J. M. Smucker Co. Reports 14 Percent Net Sales Gain In Fourth Quarter

The J. M. Smucker Co. announced results for the fourth quarter and year ended April 30, 2012. Results for the quarter and year ended April 30, 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 $1.10 and $1.00 for the fourth quarters of 2012 and 2011, and $4.73 and $4.69 for the years ended April 30, 2012 and 2011, respectively, an increase of 10 percent and 1 percent for the quarter and full year, respectively.

GAAP and non-GAAP results include the impact, related to the Europe's Best® frozen fruit and vegetable business, of an $11.3 million loss on the sale of business in the year ended April 30, 2012, and a noncash impairment charge of $17.2 million in the year ended April 30, 2011.

Non-GAAP income per diluted share excludes restructuring and merger and integration costs ("special project costs") of $0.17 and $0.18 per diluted share in the fourth quarters of 2012 and 2011, and $0.67 and $0.64 for the years ended April 30, 2012 and 2011, respectively.

"We are pleased to have delivered another year of record sales and year-over-year earnings per share growth in a complex macroeconomic environment," commented Richard Smucker, chief executive officer in a prepared statement. "As we look ahead, we will continue to invest in our portfolio of trusted brands, build upon our recent acquisitions, advance our extensive pipeline of innovation, further our supply chain productivity initiatives, and build upon the foundation being laid in China. We are well-positioned for continued growth."

"While higher food prices continue to pose a challenge to consumers, we believe that softening commodity costs should provide some relief to improve volume. We remain committed to price leadership as demonstrated by our recent six percent price decrease on coffee," said Vince Byrd, president and chief operating officer. "In this economic environment, it is important to continue to build our brands for the long term while maintaining our ability to quickly adjust our marketing tactics to meet ever-changing consumer needs."

Net sales increased 14 percent in the fourth quarter of 2012, compared to the fourth quarter of 2011, driven primarily by the impact of acquisitions and higher realized prices. The Sara Lee foodservice business and Rowland Coffee acquisitions during the year contributed $97.4 million and $28.4 million to net sales in the fourth quarter of 2012, respectively, and combined represented 11 percentage points of the net sales increase. The impact of sales mix was favorable primarily due to K-Cups®.

Overall volume, excluding acquisitions, was down 7 percent in the fourth quarter of 2012, compared to the fourth quarter of 2011, primarily driven by Jif® peanut butter, Pillsbury® baking mixes, and Folgers® coffee. The overall volume decline, compared to last year's fourth quarter, was generally in line with the company's expectation of continued weak consumer purchases, attributed mostly to significantly higher retail prices and the competitive environment.

Gross profit increased $28.8 million, or 7 percent, in the fourth quarter of 2012, compared to 2011, and increased $20.0 million, excluding special project costs, due to acquisitions. During the fourth quarter of 2012, commodity costs were higher, compared to the fourth quarter of 2011, most significantly for green coffee and peanuts. The impact of lower volume in the base business more than offset the net benefit of higher prices taken in response to higher costs. Included in overall higher costs, the net effect of the change in unrealized mark-to-market adjustments on derivative contracts was $5.9 million unfavorable and primarily related to coffee. Gross margin contracted from 36.8 percent in the fourth quarter of 2011 to 33.7 percent in the fourth quarter of 2012, excluding special project costs.

Selling, distribution, and administrative (SD&A) expenses decreased 4 percent in the fourth quarter of 2012, compared to the fourth quarter of 2011, and decreased as a percentage of net sales from 18.8 percent to 15.8 percent, primarily due to an $11.7 million, or 18 percent, decrease in marketing expenses during the period. A portion of the marketing expense decline was redeployed to trade and consumer promotions, which were reflected as a reduction of net sales. Over the same period, general and administrative and distribution expenses both decreased 3 percent. Contributing to the decrease in general and administrative expenses, incentive compensation costs were lower in the fourth quarter of 2012, compared to 2011. Selling expenses increased 17 percent in the fourth quarter of 2012, compared to 2011, generally in line with the increase in net sales.

Higher amortization expense was recognized in the fourth quarter of 2012, compared to 2011, primarily related to the intangible assets associated with the company's recent acquisitions. In addition, noncash impairment charges of $4.6 million were recognized in the fourth quarter of 2012.

Operating income increased $19.5 million, or 12 percent, in the fourth quarter of 2012, compared to 2011. Excluding special project costs in both periods, operating income increased $15.9 million, or 8 percent, and declined from 16.7 percent of net sales in 2011 to 15.8 percent in 2012.

Interest and income taxes interest expense increased $6.4 million in the fourth quarter of 2012, compared to 2011, representing the costs of higher debt outstanding, primarily due to the company's October 2011 public debt issuance. The increased borrowing costs were 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 increased $4.7 million in the fourth quarter of 2012, primarily reflecting a $14.0 million increase in income before income taxes. The effective tax rate was 36.5 percent in the fourth quarter of 2012, compared to 36.7 percent in 2011.

The U.S. retail coffee segment net sales increased 7 percent in the fourth quarter of 2012, compared to the fourth quarter of 2011, including the realization of higher price. The acquisition of Rowland Coffee contributed approximately $24.0 million to segment net sales, representing 5 percentage points of the segment net sales increase. Segment volume decreased 8 percent for the fourth quarter of 2012, compared to the fourth quarter of 2011, excluding Rowland Coffee. Volume declined 7 percent for the Folgers® brand and 13 percent for Dunkin' Donuts® packaged coffee.

Coffee volume declines were primarily attributed to a combination of lower consumer purchases in response to higher retail prices, inventory level management by key retailers in anticipation of a price decline, which the company announced on May 15, 2012, and promotional activities by competitors.

Net sales of Folgers Gourmet Selections® and Millstone® K-Cups®, increased $34.7 million, compared to the fourth 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 increased $7.9 million, or 7 percent, in the fourth quarter of 2012, compared to the fourth quarter of 2011, despite base volume declines, primarily due to lower marketing and distribution costs, and the contribution from Rowland Coffee. The net benefit of higher prices related to higher costs in the fourth quarter of 2012, compared to 2011, contributed slightly to segment profit.

The U.S. retail consumer foods segment net sales increased 5 percent in the fourth quarter of 2012, compared to 2011, due to the impact of price increases. Segment volume declined 11 percent. Jif® peanut butter net sales increased 25 percent in the fourth quarter of 2012, compared to 2011, reflecting price increases over the past year and lower promotional activity, somewhat offset by a 17 percent volume decline.

The company attributed the overall decline in peanut butter volume equally to both consumer response to significantly higher retail prices and lost peanut butter distribution with a key retailer in non-measured channels earlier in the fiscal year. Smucker's® fruit spreads net sales declined 8 percent and volume was down 11 percent during the same period, primarily due to competitive activity. Crisco® brand net sales increased 7 percent and volume was down 7 percent in the fourth quarter of 2012, compared to 2011. For the same period, net sales and volume for the Pillsbury® brand decreased 20 percent and 14 percent, respectively, with declines mostly in baking mixes resulting from lower promotional activity in the current year and strong results in the prior year. Canned milk net sales decreased 3 percent and volume decreased 11 percent during the fourth quarter of 2012, compared to 2011.

The U.S. retail consumer foods segment profit decreased $6.1 million, or 6 percent, in the fourth quarter of 2012, compared to the fourth quarter of 2011, primarily due to volume. Price increases taken earlier in the fiscal year, most notably on peanut butter, more than offset higher commodity costs. Segment selling and marketing expenses were down, however, a noncash impairment charge of approximately $4.6 million was recognized in the fourth quarter of 2012 related to a regional canned milk trademark. Segment profit margin was 19.8 percent in the fourth quarter of 2012, compared to 22.1 percent in 2011.

The international, foodservice, and natural foods segment increased 47 percent in the fourth quarter of 2012, compared to 2011. Excluding the impact of acquisitions, divestiture, and foreign exchange, segment net sales increased 9 percent over the same period last year led by a 4 percent increase in volume. Volume gains in Robin Hood® and Five Roses® flour, Santa Cruz Organic® beverages, and Smucker's® fruit spreads and Uncrustables® sandwiches more than offset declines in R.W. Knudsen Family® beverages and Bick's® pickles.

Segment profit increased $9.3 million in the fourth quarter of 2012, compared to 2011, primarily due to lower marketing expenses, the contribution from recent acquisitions, and volume growth. Segment profit margin was 14.9 percent in the fourth quarter of 2012, compared to 17.9 percent in the fourth quarter of 2011, partially reflecting the acquisition of the lower-margin Sara Lee foodservice business. 

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