The J. M. Smucker Co. announced results for the third quarter ended Jan. 31, 2013, of its 2013 fiscal year. Results for the quarter and nine months ended Jan. 31, 2013 and 2012, include the operations of the North American foodservice coffee and hot beverage business acquired from Sara Lee Corporation since the completion of the acquisition on Jan. 3, 2012.
Net sales increased six percent in the third quarter of 2013, compared to the third quarter of 2012, primarily due to the Sara Lee foodservice business acquisition and favorable sales mix. As a result of the acquisition in January of last year, an additional two months of net sales, totaling $59.7 million, were recognized in the third quarter of 2013.
Favorable sales mix in the quarter was driven by the company’s K-Cups® and peanut butter products, which are higher priced per pound, compared to other products within the company’s portfolio. Overall net price realization was lower primarily due to price declines on coffee taken earlier in the fiscal year. Volume gains realized in Jif® peanut butter and Smucker’s® fruit spreads were offset by decreases in the Pillsbury® brand and the Canadian Robin Hood® and Five Roses® flour brands. Overall volume, based on weight and excluding the incremental impact of the acquisition, decreased one percent in the third quarter of 2013, compared to the third quarter of 2012.
Gross profit increased $70.5 million, or 15 percent, in the third quarter of 2013, compared to 2012, due to favorable mix, lower commodity costs, the impact of an additional two months of the Sara Lee foodservice business, and a decrease in special project costs. Excluding special project costs, gross profit increased $58.6 million, or 12 percent, and improved to 34.5 percent of net sales in the third quarter of 2013, compared to 32.6 percent in the third quarter of 2012.
Overall lower commodity costs during the third quarter of 2013, compared to the third quarter of 2012, were driven by green coffee offset somewhat by higher peanut costs. The favorable net impact of lower green coffee costs on gross profit was primarily timing related. The company reduced coffee prices in May 2012 with the expectation that it would recognize lower green coffee costs as it progressed through its fiscal year. The actual realization of these lower costs during the quarter, in large part, offset the unfavorable impact realized earlier in the year. Unrealized mark-to-market adjustments on derivative contracts were a loss of $0.5 million in the third quarter of 2013, compared to a gain of $2.1 million in the third quarter of 2012.
Total selling, distribution, and administrative expenses increased 12 percent in the third quarter of 2013, compared to the third quarter of 2012, and increased as a percentage of net sales from 15.3 percent to 16.1 percent. Marketing, selling, and distribution expenses increased 6 percent, 10 percent, and 5 percent, respectively, and were primarily driven by the acquired Sara Lee foodservice business. General and administrative expenses increased 21 percent due to increased incentive compensation and employee benefit costs. Higher amortization expense was recognized in the third quarter of 2013, compared to 2012, primarily related to the intangible assets associated with the Sara Lee foodservice business acquisition.
Operating income increased $57.9 million in the third quarter of 2013, compared to 2012. Excluding special project costs in both periods, operating income increased $33.4 million, or 14 percent, and increased from 15.9 percent of net sales in 2012 to 17.1 percent in 2013.
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales decreased two percent in the third quarter of 2013, compared to the third quarter of 2012, reflecting price declines taken over the past year. Segment volume increased 1 percent in the third quarter of 2013, compared to the third quarter of 2012, led by K-Cups®, Café Bustelo®, and Café Pilon®. Volume of the overall Folgers® brand was flat as the growth experienced in K-Cups® was offset by a slight decline in roast and ground that was attributed to the constraint for coffee containers, which arose earlier in the fiscal year and is now resolved. Dunkin’ Donuts® packaged coffee volume decreased 2 percent. The impact of sales mix was favorable due to K-Cups®. Net sales of K-Cups® increased $30.4 million, or 51 percent, compared to the third quarter of 2012, and contributed 5 percentage points of growth to segment net sales, while contributing only 1 percentage point of growth to volume.
The U.S. Retail Coffee segment profit increased $36.8 million, or 27 percent, in the third quarter of 2013, compared to the third quarter of 2012. Green coffee costs were significantly lower in the third quarter of 2013, compared to the third quarter of 2012. The Company reduced coffee prices in May 2012 with the expectation that it would recognize lower green coffee costs as it progressed through its fiscal year. The majority of these lower costs was recognized during the quarter and, in large part, offset the unfavorable impact realized earlier in the year. On a year-to-date basis, the net impact of lower prices and green coffee costs has been relatively neutral to segment profit. Mix also contributed to the increase in segment profit in the third quarter of 2013, compared to 2012, offset somewhat by an increase in marketing expenses. Unrealized mark-to-market adjustments on derivative contracts, which represented a gain of $0.3 million in the third quarter of 2013, compared to a gain of $2.5 million in the third quarter of 2012, had an unfavorable impact on segment profit growth of $2.2 million.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales increased four percent in the third quarter of 2013, compared to 2012, as the impact of favorable sales mix and higher net price realization offset a 1 percent decline in segment volume. Jif® brand net sales increased 21 percent in the third quarter of 2013, compared to 2012, reflecting a 17 percent volume increase. Jif® peanut butter volume in last year’s third quarter was significantly lower, impacted by the 30 percent price increase at the beginning of that quarter along with the consumer buy-in that occurred in advance of it. Smucker’s® fruit spreads net sales and volume increased five percent and nine percent, respectively, in the third quarter of 2013, compared to 2012. Net sales and volume of Smucker’s® Uncrustables® frozen sandwiches both increased 38 percent during the same period, benefiting from new distribution.
Net sales for the Pillsbury® brand decreased four percent, while volume decreased nine percent, in the third quarter of 2013, compared to 2012, with approximately one-half of the volume decline due to the tonnage impact of the previously announced cake mix downsizing. Canned milk net sales and volume decreased 10 percent and five percent, respectively, during the third quarter of 2013, compared to 2012.
The U.S. Retail Consumer Foods segment profit was flat in the third quarter of 2013, compared to the third quarter of 2012 which benefited from the timing of peanut butter pricing actions. Segment profit was positively impacted by mix along with decreases in marketing and selling expenses. Overall raw material costs recognized were higher in the third quarter of 2013, compared to 2012, primarily due to peanuts. In anticipation of lower peanut costs in future periods, the Company decreased peanut butter prices by approximately 10 percent late in the third quarter. As a result, higher peanut costs were not fully recovered by net price realization and contributed to the flat quarter-over-quarter segment profit. Unrealized mark-to-market adjustments on derivative contracts were a gain of $0.4 million in the third quarter of 2013, compared to a loss of $0.2 million in the third quarter of 2012.
“We went into the important holiday season positioned for growth in many of our categories and are pleased with the results,” Richard Smucker, chief executive officer said in a prepared statement. “Our strategy of generating growth through brand-building, innovation, acquisitions, and productivity initiatives made possible solid third quarter and year-to-date results. Our brands continue to demonstrate their strength and resilience. To our employees, we thank them for their unending commitment to our strategy and their skill in executing it.”
“Our solid third quarter sales were punctuated by the continued growth of our K-Cups®, momentum in the spreads business, and the initial contributions of our Sara Lee foodservice business acquisition,” added Vince Byrd, President and chief operating officer. “Our long-term business perspective coupled with the ability to quickly adapt to changing market conditions has enabled us to perform well in an unsettled business environment. The consumer response to our tactical adjustments over the last few quarters has been positive and we are well positioned for continued profitable growth.”
