J M Smucker Co (SJM) 2003 Q3 法說會逐字稿

Good morning and wealth come, ladies and gentlemen, to the J.M. Smucker Company third quarter fiscal 2003 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.At the request of the company, we will open the conference up for questions and answers after the presentation.I will now turn the conference over to Mr. Steven Ellcessor. Go ahead, sir.

Good morning and welcome to the J.M. Smucker Company third quarter investigator conference callcall. I'm Steven Ellcessor, Chief Financial Officer. Thank you for joining us. With me from the Smucker company, are Tim Smucker, chairman and co-CEO, Richard Smucker, president and co-criminal. Fred Duncan, vice-president special markets and Steve Oakland, general manager and consumer oils.Today we will discuss an update on the business activityies of the Smucker company. After this introduction, Richard Smucker will provide you with a review of the our financial performance for the quarter and Tim Smucker m take a look at the outlook for the remainder of the year. Then we will be available for your questions. If you have not seen our press release, it is available on our Web site, www.smucker.com. If you have any follow-up questions after today's call, contact me or our treasurer, Mark Belgya.

I will remind you that certain statements during this presentation and during the question and answer session that follows may relate to expectations and as such constitute forward-looking statements within the meaning of the private securities legislation reform act of 1995.I invite you to read the full disclosure statement concerning such forward-looking statements that is in the press release.With that, I'll turn the call over to Richard Smucker.

Good morning, everyone. Thank you for joining us on our call today. The third quarter marked another record quarter for the Smucker company. We are pleased with the performance of our Smucker's brand during the quarter, as well as strong contributions once again from the Jif and Crisco businesses. We are beginbeginning to see the results of our investments in these brands. The company recorded sales for the third quarter ended January 31, 2003 of 341 million, which is more than double last year's third quarter.The Jif and Crisco businesses contributed 168 million to the third quarter sales. Excluding the Jif and Crisco contribution, sales increased by approximately 3% over the third quarter of 2002.

All business areas posted increases over the prior year, except for industrial which was down 13% due to the planned discontinuation of certain low margin contracts.Without industrial, the company's traditional businesses were up 6%. The overall top line growth translated into strong earnings. Net income was 28 million or 56 cents per share in the third quarter of this year versus 7.9 million for 34 cents per share in the same period last year.Net income for both quarters including merger related costcosts of two cents a share. Excluding those costs, earnings per share would have been 58 cents this quarter and 36 cents last year.Third quarter operating profits increased 35 million over last year, and increased as a percentage of sales from 8.5 8.5 percent to 14.5%.This improvement resulted from a combination of both highhigher gross margin and a lower ratio of SG&A expenses to sales. The increase in gross margin was primarily due to the impact of the Jif and Crisco sales during the quarter and favorable peanut costs.

Due to the strong sales performance of both Jif and our natural peanut butter brands, the company had the advantage of lower cost peanutpeanuts earlier than expected.As was the case last quarter, the strong sales performance of Jif and Crisco also favorably impacted manufacturing operations, resulting in favorable absorption of fixed costs.For the quarter, SG&A represented 21-point 1% of sales, in line with our year to date average. We have been able to lower our SG&A as a percent of sales by 250 basis points from last year, exceeding our original expectationsexpectations. Further, we have accomplished this despite an increase in overall marketing expenses relating to the support of Jif and Crisco and our roll out of the Smucker's uncrusable product.

Normally items below operating profit are not significant enough to comment on. However, as you may have noted our other expense line was over 2.5 million. Most of this relates to the write down of certain assets, primarily minor equity investments which we have determineed have a fair valueless than what we are carrying them for on our balance sheet.With the quarter's performance, sales in the first nine months of fiscal 2003 increased to 983 million, up 92 92 percent from last year. Although the Jif and Crisco businesses contributed 428 million to that total, our traditional businesses have contributed strongly, up 9 9 percent over the first nine months of last year. Earnings per share for the first nine months were a dollar 67, excluding merger related costs, compared to a $1.05 last year.Let's take a brief look at the results for the quarter for our main businesses.

Turning first to our consumer business area, sales of traditional Smucker's brand products were up 4 percent for the quarter. This increase came as a result of growth in our food spreads fruit spreads and natural peanut butter categories. In addition, the roll out of uncrustables into the retail channel also contributed to growth in this quarter.The company's special foods channel had a very good quarter, with sales up more than 30%, albeit off a relatively small base.The Jif peanut butter line is also part of the consumer business area. It, too, had a very good quarter, with sales up approximately 13 percent in volume over the same period last year. As we noted in our release, the Jif brand has been gaining momentum during the last several months and has out paceed the category, which itself is growing at rates greater than expected.

We are pleased to see growth in the consumer oils business area as well. This quarter, consumer volume was up 8 8 percent over last year, which resulted in share of market gains for Crisco for the first time in two years.It is assuming responsibilities for the Jif and Crisco brand we have been actively making the brand building investments needed to drive continued growth into the future. We believe this quarter's results suggest that these actions are beginning to pay dividends.Turning now to special markets, this segment is composed of the food service, industrial, International, and beverage business areas. Sales in this segment were up 8 8 percent over last year, as all of the areas realized increases except as noted for industrial.Now I'll turn the conference call over to Tim, who will comment further on our progress to date with the Jif and Crisco brands and also discuss our expectations for the remainder of this fiscal year.

Good morning, everyone. As Richard said at the beginning of this call, we are pleased with our results this quarter. More importantly, we are starting to see the impacts of some of our strategic initiatives. As we noted last quarter, our teams were faced with strong competitive initiatives that they had to react to while implementing new marketing and sales plans for the Jif and Crisco brands. At the same time we were implementing new pricing on the brands.We are seeing preliminary results that both Jif and Crisco are strengthening and expect to see continuing share of market growth. We also kept our traditional brands focused on growth. For our teams have responded to the challenge and we are well positioned in our core brands. In addition, we are moving ahead quickly with the roll out of uncrustables.

As we mentioned last quarter, we will be accelerating our roll-out in the fourth quarter and and expect to be in full national distribution by the end of the summer.We also a announced our plans to build a new plant to accommodate the anticipated growth of this new product and to provide better customer service and lower production costs.We recently introduced a new uncrustables product, a grilled cheese sandwich, and are encouraged by the initial results. With the focus on the traditional brands, new investments in Jif and Crisco, and exciting new products, we are encouraged about our future opportunities and performance.Obviously, we have had an excellent nine months, with strong, traditional business growth and smooth and successful transition of the Jif and Crisco businesses.

We expect to see continued growth.The fruit spreads, peanut butter and toppings industry categories all continue to exhibit good growth characteristics. Even the oils and shortening businesses, weak in recent years, are stronger over the last 52-week period than they have been for awhile.Our market leading position in each of these categories positions us well to take advantage of the growth opportunities in each of them.

Looking then to the remainder of the year, we are raising our earnings guidance for the fiscal year 2003 to a range of $2.10 to $2.14 per share, up from $1.98 to $2.05 previously.This new guidance is based on the following factors: First, we are still expecting sales for the year of approximately $1.3 billion. Second, the mix in the fourth quarter will be somewhat less favorable from a margin perspective as Crisco sales will be seasonally lower than they were in the holiday dominated third quarter.Third, we will be making additional investment spending in the fourth quarter behind the peanut butter business and in support of the accelerated roll out of Smucker's ununcrustables.

In closing, let me say again how pleased we are with the performance of our traditional businesses and with the smooth integration and transition of the Jif and Crisco businesses and their very positive contribution to this quarter's record results.We look forward very much to using the progress made so far this year as a base for continued growth. We thank you for your time.We are now happy to answer any of your questions.

Thank you, gentlemen. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the hand set before presspressing any numbers. Should you have a question, press star one on your push button telephone. If you wish to withdraw your question, please press star two.Your question will be taken in the order that it is received. Please stand by for your first question.Thank you. Our first question comes from Mark Chekanow from Sidoti & Company. State your question

Good morning. Could you talk about some of the synergies with respect to the combined portfolio and how much potential is there with the brokers to push the combined portfolio and get distribution in places where you weren't before?

In terms of the brands, there is not a lot of distribution gaps on the core products. What we have been able to do, though, is leverage our broker network and our sales team, of course. And those expenses and resources, to say increase retail work, et cetera, that may not have been done previously.In terms of the core distribution, our sales gains to date are not necessarily a function of increased distribution.

Okay. And also there was a lag in the drop in peanut prices versus when the price decrease went through. Can you discuss the outlook for gross margins, what we can expect now that you have a better idea of what peanut prices are and the success of the, and the sales basically from the reduction of prices?

Let me add one brief comment to vins' means on your question. I think you are definitely right, there are a lot of distribution gaps, but there is one thing that -- I guess you would call it a synergy, the addition of the Jif and Crisco brands does bring to us is, to the extent that our traditional Smucker's business is stronger in the traditional grocery side than the Jif and Crisco business was, there is an opportunity, we think, particularly on the Crisco side, to improve the positionpositioning of Crisco in the traditional groceryies as our sales force spends a little more time with our traditional grocery customers on that brand.

I suppose the other area for improved efficiency it allows us to get more truck loads than previously. [inaudible]. Fruit spreads and toppings, for example, by filling out those trucks with peanut butter and/or Crisco that has helped us in that regard as well.

That's what I believe I was alluding to. Not necessarily the different stores, but more just the synergies of being able to distribute more product. Again can we talk a little bit about more normalizeed gross margins now that you have an idea on peanut prices going forward?

We expect gross margins going forward, the third quarter was somewhat exceptional as we noted because we did get into the early crop of peanuts, the new crop of peanuts earlier than we expected. As Tim said in his Comments on a more normalizeed basis we do plan to [inaudible] back a little bit of that, in support of that category and the roll out of uncrustables. You will see gross margins this quarter that are probably more what we expect going forward, not quite perhaps as good as what we had in the third, but still very good and much better than historically.

Good. Thanks a lot, guys.

Thank you. Our next question comes from Scott Van Winkle from Adams harkness. State your questionquestion, sir.

Congratulations, guys. Just a couple questions. From the demand picture, what do you really attribute the growth of the entire peanut category, not just Jif to. If anything you are seeing anything out in the market?

I would say two things, Scott. First, the general economy. We typically find when the economy is soft that siewrm consumer consumers go back to traditional favorites and also go back to the grocery stores as opposed to eating out.Secondly, whenever you have increased competitive activity and a lot of noise from everyone in the industry, it helps the overall category. Clearly, there has been some activity during our transition by our competitors. Now we are investsing in those brands and bringing it to the attention of the consumer.And the balance sheet

And the balance sheet looked very good after the quarter. With net debt, looks below $20 million. Are you maybe on a faster pace to expand through acquisition now that it seems like things are rolling well with these acquisitions?

We are as fast as we can be. Obviously we have a strong balance sheet. But as you know, acquisitions happen when someone is ready to sell and someone is ready to buy. We are ready to buy. We are waiting for some of the brands we are interested in to be ready to sell. When that happens, we will be there.

Can you give us any specific declines in peanut costs and what your average purchase price was during the quarter?

We haven't disclosed that, Scott.

Thank you.

Thank you. Our next question comes from John McMillin from Prudential Securities.

Sorry, I'm in an airplane. Congratulations on the results. Sorry for the background noise.Can you give us a quick early look into '04? You have a company goal of high double digit single digite growth. Could you do that in 04 off this new base?

John, we aren't quite ready to do that yet, but we plan to talk about that a little bit next week.

Can you give us the nine-month volume numbers or shipping numbers for peanut butter, oil, and fruit spreads? You can put me on mute just to try to get rid of all the background noise if you want. That's all I have.

John, back to that -- we'll get back to that one, if we can.

You don't know your peanut butter shipments pro forma for the next nine months?

We are not sure we want to disclose them.

Trying to measure shipments, take aways, that would certainly help.

John, we don't have the numbers pulled together right now. That's not something we spend a lot of time trackingtracking. You guys look at volume more than we do. We'll look at that.

If sales in the quarter were up 3%, is that pro forma or is that the old Smucker's?

Essentially for the old Smucker's. Again, that's with a decline in the industrial business. If you exclude that decline in the industrial business, old Smucker's is up 6 percent for the quarter, 9 percent for the year-to-date.

I thank you.

Our next question comes from George Askew from Legg Mason. Please state your question.

I'm sorry. Nice quarter, guys. Would industrial have been up if you had not discontinueed the 5 million in sales?

Yes, it would have.

Can you quantify for us the nine month sales discontinuance? I know for the full year you're saying 20 to 22. Is it 15 for the nine months?

Nine months, it's 15 to $16 million, right. Per

Can you tell us what benefit to margins the termination of those contracts has had? Obviously they were not profitable contracts.

Right. Well, overall -- they certainly contributed to the increase in the margins in the industrial business. But in the total, for the total company, it's still a relatively small part of the total. It's only $15 million or so out of the 900 million.

Right.

So it's good for the industrial group but doesn't have much of an impact on the corporation.

Should we think of fourth quarter gross margins to be more like, say, the October quarter or a blend of the first half? You know, you addressed it a moment ago and said the third quarter is exceptional. How should we [inaudible] the fourth quarter?

Similar to our year-to-date number.

To come back to your earlier question on the industrial, if you look at it from net after, that business is probably about 200 basis points better this year than it was last year as a result of discontinueing some of those businesses.

For the industrial group?

For the industrial group.

That's net after?

That's right.

Oh, can you give us a little bit more color on the grilled cheese uncrustables? Where are those? Where is that product available currently? What is the phase of roll out?

It is currently in test in the two additional markets we went to with the peanut butter and jelly, which is the Colorado up bus and since nationality area. I don't think we are public yet with how much we are expanding that next year, but it will be a significant part of the United States. We are very, very encouraged with the results and what it has done to the overall category in those markets.

We have been offering it to schools for quite some time. It is not something that is completely new in terms of the product. And we really have great reception all the way along. In fact, in some cases even more so than the peanut butter and jelly. There's a lot of enthusiasm about that product.

Would you say it's sort of on a 12-month or 15-month lag to the peanut butter and jelly version?

Probably about 12 months, that's a good -- about 12 months.

Okay, super. That's all. Thank you. See you next week.

Thank you. I hope it's warmer out there than here.

Indeed.

Thank you. Next question comes from Chris Owendal (ph) from Saks (ph) and Associates.

Good morning, gentlemen. I would like to add my congratulations as well. With respect to the retail market, you disclosed that core Smucker's sales were up 4%4%?

Correct.

That includes the roll out of uncrustables. Can you give us the A.C. V distribution of uncrustables at the end of the quarter as well as provide a little more color as to how much that product contributed to that 4% growth?

Currently the A T scrvment is around 60%. By the end of the fiscal year that will be closer to 70 to 75% as we found that we are rolling that out to the east sooner than we originally anticipated. That is gaining distribution as we speak today. We have a lot of activity planned in the eastern market for it.Uncrustables clearly did contribute to the quarter are but overall, even without uncrustables we are still up around the four to 5% range without, with the core business.

Okay, thank you.

You're welcome.

Thank you. Our next question comes from Stephen Hoffman from HighLine (ph) Capital. State your question.

Good morning. Could you please quantify the write-down of assets that you spoke about included in the other expense line? And its after taxes and [inaudible] EPS?

Well, total after tax expense was 23 cents. It was, 2 million of that was the write-down of assets.

Okay, great. Thanks a lot. That's it. I thank you.

The next question comes from Mark Chekanow from Sidoti & Company. State your qui.

Could you expand a little bit further on ununcrustables distribution, what it looks like in the club channel versus the school channel? How has distribution or your efforts there gone? Is there any difference between Sam's or Costco and tined kind of the potential market there?

In general it is not a permanent item in the club channel. And as you know, depending on whether it's Sam's or Costco, they may make regional versus national decisiondecisions.It is in a few of the Costco regions. Actually, what we've done is heretofore discouraged them to put it in in markets where we don't have support. Given that we are going to expand that nationally next year, we are going forward on all fronts to get it into all three, actually, between B J's, Costco and Sam's.But in some cases it is permanent. But in others it's a seasonal item that we will hope to have good distribution during the back, or return to school time frame. And as I think we reported, maybe during the last call, it also, our ten-pack is in, of course, Wal-Mart nationally on both the grape and recently the straw berry.

Also to steb step back, looking at any partnership opportunities? There are so many products rolled out in the convenience and to go foods, but do you see any partners in that segment? Anything p p interesting coming to market that you would be able to partner with?

In terms of co-branding?

Yes, or any type of ingredient product that some other manufacturing company would be using, in the convenience and to go foods?

I think we are always on the outlook for that opportunity. There is nothing at this point in time that we can really comment about.

Okay, thank you.

Thank you. Our next question comes from Scott Van Winkle from Adams Harkness. Please state your question.

I hate to keep harping on uncrustables. If you look at uncrustables in groceryies, schools, where are you most impressed relative to your original expectations about the success?

I think we are across the board. I think that's the exciting thing about this product is that each of the areaareas we are in supports the other. And so across the board there is no discouragement in any of those. In factfact, I think our real problem is trying to manage it so that, manage the expectation in each market.

When you answered a previous question, you said sales of uncrustables were up four to 5%. I actually missed the question. Was that food service sales without uncrustables were up four to 5%?

Actually our base business was up 4 percent in the quarter and we were, the question was how much did uncrustuncrustables contribute to that. And although it contributed it, it was still not a large contributor. Just in terms of absolute size. Plus as we are rolling out, you know, there is a lot of investment spending. So we get -- we a lot of sales, but we don't show it in the top line because we are spending those back in terms of introduction expenses and so forth.So this business is an investment spending business for the next couple of years, but we are very encouraged about the reception in the marketplace, as Tim mentioned.

Then I'll ask this question. If you excluded it from food service, what was your food service growth have been?

9 percent for the quarter.

Great, thank you.

Our next question comes from Jaine Mehring from Salomon Smith Barney.

Good morning,. This is Jennifer Helm (ph). I want to clarify the growth for Crisco. In the press release it was 8%. That was at retail, retail take away, right? Or was that your shipments?

Hi, this is Steve. That is retail shipments and we do that because we have some other channels where we sell bulk products and those things. We didn't want that to distort that number.

Those are your shipments to the retail channel?

Right.

The bulk shipments are even better.

Yes, but the numbers are so large it distorts the overall number.

Those are down, those are in the retail segment?

Those are two retail traditional summers. That includes club, include mast, include Wal-Mart. The core retail Crisco items.

What was the take away during the quarter?

Take away for the quarter, if you look at the latest, and this is updated as of yesterday, IRI for 12-week ending January 26, the dollar take away was up 7.7%. Very similar numbers to our shipments.

Is this volume or sales for take away?

Those numbers are dollars and ununfortunately, this update was done last night. The volume numbers are similar, but we don't have IRI update on volume this morning.

Okay. I'm interested in an update on competitive environment and the price changes. Have there been any changes? Has everyone followed? Has promotional activity increased? I'm interested in both for Crisco and Jif.

Well, we -- stay with Crisco first. It was obviously very competitive through the whole transition. With, you know, two of the major brands, both Massola and Crisco changing branldz, there was a tremendous amount of activity. Prices for us have gone up twice. They went up 15 or 16 percent in September and another 5 percent in January.And those prices in the similar products, vegetable oil products are consistent across our branded competitors. Everyone reacted similarly.

In terms of Jif, it is still making, our price decrease is making its way to the shelf. But it appears all of our major competitors have followed similarly to what we have done. And And then in terms of activity, the return to school time frame is a period of high promotional activity. Again, there was quite a bit of activity in that time frame, but maybe nothing unusual.

I wanted to follow up on your comment that marketing was up. Is that as a percent of sales? What is the marketing spending as a percent of sales for the Jif and Crisco businesses versus your other businesses?

We just don't share that detailed information. We don't -- we don't like our competitors to know it.

Is it becoming more consistent? Originally you indicated that you expected the level to be below where your traditional spending had been, but then over time get more to that level.

Our intent is to spend -- as we saidsaid, we raised the spending close to the jam and jelly spending, which we have done. And we are very close right now.

And I think what we can say is that we have made a significant investment. We plan to spend about 25% more this year in trade and consumer spend than what was spent previously. We look at continuing that in the future.

Okay. That's it. Thank you.

Thank you.

Ladies and gentlemen, just a reminder, if you do have a question, you may press star one on your touchtone phone at this time.

While we are waiting, let's go back to John McMillin's question on the volume. Steve, would you like to address that?

Yes, John. First of all, keep in minds if you are trying to reconcile this to sindz syndicated data, there's a significant amount of the data that is not measureed by IRI or Nielsen. If you look at the Jif business since we owned owned it it's up roughly 8 percent in terms of shipments prior compared to the prior year. The fruit spreads, they are up in the 5% range, year-to-date. The overall Smucker business without Jif is up about 5% as well in shipments.

If we look at Crisco, if you look just from June 1, our total tonnage shipments are flat with last year. That tea deceiving in that those de seefg in that those trends were declining the first month we got it. There was not a lot of merchandising support in our customer base.So those trends have improved dramatically as we got into the fall. The numbers for the last quarter were up 9% or 8%.So the momentum has really turned around on Crisco, more just because of the sheer promotional support and advertising that was not in place the first month or two when we took over.

Do we have any more questions?

Gentlemen, at this time I am showing no further questions. I will turn the conference back to you to conclude.

Thank you very much. We appreciate everybody's interests and look forward to seeing many of you next week in Arizona. Have a good day.

Thank you.

Ladies and gentlemen if you wish to access the rebroadcast after the live call you may do so by dialing 1-800 428 froiks scbiks froap. Or 709-2089 with a pass code id. number of 286178. This concludes our conference call for today. Thank you all for participating. Have a nice day. All parties may now disconnect.