The J. M. Smucker Company Announces Second Quarter Results

"Our long-term perspective in managing our business is backed by a strong financial position that provides the ability and flexibility to capitalize on opportunities that support our strategy," added Richard Smucker, Executive Chairman and Co-Chief Executive Officer.

19 Nov 2010 --- The J. M. Smucker Company announced results for the second quarter ended October 31, 2010, of its 2011 fiscal year.

*Non-GAAP income per diluted share was $1.38 and $1.22 for the second quarters of 2011 and 2010, and $2.42 and $2.14 for the first six months of 2011 and 2010, respectively, an increase of 13 percent in both periods. Non-GAAP income per diluted share excludes restructuring and merger and integration costs ("special project costs") of $0.13 and $0.04 per diluted share, in the second quarters of 2011 and 2010, and $0.31 and $0.14 in the first six months of 2011 and 2010, respectively.
*Non-GAAP operating income was up 10 percent, and operating margin improved to 20.6 percent in the second quarter of 2011, compared to 18.7 percent in the second quarter of 2010.
*Results for the second quarter of 2011 include the impact of a lower effective tax rate of 32.5 percent, compared to 34.9 percent in the second quarter of 2010.

"We are pleased to deliver another quarter of strong earnings in this challenging economic environment," commented Tim Smucker, Chairman of the Board and Co-Chief Executive Officer. "Our team continues to take a long-term view of our business, focusing on the health of our brands, delivering value to our consumers, and managing the balance between volume growth, share of market gains, and profitability."

"Our long-term perspective in managing our business is backed by a strong financial position that provides the ability and flexibility to capitalize on opportunities that support our strategy," added Richard Smucker, Executive Chairman and Co-Chief Executive Officer. "As we look ahead, we anticipate that marketplace dynamics, including escalating commodity costs, will continue to present challenges. However, we are confident in the ability of our team to execute our strategy and address these obstacles."

Net sales in the second quarter of 2011 were essentially equal to the second quarter of 2010, and increased 1 percent, excluding the impact of the potato products divestiture and foreign exchange. Overall volume declined 4 percent driven by the Company's U.S. Retail Oils and Baking Market segment brands and Folgers coffee in the U.S. Retail Coffee Market segment. Volume gains were most significant across the Special Markets segment, while gains were also realized in Dunkin' Donuts packaged coffee, Smucker's fruit spreads, and Jif peanut butter. The net impact of pricing contributed approximately 3 percent to net sales and the overall impact of sales mix was favorable.

Gross profit increased $2.4 million to 38.7 percent of net sales in the second quarter of 2011, from 38.5 percent in the second quarter of 2010. The second quarter of 2011 includes the impact of $12.1 million of restructuring charges in cost of products sold and $5.9 million of unrealized mark-to-market losses on derivative contracts. The impact of raw material and manufacturing costs on gross profit was mixed. Green coffee costs were significantly higher in the second quarter of 2011, compared to the second quarter of 2010. Pricing actions taken earlier in the year, relative to the recognition of higher green coffee costs, contributed to gross profit in the second quarter of 2011. The Company expects to recognize steadily higher green coffee costs during the remainder of the year. Higher costs were also realized for milk, sugar, and soybean oil while lower costs were recognized for peanuts and flour. The second quarter of 2010 had benefited from volume-related plant efficiencies.

Selling, distribution, and administrative expenses decreased 4 percent for the second quarter of 2011, compared to 2010, and decreased as a percentage of net sales from 18.2 percent to 17.4 percent. Compared to the second quarter of 2010, that included higher levels of investment spending in brand equity initiatives and new advertising, marketing expenses decreased 15 percent for the second quarter of 2011. A portion of the marketing expense decrease was reallocated to support promotional programs, primarily in the U.S. Retail Oils and Baking Market segment. Selling and distribution expenses in the second quarter of 2011 remained relatively even with 2010. General and administrative expenses were up 5 percent over the same period.

Operating income increased $8.8 million, or 4 percent, in the second quarter of 2011, compared to 2010, despite an increase in special project costs of approximately $15.0 million. Excluding the impact of special project costs in both periods, operating income increased $23.9 million, or 10 percent, and improved from 18.7 percent of net sales in 2010, to 20.6 percent in 2011.

Interest and Income Taxes

Interest expense increased $1.0 million during the second quarter of 2011, compared to 2010, as lower average debt outstanding was somewhat offset by modestly higher interest rates.

Income taxes decreased $3.0 million in the second quarter of 2011, compared to 2010, resulting in a quarterly effective tax rate of 32.5 percent in 2011, compared to 34.9 percent in 2010. The lower effective tax rate for the second quarter of 2011 primarily reflects benefits realized from an increased deduction related to U.S. manufacturing activities, compared to 2010, together with lower state income taxes.

While the Company's four reportable segments remain the same for 2011, the calculation of segment profit has been modified to include intangible asset amortization and impairment charges related to segment assets, along with certain other items in each of the segments. These items were previously considered corporate expenses and were not allocated to the segments. This change more accurately aligns the segment financial results with the responsibilities of segment management, most notably in the area of intangible assets. Fiscal 2010 segment profit has been recalculated to be consistent with the current methodology.

U.S. Retail Coffee Market

The U.S. Retail Coffee Market segment net sales increased 7 percent in the second quarter of 2011, compared to the second quarter in 2010. Price increases totaling 13 percent were taken in 2011 to cover rising green coffee costs, but were partially offset by a 7 percent overall volume decline and additional promotional spending. Volume decreased in the Folgers brand while Dunkin' Donuts packaged coffee continued its double-digit growth. The introduction of Folgers Gourmet Selections and MillstoneK-Cups offerings during the quarter contributed approximately 2 percent to U.S. Retail Coffee Market segment net sales.

Green coffee costs were significantly higher in the second quarter of 2011, compared to the second quarter of 2010. Pricing actions taken earlier in the year, relative to higher green coffee costs realized during the second quarter, contributed to segment profit. The Company expects the impact of rising green coffee costs to accelerate during the remainder of the year. Marketing expenses decreased in the second quarter of 2011, compared to the second quarter of 2010 which included significant long-term investments in brand equity initiatives and new advertising. U.S. Retail Coffee Market segment profit increased 13 percent in the second quarter of 2011, compared to the second quarter of 2010 that included the benefit of volume-related plant efficiencies. Segment profit margin was 31.2 percent in 2011, compared to 29.6 percent in 2010.

U.S. Retail Consumer Market

The U.S. Retail Consumer Market segment net sales declined approximately 2 percent while volume increased 1 percent, excluding the effect of potato products divested in the fourth quarter of 2010. Net sales include the impact of a peanut butter price reduction of 5 percent taken earlier in the fiscal year. Volume gains were realized in Smucker's fruit spreads, Jif peanut butter, and Smucker's Snack'n Waffles brand waffles, offsetting volume declines in Smucker's Uncrustables sandwiches and toppings. Reported segment net sales and volume decreased 6 percent and 3 percent, respectively, for the second quarter of 2011, compared to the second quarter of 2010, reflecting the divested potato products.

The U.S. Retail Consumer Market segment profit increased 5 percent for the second quarter of 2011, compared to the second quarter in 2010, due to lower supply chain and raw material costs, primarily peanuts and corn sweetener, and a favorable sales mix that more than offset increased marketing. Segment profit margin for the quarter improved significantly from 24.3 percent in the second quarter of 2010, to 27.3 percent in 2011.

U.S. Retail Oils and Baking Market

Net sales and volume in the U.S. Retail Oils and Baking Market segment were down 8 percent and 10 percent, respectively, for the second quarter of 2011, compared to 2010. Pillsbury flour and baking mixes volume was down double digits due to a combination of planned reductions in lower-margin products, and an unprecedented competitive and promotional environment. Following a price decline taken earlier in the year, Crisco oils volume showed modest improvement, but was down 3 percent for the second quarter of 2011, compared to 2010.

The U.S. Retail Oils and Baking Market segment profit decreased 10 percent for the second quarter of 2011, compared to the second quarter of 2010. The impact of the sales decline, along with increases in milk, sugar, and soybean oil costs, and unrealized mark-to-market adjustments on commodity contracts contributed to the profit decrease. Segment profit margin decreased from 14.9 percent in the second quarter of 2010, to 14.6 percent in 2011.

Special Markets

Net sales in the Special Markets segment increased 4 percent in the second quarter of 2011, compared to 2010. Excluding foreign exchange, net sales increased 2 percent over the same time period. Volume increased 4 percent in the second quarter of 2011, compared to 2010, driven by gains in the natural foods, baking, and coffee categories. The impact of volume gains was partially offset by higher promotional spending.

Special Markets segment profit increased 24 percent and profit margin increased to 19.8 percent from 16.7 percent for the second quarter of 2011, compared to 2010, primarily due to coffee price increases taken earlier in the year, lower flour costs, and the favorable impact of sales mix associated with higher natural foods and coffee sales.