the full-year increased from 32.4% in 2010 to 33.1%.
  
• Let me now provide a few more details on our reportable segment starting with US retail coffee. Net sales increased 21% in quarter reflecting price increases taken during the fiscal year, partially offset by higher spending in support of Easter promotional period.
  
• Volume increased 3% for Folgers and offset a low double-digit decline in the Dunkin' Donuts brand. While Dunkin' Donuts was down, this compares to a strong 2010 fourth quarter where volume was up over 20%.
  
• Dunkin' Donuts sales for the year were up 18%. K-Cup products contributed approximately 5% to segment sales for the quarter. Coffee segment profit increased 8% with pricing taken during the year more than offsetting higher green coffee cost.
  
• Volume was up 2% offset by a 5% price decrease on peanut butter take in the first quarter. Our peanut butter capital -- category was up 8% in volume for the quarter. Jif benefited from incremental volumes in the club channels, along with the continued growth of Jif Natural. The strong peanut butter performance in the quarter comes on top of 13% volume increase in last year's fourth quarter.
  
• Segment profit decreased 7% as the prior-year included $13 million gain on a divestiture of potato products. Marketing expense and supply chain cost were low and the quarter. Segment margins declined from 30.5% in last year's fourth quarter to 28.9% this year, but was up after excluding the 480 basis point impact on the prior-year's gain.
  
• Turning to the U.S. Retail Oils and Baking segment, Net sales and volume for the quarter increased 11% and 6% respectively. Increased volume was driven by Pillsbury baking mixes and frosting, reversing the trend of the last several quarters along with gains in Crisco oil and milk. Net pricing in a favorable sales mix also contributed to the higher sale.
  
• Segment profit increased 3% as higher cost for certain commodities and [indiscernible] were more than offset by pricing and lower marketing in the current quarter. The prior-year quarter also includes the impact of asset write-offs. Segment margin decreased 80 basis points to 12%.
  
• And finally, net sales in Special Market segment 8% with pricing, sales mix and foreign exchange all contributing favorably. Volume for the quarter decreased 4%, at double-digit increases in Bick's Pickles and Folgers coffee in Canada were more than offset by the decline in the Canadian baking brand in the Natural Foods' business.
  
• Segment profit grew 11% in the quarter with segment margin increasing 70 basis points to 17.9%. The impact of price increases, sales mix and improved profitability of Smucker's Uncrustables following the consolidation and manufacturing operations more then offset higher from it will cost and an increase in margin expenses in Canada. The prior-year quarter also includes the impact of asset write-off.
  
• We ended the year with $320 million in cash-on-hand, including approximately $110 million in Canada at currently cannot be repatriated in a tax efficient manner.
  
• Subsequent to year-end, the acquisition of the Rowland Coffee Roasters with finance with available cash on hand and a $180 million in borrowing under our $600 million revolving credit facility.
  
• Anticipating additional working capital needs, our current borrowings on a revolver were $240 million in an average rate of 1.5%.
  
• (Richard K. Smucker) We are incurring significantly higher cost in 2012 for nearly all of our key commodities with the largest increases in Coffee, soybean oil, flour and peanuts. As a result, we currently estimate year-over-year increases in cost of goods sold of approximately 25% excluding the addition of Rowland Coffee. To offset higher cost, we have utilized the combination of price increases and cost savings initiative to protect profit dollars recognizing that margin percentages will decline. Third, we expect to make significant progress on the supply chain restructuring initiatives. During 2011, the Sherman Texas coffee facility was closed, while the remaining operations at the Kansas City coffee facility, and the Canadian condiments facility are scheduled to conclude over the next year.
  
• In addition, the construction of our new Fruit Spreads Manufacturing facility in Orrville, Ohio is well underway, with initial production in the new plant scheduled with the summer of 2012. We recognize the impact on the affected employees and we thank them for their support.
  
• Turning now to our guidance for 2012. Net sales are expected to increase approximately 20% over the prior year.
  
• We expect non-GAAP income per diluted share in the range of $5 to $5.15, resulting in growth that is in line with our 8% plus long-term strategic growth objective.
  
• Additional assumptions for 2012 estimates include the following, an increase in SG&A of approximately 10% including the addition of Rowland Coffee, interest expense of approximately $60 million. And finally, the effective tax rate is anticipated to be 33% to 33.5%.
  
• (Q&A) First one, given the amount of pricing that you have, kind of how should we think about the -- I know you don't like to talk about the quarters, but as we think about the quarterly flow of the year with that -- with the pricing, and I mean is that -- it sounds like it's going to be a acceleration as we kind of progress through the year based on how you've lifted prices. And then second is, can you talk a little bit more about peanut butter and the -- I guess it was like a 20% or so price increase that Unilever put through and you're position given such as short crop in terms of just actually producing the amount of jars that you are going to need? (A) I'll take the first question, and Steve will take the peanut butter question specifically. But I think, as mentioned in the script, the majority of our pricing was taken through last fiscal year to '11, but then we announced virtually every product category had yet another round of price increases that will take effect in the first quarter at various stages, both from a quarterly perspective, I would say that you'll see more pricing action take effect in this second through the fourth quarter then you will in the first quarter. (A) Yeah, Eric this is Mark Belgya. The other thing would be of course we -- we will left the, one of the coffee increases in February, that we took double-digit one. So there you'll start seeing some moderation in the fourth quarter. (A) Steven Oakland will comment on the peanut butter business and the actions that we've taken and what's going on in industry. As you know, we are the largest peanut buyer, right, globally. And so, as we work with those key suppliers and sellers that it became evident to us very early on that this year's peanut crop was short frankly. And so as we worked with them, we started to prepare our Lexington facility and prepare our supply chain to assure we can continue the growth of the business. And if you look at the business, it grew last year by 5%, frankly it grew the year the year before by a little more than that. So, we anticipate that business growing again this year. So, we discontinued and there has been some writing about those, as maybe with a little misunderstood, but we discontinued some signing items that were complex and that gave that facility even more capacity so that it could deal with a short crop. So if you combine those efforts with -- quite frankly our position, we feel great about our key promotional periods Back-to-School and fall bake, our price increase that we took, that one that affect us last month is about half what some of the competitors that you listed had mentioned, but we think, we think it's adequate to cover our needs and the actions that we've done are going to get us through another great year on Jif. Remember, we also took a 5% price decline at the market -- a year ago. So, the Jif business continues to grow and we get a lot of that business on regular everyday shelf turns, and we think that's very, very healthy. So keeping that price close, given the customer value everyday, not just on deep deals has been a success to that business and we intent to continue it.
  
• (Q&A) Mark, could you talk a little bit where the depreciation restructuring line came from the operating activities, is that mainly tied to the Sherman Texas plant? (A) Where the charges, yes. Chuck, most of the charges we've had during the year its acceleration on all the plants that are closing, but clearly with Sherman having the shortest time period, the majority at least the large percentage of the non-cash charge would be the SLA with that. But the other plants are also were accelerating depreciation on those as well.
  
• And then a bigger picture question, somebody you mentioned that you felt higher prices of coffee that you have gone through on the shelf are being reasonably well accepted by the consumer, I would imagine oils are at the other extreme when you are raising prices. Can you talk about the what sort of the in the middle how consumers are reacting to these price increases. And are you trying price to maintain a certain level of volume growth or are you trying to simply pass through cost? (A) Well, first of all as you know its unprecedented time across all commodities, and I think as Tim or Richard mentioned in their formal remarks, we are trying to do everything we can to delay or have other costs offset to open the pricing decisions. Also as mentioned we are [indiscernible] pretty much a Penney for a penny type pricing as opposed to increasing margin percentages. They have happened accepted pretty much from the trade, they have not all been reflected of course on shelves, so the consumer has not seen the full impact of our pricing actions most in particularly those that we just announced over the last month or so. But again for the most part we feel our products and brands will be able to withstand the pricing actions we've taken.

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