The J. M. Smucker Co. announced results for the third quarter ended Jan. 31, 2012, of its 2012 fiscal year. Results for the quarter and nine months ended Jan. 31, 2012, include the operations of Rowland Coffee Roasters, Inc. and the North American foodservice coffee and hot beverage business acquired from Sara Lee Corp. since the completion of each acquisition on May 16, 2011 and Jan. 3, 2012, respectively.
Non-GAAP income per diluted share was $1.22 and $1.27 for the third quarters of 2012 and 2011, and $3.63 and $3.69 for the first nine months of 2012 and 2011, respectively, a decrease of 4 percent and 2 percent for the quarter and the first nine months, respectively. GAAP and non-GAAP results include the impact of an $11.3 million loss on the sale of business in the first nine months of 2012, and a noncash impairment charge of $17.2 million in the third quarter and first nine months of 2011, both related to the Europe's Best® frozen fruit and vegetable business.
A greater-than-anticipated decline in overall sales volume was the primary driver of the decrease in income per diluted share in the third quarter of 2012, compared to 2011.
Non-GAAP income per diluted share excludes restructuring and merger and integration costs ("special project costs") of $0.19 and $0.16 per diluted share in the third quarters of 2012 and 2011, and $0.51 and $0.46 for the first nine months of 2012 and 2011, respectively.
"Although sales increased 12 percent for the quarter, we were disappointed with overall volume and its impact on earnings," said Vince Byrd, president and chief operating officer in a prepared statement. "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:
Retail price points were significantly higher in the third quarter of 2012, compared to the prior year.
Consumer pantry loading of peanut butter during the second quarter of 2012 was higher than originally estimated and resulted in lower volume during the third quarter.
Key retailers managed inventory levels down during the quarter.
Specific competitive activities and price points in certain of the company's categories were particularly aggressive, however, the company chose not to engage in these activities.
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.
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.