J. M. Smucker Company Announces Net Sales Increased 52 percent Led by Folgers

Gross profit increased $248.8 million in the second quarter of 2010 compared to 2009 with Folgers contributing approximately 90 percent of the increase. Folgers' gross margin was favorably impacted by green coffee market conditions, volume-related plant efficiencies, and product sales mix.

23 Nov 2009 --- The J. M. Smucker Company announced results for the second quarter ended October 31, 2009 of its 2010 fiscal year. Results for the three-month and six-month periods ended October 31, 2009, include the operations of The Folgers Coffee Company ("Folgers"). References to base business refer to the Company's operations excluding the impact of Folgers.

* Merger and integration costs of $0.04 and $0.14 per diluted share are included in the second quarter and first six months of 2010, respectively, while restructuring and merger and integration costs of $0.07 and $0.12 per diluted share are included in the second quarter and first six months of 2009, respectively. Excluding these items, the Company's non-GAAP income per diluted share was $1.22 and $1.01 for the second quarter of 2010 and 2009, respectively, an increase of 21 percent, and $2.14 and $1.83 for the first six months of 2010 and 2009, respectively, an increase of 17 percent.
* Amortization expense of $0.10 and $0.02 per diluted share is included in the second quarter of 2010 and 2009, respectively, and $0.20 and $0.04 per diluted share is included in the first six months of 2010 and 2009, respectively.

"Achieving another quarter of record results further affirms our strategy of owning and marketing center-of-the-store, number one food brands," commented Tim Smucker, Chairman of the Board and Co-Chief Executive Officer. "In support of our brands, we recently introduced new advertising, increased media support, and implemented multi-brand promotional events across our portfolio. Consumers continue to respond well to our brands, our product innovations, and the value we bring in helping to provide memorable meals and moments for their families."

"With strong momentum in the first half of the year, and confidence in our strategy and our ability to execute this strategy, we are raising our outlook for the year," added Richard Smucker, Executive Chairman and Co-Chief Executive Officer. "We recently celebrated the one year anniversary of the Folgers merger, and appreciate the efforts of our employees in quickly achieving all key integration milestones. We continue to expect good performance from our portfolio of iconic brands."

Gross profit increased $248.8 million in the second quarter of 2010 compared to 2009 with Folgers contributing approximately 90 percent of the increase. Folgers' gross margin was favorably impacted by green coffee market conditions, volume-related plant efficiencies, and product sales mix. Gross profit on the Company's base business improved by approximately 10 percent, and gross margin increased from 28.9 percent in last year's second quarter to 33.8 percent this quarter. Last year's results included charges of approximately $24.4 million related to nonqualifying commodity derivatives reflecting a sharp decline in soybean oil and wheat markets. Lower raw material and distribution costs this quarter also contributed to the base business margin improvement. Overall, gross margin improved to 38.5 percent in the second quarter of 2010.

Selling, distribution, and administrative ("SD&A") expenses increased 56 percent for the second quarter of 2010, compared to 2009, with the addition of Folgers accounting for the majority of the increase. As a percentage of net sales, SD&A increased from 17.8 percent in the second quarter of 2009 to 18.2 percent in 2010. Consistent with the Company's strategy of long-term investment in its brands, marketing expense increased approximately 70 percent during the second quarter of 2010, compared to 2009, in support of brand equity initiatives, including new advertising for many of its brands. As a result, marketing and selling expenses as a percentage of net sales increased from 9.6 percent in last year's second quarter to 10.1 percent this year.

Amortization expense, a noncash item, increased $16.8 million to 1.4 percent of net sales in the second quarter of 2010, compared to 0.1 percent in the same period in 2009, reflecting the addition of intangible assets associated with the Folgers transaction.

Driven by gross profit, operating income more than doubled compared to the second quarter of 2009, and improved from 10.2 percent to 18.1 percent of net sales. Excluding the impact of merger and integration costs in both years, and further excluding restructuring costs in 2009, operating income increased from 11.0 percent of net sales in 2009 to 18.7 percent in 2010.

Interest and Income Taxes

Interest expense increased $6.2 million during the second quarter of 2010, compared to 2009, as a result of an increase in the Company's debt obligations associated with the Folgers transaction in the third quarter of 2009, offset slightly by the retirement of $75 million in debt on June 1, 2009.

Income tax expense increased $49.2 million during the second quarter of 2010 compared to 2009. The effective tax rate increased to 34.9 percent in the second quarter of 2010 compared to 33.4 percent in 2009, reflecting the higher effective tax rate associated with the Folgers business and the net favorable resolution of previously open tax positions in 2009 as compared to 2010.

U.S. Retail Coffee Market

The U.S. retail coffee market segment contributed $445.1 million to net sales in the second quarter of 2010. Compared to the same three-month period last year, prior to the transaction, volume increased approximately 5 percent. Strong growth in the Folgers brand contributed over three-quarters of the volume increase compared to last year, while the continued growth of Dunkin' Donuts coffee in gourmet contributed the remainder.

The U.S. retail coffee market segment added $148.5 million in segment profit for the second quarter of 2010, representing a 33.4 percent margin. Margins in the coffee segment were driven by favorable commodity costs, volume-related plant efficiencies, and sales mix. Investment in increased marketing offset a portion of the margin gains.

U.S. Retail Consumer Market

U.S. retail consumer market segment net sales for the quarter were down 4 percent compared to the prior year, primarily due to sales mix. Total volume in the U.S. retail consumer market was flat compared to the second quarter last year, as gains in Jif peanut butter and Hungry Jack pancake mixes and syrups were offset by declines in potatoes, fruit spreads, Smucker's Uncrustables sandwiches, and the specialty foods business.

U.S. retail consumer market segment profit increased 4 percent for the second quarter of 2010 compared to the same period in 2009, mainly due to operating efficiencies. Segment profit margin for the quarter improved from 22.6 percent of net sales in the second quarter of 2009 to 24.5 percent in 2010.

U.S. Retail Oils and Baking Market

Total volume in the U.S. retail oils and baking market segment was up 3 percent, with double-digit gains in the Pillsbury and Crisco brands offsetting declines in canned milk. Net sales in the U.S. retail oils and baking market were down 9 percent for the second quarter of 2010 compared to 2009, reflecting the impact of price declines in shortening, oils, flour, and canned milk, and higher promotional spending on Crisco oils.

U.S. retail oils and baking market segment profit increased 55 percent for the second quarter of 2010, compared to the same period in 2009, and segment profit margin improved to 15.8 percent of net sales from 9.3 percent in 2009. Last year's second quarter segment profit included a significant portion of the charges on commodity derivatives and accounts for most of the profit improvement in the current quarter. In addition, supply chain efficiencies, including lower distribution costs, offset an increase in marketing primarily in support of the Pillsbury brand and a lower contribution from canned milk.

Special Markets

Net sales in the second quarter for the special markets segment increased 15 percent. The acquisition of Folgers added $42.8 million to special markets net sales, more than offsetting a 1 percent volume decline in the base business. Volume gains were realized in Canada primarily in the baking and pickles categories while declines in foodservice and natural foods were generally attributable to the current economic environment.

Special markets segment profit increased 56 percent for the second quarter of 2010 compared to 2009, with the addition of Folgers and lower costs. Profit margin for the quarter improved from 12.7 percent in the second quarter of 2009 to 17.2 percent in 2010.