J.M. Smuckers had a year of record sales and year-over-year earnings per share growth despite commodity cost increases and an uncertain economic environment. Each business segment had strong sales growth. J.M. Smuckers' 5-year compounded annual growth rates are 21% for sales and 10% for earnings per share.
The company addressed price inflation by increasing costs, in some cases by double digits. Commodity cost are now softening and should help moderate retail pricing and increase the volume of sales. It expects lower costs for coffee and milk, but higher costs for peanuts, sugar, certain fruits and other raw materials.
For fiscal year 2012, J.M. Smuckers made three acquisitions: Rowland Coffee, the Sara Lee food service beverages, and acquiring a minority stake in Seamild, one of the leading companies in China's oatmeal business. J.M. Smuckers invested $35 million in Seamild to get a 25 percent equity interest. Seamild has a lot of strength in marketing in China.
In Retail Coffee, K-Cup sales contributed significantly to J.M. Smuckers' sales and the company will soon be offering two new varieties. It expects low double digit growth on the K-Cups to continue. The entrance of private label on the K-Cups brand will continue to grow the Keurig system and the category. Volume on its Dunkin' Donuts brand declined by 13 percent last quarter, which the company believes was price-gap related. Gevalia is not cannabilizing Dunkin' Donuts, and in fact, it has not started off as strongly as the company had hoped. On the coffee business as a whole, there was a major customer who decided to take a lower margin on private label, but J.M. Smuckers is narrowing the price gap.
J.M. Smuckers' relaunch of Folgers Gourmet Selection bag coffee will position the brand as an entry level brand into the premium coffee segment. J.M. Smuckers will thus have three tiers of selections in the gourmet section: Folgers Gourmet Selections, Dunkin' Donuts and Millstone brands. J.M. Smuckers is also announcing the launch of Folgers FRESH BREAKS, a premium single-serve instant coffee with a more roast and ground-like experience, and it will be marketing the product significantly. The company anticipates above-average growth rates from the Cafe Bustelo brand, which was part of the Rowland acquisition, as its continue to expand into Hispanic markets in the United States. In May, J.M. Smuckers decreased the price of its coffee products by 6 percent and green coffee costs are expected to be lower in 2013. The company expects modest volume growth in fiscal year 2013. J.M. Smuckers expects double digit growth in the Retail Coffee segment in fiscal year 2013, although it expects a decline in Q1.
In the Retail Foods segment, volume will still remain under pressure, especially in the first half of the year, due to higher prices and competition. J.M. Smuckers will be launching a number of new products, including the recent launch of Jif Hazelnut spreads. The response to Jif Hazelnut has been positive so far. J.M. Smuckers will also be launching new Pillsbury baking items and it has launched a downsized cake mix. It is also focusing on getting the correct price for items like oils and milk. J.M. Smuckers will be reinstating its back-to-school promotions this year.
J.M. Smuckers had targeted volume declines on its flour business, which is low margin. It exited a regional flour business. In the Pillsbury business, it downsized, and because it reformulated the products, the volume is down.
The 11 percent volume decline in fruit spreads was due to the entry of a new product into that category by a key branded player. J.M. Smuckers had pulled back on promotions for fruit spreads because it took some of the peanut butter promotions off the market. It will be bringing back the promotions and also has some new fruit spread products coming out. I
With regard to the Sara Lee food service beverage acquisition, J.M. Smuckers made 2 strategic decisions that will delay the transaction's expected EPS accretion; (1) it slowed the roast and ground supply chain integration activities, and (2) it initially absorbed additional lower margin Roast and Ground business that was not included in its long-term projections, J.M. Smuckers did not want to alienate customers by immediately stopping the Roast and Ground business and the contracts for that business was intertwined with products like cocoa and cappucino, which J.M. Smuckers is interested in. J.M Smuckers has now started to exit some of those businesses, however. These decisions will delay the majority of the EPS benefit for an additional 12 to 18 months. J.M. Smuckers had initially said the Sara Lee acquisition would be accretive in the amount of $.08 to $.09/share. At this point, in terms of earnings per share, it will be flat in fiscal year 2013.
J.M. Smuckers is making significant progress on its new state-of-the-art food manufacturing facility in Orville, Ohio and will begin production in July. It is also expanding 2 of its coffee facilities in New Orleans. It is also expanding the capacity of its Smuckers Uncrustable sandwich manufacturing facility in Scottsville, Kentucky, which will help it respond to strong consumer demand for the product.
J.M. Smuckers is planning to increase marketing and innovation in fiscal year 2013. It expects to launch 100 new products over the year. It is expanding the use of digital marketing and social media.
J.M. Smuckers also plans to focus on product price gaps by narrowing its everyday and promotional price gaps with branded and private label competitors and taking a more aggressive stance on pricing in some price-sensitive categories. It will also provide lower price offerings through expanding the availability of its opening price point products and downsizing selected items. It will not necessarily be reducing prices across the board, but will make sure it has the right prices during key promotional periods.
Evaluation of markets
The consumer is still very cautious and is not stocking up.
The middle-of-the-store products are declining, not growing. If they are growing, it is because retailers are stealing the market share from their competitors. J.M. Smuckers is getting feedback that it is doing better than most.
J.M. Smuckers is hearing that the peanut crop is a strong one this year. Plantings are up 20 to 25 percent and the current moisture in the ground is good. It will not know for sure how good the crop is until the fall.
J.M. Smuckers is expecting a larger Arabica coffee crop in Brazil. There is continued tightening on Robusta coffee. Factors such as rain in Columbia and the holding of Robusta from some of the farmers is increasing prices on that crop. There is also some speculation, which is leading to price volatility. Private label coffee tends to be 100 percent Robusta.
Financials.
Sales increased 15 percent.for fiscal year 2012. In Q4, sales increased 14 percent. The company had volume increase in Q4 and anticipates that volume will increase in fiscal year 2013. J.M. Smuckers expects net sales for 2013 to increase approximately 7%, with the Sara Lee acquisition contributing 2/3 of the amount.
SG&A expenses declined 4% for Q4. There were higher selling expenses as a result of businesses acquired during the year. These higher expenses were more than offset by lower marketing expenses and a decrease in incentive compensation. SG&A expenses will increase 10 to 11 percent in fiscal year 2013, due to a 20 percent increase in marketing and the impact of the Sara Lee acquisition.
J.M. Smuckers expects fiscal year 2013 non-GAAP income per diluted share to be between $5 to $5.10, which assumes approximately 110.5 million shares outstanding. It expects the stronger earnings growth to take place in the second half of the year. Q1 EPS should decline from the same period last year due to a decline in profits in the coffee segment.
J.M. Smuckers ended fiscal year 2012 with $230 million in cash and no borrowings outstanding. Free cash flow for the year totaled $457 million. J.M. Smuckers expects free cash flow in fiscal year 2013 to be $500 million to $550 million. It believes it can double its free cash flow in the next five years. J.M. Smuckers' goal is to reinvest half of free cash flow into the business and return the other half to shareholders.
In fiscal year 2012, J.M. Smuckers repurchased over 4 million shares of common stock, which was approximately 4% of the shares outstanding. It has another 3.9 million shares available for repurchase under its repurchase program. It increased its annual dividends by 15%.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
No comments:
Post a Comment