J. M. Smucker Co. Reports 9 Percent Net Sales Gain In Third Quarter

The J. M. Smucker Co. announced results for the third quarter ended Jan. 31, 2011, of its 2011 fiscal year.

"We continue to deliver solid earnings and sales growth in a dynamic consumer environment," commented Richard Smucker, executive chairman and co-chief executive officer in a prepared statement. "These strong results reflect our disciplined approach to managing our business, the ongoing investments in the equity of our brands, and the benefit of a cultural commitment to making the highest-quality products."

"Our team continues to drive results, including volume growth and strong cash flow which have enabled us to repurchase over three percent of outstanding shares and declare a 10 percent quarterly dividend increase," added Tim Smucker, chairman of the board and co-chief executive officer. "As we navigate through an uncertain commodity cost environment, we expect to continue to drive financial results by maintaining our balanced approach to pricing, market share growth, and profitability."

Net sales in the third quarter of 2011 increased $106.5 million, or 9 percent, compared to the third quarter of 2010, and increased 10 percent, excluding the impact of the 2010 potato products divestiture and foreign exchange. Overall volume increased 3 percent as solid gains were realized in Crisco(R) oils, Jif(R) peanut butter, Smucker's(R) fruit spreads, Dunkin' Donuts(R) packaged coffee, and natural foods beverages. The net impact of pricing contributed approximately 4 percent to net sales and the overall impact of sales mix was favorable.

Gross profit increased $16.1 million in the third quarter of 2011, compared to 2010, as the increase in net sales offset the impact of overall higher raw material costs and $16.9 million of special project costs included in cost of products sold. Excluding special project costs, gross profit increased $33.0 million, or 7 percent, yet decreased as a percent of net sales from 38.0 percent in the third quarter of 2010, to 37.4 percent in the third quarter of 2011. Raw material cost increases were most significant for green coffee, milk, sugar, and soybean oil, and more than offset lower costs for peanuts. Coffee price increases taken earlier in the year offset higher green coffee cost and contributed to the gross profit increase in the third quarter of 2011, but did not result in an overall gross margin gain. Gross margin was further impacted by price declines taken on oils during the second quarter in response to competitive dynamics.

Selling, distribution, and administrative expenses in the third quarter of 2011, were flat compared to 2010, and decreased as a percentage of net sales from 17.8 percent to 16.3 percent. Marketing and distribution expenses for the third quarter of 2011 both decreased 1 percent, compared to 2010, while selling expenses increased approximately 7 percent related to the increase in net sales. General and administrative expenses decreased 3 percent over the same period.

Operating income increased $3.1 million, or 1 percent, in the third quarter of 2011, compared to 2010, despite an overall increase in special project costs of approximately $23.3 million. Excluding the impact of special project costs in both periods, operating income increased $26.4 million, or 12 percent, and improved from 17.8 percent of net sales in 2010, to 18.4 percent in 2011. Additionally, noncash impairment charges of $17.2 million and $9.8 million, primarily related to the Europe's Best(R) intangible assets in Canada, reduced the company's overall operating margin by 1.3 and 0.8 percentage points in the third quarters of 2011 and 2010, respectively.

While the company's four reportable segments remain the same for 2011, the calculation of segment profit was modified at the beginning of 2011 to include intangible asset amortization and impairment charges related to segment assets, along with certain other items in each of the segments. These items were previously considered corporate expenses and were not allocated to the segments. This change more accurately aligns the segment financial results with the responsibilities of segment management, most notably in the area of intangible assets. Fiscal 2010 segment profit has been recalculated to be consistent with the current methodology.

The U.S. retail coffee market segment net sales increased 18 percent in the third quarter of 2011, compared to the third quarter of 2010. Through the third quarter, price increases totaling 13 percent were taken during 2011 to cover rising green coffee costs. The impact of these price increases, and favorable sales mix more than offset a 2 percent volume decline. The introduction of Folgers Gourmet Selections(R) and Millstone(R)K-Cups(R) offerings earlier in the fiscal year added approximately 4 percent to U.S. Retail Coffee Market segment net sales in the third quarter of 2011. Volume decreased 3 percent for the Folgers(R) brand while Dunkin' Donuts(R) packaged coffee increased 8 percent in the third quarter of 2011, compared to 2010.

U.S. retail coffee market segment profit increased 19 percent in the third quarter of 2011, compared to the third quarter of 2010. Green coffee costs were significantly higher in the third quarter of 2011, compared to the third quarter of 2010, but were offset by previously announced price increases and favorable sales mix. Promotional spending was up for the third quarter of 2011 compared to 2010, but at an overall lower rate during the Fall Bake and Holiday period while marketing expenses decreased. As a result, segment profit margin was 28.5 percent in 2011, compared to 28.1 percent in 2010. The company expects to recognize higher green coffee costs in the fourth quarter and, as a result, announced a 10 percent price increase in early February.

The U.S. retail consumer market segment net sales increased 5 percent while volume increased 7 percent, excluding the effect of potato products divested in the fourth quarter of 2010. Net sales include the impact of a peanut butter price reduction of 5 percent taken earlier in the fiscal year. Volume gains were realized in Jif(R) peanut butter, Smucker's(R) fruit spreads, and Hungry Jack(R) pancake mixes and syrup. Reported segment net sales were flat and volume increased 3 percent, respectively, for the third quarter of 2011, compared to the third quarter of 2010, reflecting the divested potato products.

The U.S. retail consumer market segment profit increased 9 percent for the third quarter of 2011, compared to the third quarter in 2010, due to a decrease in supply chain and certain raw material costs, primarily peanuts. These more than offset a 5 percent increase in segment marketing expense during the third quarter of 2011. Segment profit margin for the quarter improved significantly from 24.2 percent in the third quarter of 2010, to 26.4 percent in 2011.

Net sales and volume in the U.S. retail oils and baking market segment increased 4 percent and 3 percent, respectively, for the third quarter of 2011, compared to 2010. Net sales for the Crisco(R) brand increased 14 percent, on volume gains of 27 percent in the third quarter of 2011, compared to 2010, reflecting the impact of the price decline taken earlier in the fiscal year. While net sales were flat, Pillsbury(R) baking volume declined 9 percent resulting from a combination of planned reductions in lower-margin products, and a continuing competitive and promotional environment. Volume also declined in branded canned milk in the third quarter of 2011, compared to 2010.

The U.S. retail oils and baking market segment profit decreased 12 percent for the third quarter of 2011, compared to the third quarter of 2010, reflecting the pricing actions taken in response to competitive dynamics. Also, higher costs were realized for milk, sugar, and soybean oil. Segment profit margin decreased from 14.7 percent in the third quarter of 2010, to 12.4 percent in 2011.

Net sales in the special markets segment increased 7 percent in the third quarter of 2011, compared to 2010. Excluding foreign exchange, net sales increased 4 percent over the same time period. Volume increased 7 percent in the third quarter of 2011, compared to 2010, driven by gains in the natural foods, pickles, baking, and coffee categories.

Special markets segment profit decreased 8 percent and profit margin declined to 12.3 percent from 14.2 percent for the third quarter of 2011, compared to 2010. Impairment charges of $17.2 million related to Europe's Best(R) intangible assets in Canada were recorded in the third quarter of 2011, compared to $7.3 million in the third quarter of 2010. The incremental charge of $9.9 million reduced segment profit margin by 4.2 percentage points.

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