The J. M. Smucker Company Announces Fourth Quarter Results

20 Jun 2008

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20/06/08 The J. M. Smucker Company announced results for the fourth quarter and fiscal year ended April 30, 2008. Results for the quarter and year ended April 30, 2008, include the operations of Eagle Family Foods Holdings, Inc. ("Eagle") which was acquired on May 1, 2007.

Net sales increased 20 percent in the fourth quarter of 2008 compared to the fourth quarter of 2007 as acquisitions accounted for over half of the growth, and price increases accounted for a majority of the remainder of the overall increase in sales. The acquired Eagle businesses contributed $42.5 million and acquisitions in total added $59.9 million in net sales during the quarter. The Smucker's, Crisco, and Hungry Jack brands increased over last year due to a combination of volume and pricing gains. Favorable exchange rates also contributed to net sales.

Net income per diluted share for the quarter was $0.67, a decrease of 11 percent compared to last year's fourth quarter. During last year's fourth quarter, a peanut butter competitor was temporarily out of the market, and as a result, sales benefited by approximately $15 million and earnings by an estimated $0.08 per share. Included in net income for this quarter was a net insurance settlement of approximately $4 million, or $0.05 per diluted share, related to storm damage at a third-party distribution center in Memphis, Tennessee. Also included in net income for the fourth quarter of 2008 were restructuring and merger and integration costs of $0.06 per diluted share, while net income for the fourth quarter of 2007 included restructuring and merger and integration costs of less than $0.01 per diluted share. Excluding restructuring and merger and integration costs in both years, the Company's income per diluted share was $0.73 in the fourth quarter of 2008, and $0.75 in the fourth quarter of 2007, a decrease of 3 percent.

"Our performance this year is especially gratifying in a time of unprecedented cost increases," ommented Tim Smucker, chairman and co-chief executive officer. "Despite raw material cost ncreases over $150 million, we completed another record year with both sales and earnings xceeding our long- term strategic growth goals. It is our focus on the consumer, and meeting their needs with quality products, that provides the basis for our continued success and enhances opportunities for continued growth."

"As we start the new year, we look forward to completing the transaction to merge the Folgers coffee business into Smucker," added Richard Smucker, president and co-chief executive officer. "Folgers is a perfect fit with our strategy to own and market number one brands in North America. The addition of Folgers will strengthen our portfolio of brands and we believe it is financially compelling. This powerful combination will provide increased size and scale that will benefit all of our businesses, position us for future growth, and deliver long-term shareholder value."

Net sales increased 22 percent in 2008 compared to 2007, excluding the Canadian nonbranded, grain-based foodservice and industrial businesses sold in September 2006. The acquired Eagle businesses contributed $236.2 million in 2008 and total acquisitions added $279.7 million. Net sales increased 8 percent excluding both acquisitions and the divested Canadian businesses.

Net income per diluted share for 2008 was $3.00, an increase of 9 percent over last year. Net income for 2008 included restructuring and merger and integration costs of $0.15 per diluted share, while net income for 2007 included restructuring and merger and integration costs of $0.13 per diluted share. Excluding these costs in both years, the Company's income per diluted share was $3.15 in 2008, and $2.89 in 2007, an increase of 9 percent.

The Company uses income and income per diluted share, excluding restructuring and merger and integration costs, as key measures of results of operations for purposes of evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with U.S. GAAP. Rather, the presentation of results excluding such charges is consistent with the way management internally evaluates its businesses, facilitates the comparison of past and present operations, and provides management a more comprehensive understanding of the financial results. A reconciliation of non-GAAP measures to net income for the current quarter and year is included in the "Unaudited Financial Highlights" table.

Operating income decreased by $6.9 million, or 10 percent, compared to the fourth quarter of 2007, and decreased from 13.9 percent to 10.5 percent of net sales. The impact of higher raw material costs, predominantly the record levels for soybean oil and wheat, was the primary cause of the decline in gross profit to 30.9 percent of net sales compared to an unusually high 36.5 percent in last year's fourth quarter. The impact of price increases taken to date, while essentially offsetting higher raw material costs, was not sufficient to maintain profit margins and accounted for approximately one- third of the gross margin decline. Margins in the current quarter were also negatively impacted by the Eagle business which, due to higher milk costs and a higher percentage of non-branded versus branded sales, realized margins below the Company's average. Last year's fourth quarter results also were favorably affected by the nonrecurring benefit of incremental higher-margin peanut butter sales.

Selling, distribution, and administrative ("SD&A") expenses increased 9 percent, for the fourth quarter of 2008 compared to 2007, resulting from increased marketing investment, along with costs related to the acquired Eagle business. However, all SD&A expenses, particularly corporate overhead expenses, increased at a lesser rate than net sales resulting in an overall decrease in SD&A from 22.2 percent of net sales to 20.3 percent, providing some offset to the decline in gross profit as a percent of net sales.

Restructuring and merger and integration costs were $4.1 million higher in the fourth quarter of 2008 compared to 2007, further reducing operating margin by almost 70 basis points.

Other

Interest expense increased by $4.7 million in the fourth quarter of 2008 compared to the fourth quarter of 2007, resulting from the issuance of $400 million in senior notes in the first quarter of 2008, a portion of which repaid short-term debt used in financing the Eagle acquisition.

The effective tax rate decreased to 30.0 percent in the fourth quarter of 2008, from 35.3 percent in the comparable period in 2007 primarily due to a lower state tax rate.

During the fourth quarter, the Company repurchased 1,296,600 common shares for $66.2 million in cash, including one million common shares under a previously announced Rule 10b5-1 trading plan.

U.S. retail market segment net sales for the quarter were up 15 percent. Net sales in the consumer strategic business area increased 5 percent led by Smucker's fruit spreads and Uncrustables, and Hungry Jack products. Net sales in the consumer oils and baking strategic business area were up 32 percent. Excluding the contribution of $34.1 million from the acquired Eagle business, consumer oils and baking strategic business area net sales increased 6 percent, primarily due to volume gains in oils and price increases.

For 2008, U.S. retail market segment net sales increased 21 percent compared to 2007. Net sales in the consumer strategic business area increased 9 percent. Excluding the contribution of $198.9 million from the acquired Eagle business, net sales in the oils and baking strategic business area increased 8 percent over 2007.

Special Markets

Net sales in the fourth quarter for the special markets segment increased 34 percent. Net sales in the Canada strategic business area were up 63 percent primarily due to the impact of the acquired Eagle and Carnation canned milk businesses, the Europe's Best acquisition, and favorable exchange rates. Net sales increased 20 percent in the foodservice strategic business area, and were up 8 percent, excluding the contribution of the Eagle acquisition. Net sales in the beverage strategic business area increased by 16 percent.

For 2008, special markets segment net sales increased 24 percent compared to 2007, excluding divested Canadian businesses.

Outlook

Earlier this month, the Company announced that it entered into a definitive agreement with The Procter & Gamble Company ("P&G") to merge P&G's Folgers coffee business with and into the Company. Assuming the transaction closes early in the fourth quarter of calendar 2008, the Company's net sales are estimated to range from $3.8 to $4.0 billion and earnings per share before one-time costs associated with the transaction, are estimated to range from $3.45 to $3.50. Actual results for the year will depend on the final closing date of the transaction.

On its base business, the Company expects raw material costs in 2009 to increase approximately $150 million over 2008 levels with soybean oil, wheat, peanuts, and certain fruits accounting for the majority of the increase. Pricing actions, taken over the last several months, and including those effective in May, will help offset the impact of the cost increases, but will not be sufficient to expand margins in the near term. The Company also plans to increase its 2009 marketing investment by 20 percent.