J M Smucker Co (SJM) 2004 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J.M. Smucker Company's first quarter 2004 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 up the conference for questions and answers after the presentation. I will now turn the conference call over to Mr. Mark Belgya. Please go ahead, sir.

Welcome to the J.M. Smucker Company first quarter fiscal 2004 earnings conference call. I am Mark Belgya, the Company's Treasurer. Thank you for joining us this morning. On the call this morning from the Smucker Company are Tim Smucker, Chairman and co-CEO; Richard Smucker, President, co-CEO and Chief Financial Officer; Vince Byrd, Vice President and General Manager of our Consumer Market; Fred Duncan, our Vice President of Special Markets; and Steve Oakland, Vice President and General Manager of our Consumer Oils business.

After this brief introduction, I will turn the call over to Richard for some opening comments and a recap of the first quarter, and then Tim will discuss the outlook for the remainder of the year. At the conclusion of these comments, we will be able to answer your questions. If you have not yet seen our press release, it is available on our Web site at www.smuckers.com. If you have any follow-up questions after today's call, please feel free to contact either Richard or me.

Before we begin, I'd like to remind you that certain statements in this presentation and during the question-and-answer period that follows may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Legislation (sic) Reform Act of 1995. I invite you to read the full disclosure statement concerning such forward-looking statements in our press release. With that, I will turn the call over to Richard.

Good morning everyone and thank you for joining us on our call today. The first quarter of 2004 marked another record quarter for the Company. We continue to focus on enhancing our leadership position by investing in our brands in an effort to win the hearts and minds of our consumers. But before I get into the financial performance of the quarter, let me share how we at the Company are implementing our strategy to accomplish our objectives.

We recently completed a series of new ad campaigns for Smuckers, Jif and Crisco in conjunction with our ad agency, Gray Worldwide. We are excited with the outcome of the campaigns, which have begun to air this week. We believe this advertising will further develop the individual brand messages and reinforce how our products meet the needs of today's consumers. Also during the quarter, we initiated our first promotion combining all three brands into a single event, capitalizing on the synergistic marketing opportunity that these icon brands offer.

In addition to our three primary brands, we also remain enthusiastic about Smucker's Uncrustables. We have completed our national rollout of the product for both our peanut butter and jelly and our grilled cheese line extension. We have also developed new advertising for the brand to further support the national launch. In addition, the construction of the new Uncrustables facility in Scottsville, Kentucky is on track.

We continue to focus on improving profitability as well. We are proceeding with our previously announced restructuring project that includes the closing of three plants and a reduction of a number of SKUs. This project is on plan and will improve our overall cost to operate over the coming years. We are also moving forward with our efforts to integrate many of the best practices gained from the two plants acquired from P&G into our other Smucker's facilities. Although we do not expect any material savings resulting from these initiatives this fiscal year, we firmly believe that these actions will improve bottom-line performance in the coming years. Last year, we felt that we transformed the Company with the addition of Jif and Crisco. We expect 2004 to present additional opportunities to strengthen our brand leadership and to build on many of the activities started last year.

With that, I would now like to review our first-quarter financials with you. The Company recorded sales for the first quarter ending July 31, 2003, of 350 million, up 27 percent compared to last year. The results for last year's first quarter included only two months of operations from Jif and Crisco compared to a full quarter this year. The extra month of Jif and Crisco contributed 47 million of sales to the quarter. Excluding the additional month of sales, our business grew in excess of 10 percent.

The overall top line growth translated into strong earnings. Net income was 25.8 million, or 51 cents a share, for the first quarter of 2004, compared to 16 million, or 39 cents per share, last year. Net income for the quarter included non-cash charges of 3.2 million, or 4 cents per share, related to the Company's restructuring plan. Net income for the first quarter of 2003 included merger-related cost of 4.9 million, or 7 cents per share. Excluding these costs in 2004 and 2003, the Company's earnings per share would have been 55 cents and 46 cents respectively, an increase of 20 percent. A reconciliation of non-GAAP measures to net income has been included in our press release for your reference.

Operating income increased nearly 15 million over last year and operating margin improved from 10 percent in the first quarter of 2003 to 12.1 percent this year. Gross margin performance improved in the quarter, increasing from 33.6 percent last year to 34.5 percent in this year's first quarter. This improvement reflects first, the growth of the higher-margin Jif, Crisco and Smucker's businesses; second, lower peanut costs; and third, the additional month of peanut butter and oil sales. SD&A expenses as a percent of sales were virtually unchanged at 21.9 percent versus 21.8 percent last year. As expected, first-quarter marketing expenses were up nearly 50 percent over last year. Increased spending behind the brand and the additional month of Jif and Crisco operations in this year's first quarter were the primary reasons. Despite this sharp increase in marketing, we were able to keep SD&A constant as a percent of sales.

Let us now take a look at the results of the quarter by our two business segments. Sales in our U.S. retail segment were 248 million, up 80 million or 48 percent over last year. The additional month of Jif and Crisco sales contributed approximately 46 million to this total. Excluding the impact of the incremental month of sales, the U.S. retail segment was up 20 percent, with strong performance by all three brands. Smucker's branded products were up nearly 16 percent in the first quarter, with fruit spreads volume increasing 11 percent for the period. Natural peanut butter also continued its string of strong quarterly performances, with sales up over 15 percent. And finally, the rollout of Uncrustables, which began last year and continued through the first quarter of 2004, accounted for about one-third of the Smucker's brand overall growth during the quarter.

Jif continued its strong performance, with sales up 20 percent, excluding the benefit of the additional month. During the first quarter, Jif increased its share of market to 33 percent, and in combination with the Smucker's brands of natural peanut butter, the Company now holds a 40 percent share of the overall peanut butter category. Profitability remains strong as the brand leverages its sales growth, benefits from lower peanut cost and maintains a highly efficient operation at its Lexington, Kentucky facility. During 2004, we will be investing in our Lexington plant to further increase its capacity.

The Crisco brand was up 23 percent on a comparable basis, as the brand gained share during the quarter. Oil prices continue to be volatile, and as such, our oils procurement group has been and will continue to be actively managing this situation as we finalize our oil requirements for the fall bake period. During the quarter, the Company introduced Crisco 100 percent corn oil into the marketplace. This new product provides us an opportunity to participate in the $140 million corn oil segment, and we believe will appeal to the growing Hispanic population.

Let us now turn to our special markets segments. Sales in this segment were down 4 percent from last year's first quarter. This decrease was expected, as it reflects the impact of our planned (technical difficulty) of low margin business in the industrial and foodservice areas. The combined loss of sales was approximately 8 million, which is tracking against our full year estimate of 30 to 35 million. If you exclude this planned loss of sales, special markets actually increased 3 percent. In addition to the planned decrease, softer sales to certain existing industrial customers and a slight decrease in beverage sales also impacted the segment's results for the quarter.

Sales in foodservice and international businesses were both up for the quarter. In foodservice, the schools market was up over 50 percent, attributable to growth of Uncrustables. In addition, our traditional portion-control business experienced another good quarter of growth. Offsetting this somewhat was the impact of the Company's decision to discontinue its relationship with Lea and Perrins. This resulted in a loss of approximately 2 million in sales for the quarter, which is included in the 8 million total loss referenced earlier. Overall, the foodservice area increased 5 percent over last year.

In the international area, our Canadian business continues to post strong quarter-over-quarter results, as they were up 20 percent in local currency. Approximately one-half of this increase was due to the additional month of Crisco, but the remainder was in core business growth. In Australia, sales of Henry Jones Foods rebounded nicely from prior quarters, as it too posted double-digit sales increases. International results were further enhanced by the favorable impact of exchange rates, which added approximately 2.7 million in sales to the quarter.

In summary, we were pleased with the financial results for the quarter and appreciative of the ongoing efforts of our team to continue to build on the foundation that we established last year. I will now turn the conference call over to Tim, who will discuss our expectations for the remainder of the year.

Thank you, Richard, and good morning, everyone. Our performance for the quarter was strong. We continue to see the results of our strategic initiatives and we expect to see continued growth. All three categories -- fruit spreads, peanut butter and oils -- are responding as we had anticipated to the marketing initiatives we have put in place. Our market-leading position in each of these categories will allow us to take advantage of the growth opportunities in each of them.

As Richard mentioned, our financial performance in the first quarter met our expectations, and we continue to be comfortable with the guidance we provided to you in June. We expect to see revenue growth of over 6 percent in fiscal 2004 to approximately $1.4 billion. Included in this estimate are the following assumptions. First, in fiscal 2003 we included only 11 months of sales for Jif and Crisco. The additional month of sales included in this quarter contributed 47 million. Second, we will continue to lose sales from the planned exit of low margin contracts in our industrial and foodservice areas. We anticipate a full-year reduction in sales of about 30 to 35 million resulting from these two activities. $8 million of this total was realized in the first quarter. Third, as part of our restructuring program, we are eliminating approximately 1000 SKUs, or stock keeping units, or roughly 40 percent of our total. This will result in a loss in corresponding sales of approximately $14 million, but have an insignificant earnings impact.

Taking our first-quarter performance into account, this translates into a top line growth for the remaining nine months of slightly over 1 percent. However, when you exclude the impact of sales that we anticipate losing from the combination of the SKU rationalizations and exiting the low margin business in the industrial and foodservice areas, our real sales growth for the last nine months is over 4 percent, which is in line with our internal growth objectives. We maintain our goal of 8 percent average revenue growth over our five year strategic time frame. That 8 percent number assumes a 4 percent contribution from that acquisitions and internal growth of 4 percent per year from existing products and new products. As you know, we have no acquisitions built into our 2004 projection.

Our forecast for earnings according to GAAP is in the range of 105 million to $108 million, which represents an increase in net income of 9 percent to 12 percent, thus exceeding our strategic goal of increasing earnings at 8 percent or greater. This income range results in earnings per share of $2.10 to $2.15, which includes restructuring costs of approximately 12 million, or 15 cents per share, during the quarter. Excluding these restructuring charges would produce an earnings per share range of $2.25 to $2.30, which is consistent with our previous guidance.

This guidance is based on the following additional factors. First, we expect construction of the Scottsville, Kentucky plant to be completed by May, 2004. The impact of additional onetime costs which are specific to the new facility total approximately 7 cents per share in 2004 and have been included in the range of estimated earnings. The majority of these costs will occur in the latter half of the year. Second, we expect pension expense to increase by approximately $4 million, or five cents per share. Third, since we last provided guidance, our estimates of fruit and sweetener costs have increased for the remainder of year by approximately 1 to 2 cents per share. We expect to absorb these increases in our estimates, and are not making any changes to our guidance.

In closing, let me say that we are on track for another year of record results. We have many opportunities ahead to improve our performance by continuing to invest behind our brands and improve our overall cost structure. I also want to echo Richard's comments regarding the dedication of our whole Smucker team. It is through their efforts that we are here today, speaking to you of our record results. And we look forward to building on the progress we have made so far and strengthening our leadership position. We thank you for your time today and now we are happy to answer any of your questions.

(OPERATOR INSTRUCTIONS) John McMillin of Prudential.

In the press release, you said that this quarterly earnings met your expectations. I know you don't give quarterly earnings guidance, but in your plan, you were factoring in this 10 percent real growth and you were factoring in a 55 operating number?

We were factoring the 55 operating number. We weren't factoring in the 10 percent growth rate. That was higher than our planned internal growth rate.

And you basically found a way to spend it back in marketing or --?

We did.

So to the extent you now have a business plan for the year that only has 1 percent growth in the last nine months, why didn't you choose to kind of raise your full year revenue target, given the fact that the first quarter came in better than expectations?

As we have said before, we really like to get a little more experience under our belt under each quarter, and we look at that more thoroughly at the end of the second quarter. But as you know, our growth rates have been good, and we would like to see them continue that way, but we don't want to overpromise.

And I don't really follow the fruit harvest, but can you tell me exactly why your fruit costs went up?

A variety of reasons. A lot had to do with supply-demand, but also some weather conditions, primarily in the Northwest, where there was extreme heat, I think, as you all recognize, and that played a little havoc with berries on the vine. We got less yields than we thought. So that was the major issue there.

That often leads to less private-label supplies (indiscernible) not all bad.

I'm sorry, John. I missed that question.

Often, it can result in less supplies for private-label producers.

That is a possibility.

Well, congratulations.

Christina McGlone of Deutsche Bank.

I guess just following on John's question a little bit, I'm trying to get an idea of how the quarters will progress. And I'm wondering in terms of top line, is the pruning of low margin business in foodservice and industrial and then the SKU rationalization, is it weighted toward any particular quarter or is it evenly distributed?

The SKU rationalization for the most part is probably skewed more to the back half of the year. The industrial and the L&P is pretty radically (ph) over the remainder of the year.

Okay. In terms of lower peanut costs, when do we (indiscernible) that recognition. Is it the second quarter or is it the beginning of the third quarter?

It would be more towards the third quarter. It is clearly not in the second quarter, but it would probably be halfway through the third quarter.

I know it's early. I'm just wondering how the corn oil sales are progressing. If you've seen a pickup because of your focus on it?

The corn oil shipments are really beginning. All the pipeline fill has begun, but I would say they are slightly ahead of what we thought they would be at this time.

From your comments, it didn't seem that you'd seen much of a pickup in the foodservice sector. Am I wrong about that or does it look like it's getting better?

The industry continues to be relatively flat, specifically the airline and the hotel segments are not picking up as well as we would hope. But again, our business -- our core business, the first quarter was up 8 percent, so we are very pleased with that kind of growth in a relatively flat category.

Okay, thank you.

George Askew of Legg Mason.

Nice quarter. Actually building on the Crisco 100 percent corn oil question there, how much of a contribution was that to the quarter you just reported? And what is the target goal there on an ACV and on a revenue basis for the year?

It was not that material in the quarter. Most of those shipments went out in the last month of the quarter. And that will not have as big of a seasonal spike. Corn oil is more of an ingredient -- a food ingredient than a baking ingredient. We would anticipate that to grow slowly over the year. Our focus is on the Hispanic markets. We all know what those are. The ACV number is 80 percent or so, but it will be focused on Hispanic markets, so that is not a fair estimate really. It will be in all markets in some small size, but the focus of that will be in California, Texas, Florida, those places.

If you had to -- sort of adjusted for an ACV on a national basis, will be in a quarter of the country, you think?

I think it will be in more than that. It'll be half of the country or so.

In beverages, clearly your lemonade hit of summer of '02 -- and could you just sort of characterize that if it had staying power here in '03 -- I'm talking about the strawberry powdered lemonade. Did you expand the channels there? I know it was club store focused a year ago. And I apologize if you addressed this; I cut out during the call during your initial comments. But could you characterize how that product did this summer?

We believe it has staying power. As you know, we introduced it in the first quarter of last year; it was taken into the club stores. In our plane, we anticipated that we wouldn't get the same number of stores in this first quarter just because of reaction from competition. That is what happened. But actually, we are on or slightly above plan relative to our sales of strawberry lemonade, and yes, we believe it has staying power.

Okay. Super. I know you are clearly focused on looking at acquisitions, as you've discussed in the past. Can you give us an update on what you are seeing in the acquisition market? Is it warmer than usual, etc.?

A weather forecast?

Is there a drought in the M&A or is it --?

Actually, I don't know if we can give you any update. I think you read the same reports that we do. There still are, we think, an ample amount of opportunities out there that we continue to pursue. So we're not discouraged, I can tell you that, at all. We think there is a lot of opportunities out there and we think that the environment is still right for the right fit. So we are still very optimistic.

Okay, good deal. Thank you very much.

(OPERATOR INSTRUCTIONS) Mark Chekanow of Sidoti.

I know, naturally, your fruit spreads and peanut butter branded dominates the category versus private-label, but it's kind of tough to ignore a lot of the press that private-label has been getting, especially the recent Fortune piece entitled "Brand Killers." I would like to ask you a little bit about, is a company like Wal-Mart or Target coming to you, looking to capitalize on the growth in peanut butter by having you do a private-label. And in a sense, private-label is really getting a lot of free advertising from a lot of the media and is getting some consumer acceptance in the number of categories. What is your opinion on the future of private-label entrants into peanut butter especially?

We do get the question from time to time, but we have been very consistent in the history of the Company that we will not participate in private-label in those same categories. I think the emphasis on private-label, it tends to go in cycles, and I think you're right, that there has been some emphasis in more recent times, But to be honest with you, our approach always has been through our category management initiatives that we believe that it is two separate consumers, and that we believe that there is room for both our brands as well as private-label.

We really do take a long-term look at that over the years, and even more recently in the last year, particularly, as we have gained more category management leadership positions, particularly in the spreads category. Our customers recognize the value of our brands side-by-side with their private-labels, allowing the consumer to have a choice. So we think that they will continue to live going forward together.

If you could perhaps share with me -- I'm not exactly familiar with the (indiscernible), the Wal-Marts in the country and their offerings -- is there a significant private-label offering in peanut butter and they just haven't made significant in-routes, and that's why they have a lower share, or is there just not as much of a private-label offering in the category?

There is a private-label peanut butter offering in almost every store you would go into. But the pricing versus branded or private-label is not too different; it is certainly in that category. The brands are very, very strong. Obviously the Jif brand is strong, but the other two major branded competitors are strong brands. As Tim said, we actually give the consumers a choice, and being the number one brand is extremely important. It will probably be the number three or four brands that do get squeezed.

The Uncrustables, you're still heavily promoting that, I assume, and that a lot of that is coming out of revenue. Can you give us a time frame as to when we will see less promoted volume and more of a profit contribution from the Uncrustables?

I think from a marketing perspective, as we complete roll out -- the way that product moves is through awareness and think-through advertising and demonstrations. So even what we would call our Year 2 or Year 3 markets, we envision supporting that very heavily. On the cost side, though, where we will see the benefit, as Richard mentioned earlier, is when our Scottsville facility comes up and running a little less than a year from now.

Okay, great. Thanks.

Bob Simonson of William Blair.

Two questions. If I got this right, I think you said, Richard, that your advertising was up 50 percent or about that in the first quarter, but the total SG&A was up 28 present. Can you talk about what went down or where you got some real good leverage? That's question one. Question two is on your cash flows, could you remind us what your CAPEX expectations are for '04 and '05? And it does look like you're going to end up this year with something approaching a couple hundred million dollars in cash, and that gets bigger next year. And if I remember correctly, you have no scheduled debt repayments next year, but I think you can start buying stock back sometime next year. Can you kind of talk about in the absence of acquisitions what the dividend might do or what you might do with all of the money?

I'll start with your first couple questions around marketing SG&A. It was actually our total marketing was up about 50 percent for the quarter, not just advertising. The way we were able to maintain our SG&A costs is that although absolute dollars in our corporate overhead and distribution did go up, we were still fortunate to leverage particularly the additional month of Jif and Crisco sales in May. So the benefit that you saw last year with 11 months also continued. And then we just also were able to monitor the spending in those areas to keep SG&A flat.

Did anything go down -- any components go down in material components?

No, material components, just because again, we sort of set an infrastructure based on the new business last year. And despite additional costs last year, the leveraging effect of additional sales still allowed us to lower it. But but no absolute decrease.

Okay.

In terms of cash, our CAPEX for this year is estimated $80 million. Again, most of that or a good portion of that is around the Scottsville facility. Then in terms of the cash at the end of the year, you are correct -- we are going to have a sizable cash balance. We can, at the end of next May, will concludes the two-year period that we were precluded from stock acquisition. We will certainly look at that on an ongoing basis, although that will be evaluated use of cash along with everything else. And in terms of dividends, I will let Richard speak to that.

Dividends, as you know, we look at our dividends on a quarterly basis and usually try to increase it once a year. If we continue to hit the numbers we expect, I think you can anticipate a dividend increase -- usually next spring is when we look at it.

And the same kind of guidelines for pay-out ratios that you've given in the past?

Yes, our our pay-out ration's somewhere between 40 and 45 percent, and that is kind of where we have been staying.

Okay, thank you.

(OPERATOR INSTRUCTIONS) John McMillin of Prudential.

You've given publicly your targeted cost saves from Crisco and Jif -- Jif and Crisco in fiscal '04. Could you just tell me what that number is and how much the first quarter benefited?

In this year's first quarter?

If you just refresh me for what the targeted cost saves are from the acquisition in '04.

I don't think any of those were in '04. We actually expect most of those to hit us in '05 and '06. So there weren't really any cost savings in terms of manufacturing cost savings in this fiscal year. But we do expect them to hit us next fiscal year.

Just to refresh, on our (indiscernible) program, our supply chain initiative program, we expected to save approximately 10 million, of which a good portion of that will start to hit next year, but there are no savings. And in terms of specifically the Jif and Crisco, we've stated that there wasn't a lot of cost savings coming out of that. That was more on the SG&A side, as I just described. So we really haven't spoken publicly about any specific cost initiatives around the Jif and Crisco, but rather leveraging our learnings from those two facilities and transferring that to our existing Smucker's facilities.

And that is a good point. I think this is -- although not -- just sort of anecdotally, there is some systems that we picked up with Jif and Crisco called integrated work systems that we've actually renamed Smuckers quality management systems, that we are using in our jam and jelly facilities and other facilities. The early indications are that we are able to decrease our operating costs significantly on significant pieces of equipment. So we are very encouraged with some of the learnings we've had there, and I think that will accrue to us in the next two to three years.

Thanks, Tim.

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

We thank you for being on the call today and we look forward to another good quarter and a great year. Thanks a lot.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by dialing 1-800-428-6051 or 1-973-709-2089 with a pass code of 303325. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.