J M Smucker Co (SJM) 2004 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J.M. Smucker company 2004 earnings per conference call. I would like to inform you this conference is being recorded and all participants are in a listen-only mode. At the request of the company we will open up the conference for question and answer session after the presentation. I would like to turn the call over to Mr. Mark Belgya. Please go ahead, sir.

Good morning, everyone. Welcome to the Smucker's company's second quarter fiscal 2004 conference call. I'm Mark Belgya, the company's Treasurer.

On the call this morning from the Smucker's 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; and Steve Oakland, Vice President and General Manager of our Consumer Oils.

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

Before we begin, I would like to remind you certain statements in this presentation and during the question and answer session that follows may relate to future events and expectations and such as constitutes forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. I invite to you 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 second quarter of 2004 marked another record quarter for the company. Our three leading brand, Smucker's, Jif, and Crisco maintain their positive momentum and once again gained market share in their respective categories. In addition, the categories continued to grow and as a result we experienced solid sales and profit performance for the quarter with sales and GAAP earnings up 5 and 10% respectively. Smucker's and Jif are market leaders in their respective categories. This is proving to be synergic in the marketplace Starts

and we believe this combination is enhancing the growth of each brand, perhaps even more than we had originally anticipated. Crisco's performance in the quarter continues to support our belief that there are significant growth opportunities for the brand, and we are pleased with the ongoing progress we have made in the oils category.

In addition to our three primarily brands, we also remain enthusiastic about the growth prospects of Smucker's Uncrustables. As we noted last quarter we completed our national rollout of the product. The overwhelming initial acceptance of Uncrustables has been rewarding but at the same time created some short term challenges. Due to the strong demand in both the retail and school channels we are currently experiencing short term capacity constraints at our two manufacturing facilities.

This situation is affecting our ability to fully supply our customers. We have been working diligently to minimize the impact of the shortages and alleviate these capacity constraints. We expect the situation to be fully corrected by June 2004 in connection with the start up of our new Uncrustables facility in Scottsville, Kentucky.

While this situation will have some near term effect as to the speed with which we ramp up the business, we do not expect it will have a significant impact on this year's sales and earning results. And we do not believe it will have a material impact on the future growth of the Uncrustables business.

Another key initiative, is our restructuring project. With the current year's fruit season completed, we will soon be closing down the operations at our wood burn facility in Oregon, and our fruit operations in our Watsonville plant in Watsonville, California. The Uncrustables production at Watsonville will continue, until our new Scottsville sight is fully operational.

This overall restructuring project is on plan, and will improve our overall cost to operate over the coming years. As we have stated previously, once the plan is fully implemented in fiscal year 2006, we expect to recognize $10m in annual benefits.

We are also moving forward with our efforts to integrate many of the best practices gained from the two plant acquired from proctor and gamble into our other Smucker's facilities. This process called our Smucker's Quality Management Systems Program,, or SQMS, consists of analyzing plant operations and instituting improvements to drive productivity, improve efficiency and ultimately lower costs. SQMS is in its early stages, and will take effect over the next several years.

In addition, we recently completed a project to bench mark our corporate costs, and identify opportunities for improvement. Although we do not expect any material changes resulting from this initiative this fiscal year, we believe that the outcome of the project will position the company to achieve its growth objectives without significantly increase corporate structure over the coming years.

With that broad overview I would like to focus on our second quarter financial results. The company's sales for the second quarter, were $386 million, up 5% compared to last year. Sales in all of the company's business areas except industrial were up for the quarter. Excluding the industrial area, sales were up 9%. For the first time since the merger, both the current and prior year's quarters include full operations from Jiff and Crisco, and thus the comparisons require no adjustments.

The overall top line growth translated into strong earnings. Net income was $32.1 million, an increase of 10% over last year's net income of $29.1 million. Earnings per share for the quarter were 64 cents compared to 58 cents last year. Net income for the second quarter of 2004 included charges of $3.1 million, or 4 cents per share, related to the company's restructuring plan. Net income for the second quarter of 2003 included merger related costs of $2.5 million, or 3 cents per share.

Excluding these costs in 2004 and 2003, the company's net income would have been $34 million and $30.6 million respectively, an increase of 11%. Earnings per share would have been 68 cents and 61 cents respectively. The reconciliation of non-GAAP measures to net income have been included in our press release for your reference.

Operating income increased 8% over last year and operating margin improved from 14% to the second quarter of 2003 to 14.5% this year. This 50 basis point improvement was the result of an increase in the company's gross margin performance, which increased from 34.4% last year, to 35% in this year's second quarter. This improvement reflects the growth of the higher margin Jif, Crisco, and Smucker's businesses and a full quarter of lower peanut costs.

SG&A expenses as the% of sales were up slightly from 20.4% last year to 21% this year. In addition to planned increases in marketing and selling expenses to support your brand, certain corporate administrative expenses also increased. These increases were primarily related to expenses for outside services and employee related costs.

Finally, we were able to improve our overall interest position during the quarter, and again benefit from a slightly lower tax rate.

I'd like to make one comment regarding the balance sheet. You will note that we have added investments to our balance sheet. Due to the increased cash generated from the new businesses, we have expanded our range of investments beyond cash and cash equivalents. For comparison purposes, total cash and investments were $145.9 million at October 31, 2003, compared to $98.8 million last year.

Let's now take a look at the result of the quarter, by our two business segments. Sales in our U.S. retail segment were $281.7 million, up $24 million or 9% over last year, with strong performance by all three brands. Sales in the consumer business area were up over 7% for the quarter, due to the growth of both the Smucker's and Jif brand.

During the quarter, both brands continued to gain share of market. Smucker's branded products were up nearly 10% in the quarter due to growth in both fruit spreads and natural peanut butter. Uncrustables also contributed to the increase for the quarter. Jif volume was up approximately 13% for the quarter. However, due to the impact of the price decrease in January 2003 and mix of sales, dollar sales for the quarter were up 5%. Profitability in the consumer area remain strong as the brand leveraged their sales growth and we benefited from the timing of the lower peanut cost. For the remainder of the physical we would not expect any significant change in our raw material costs beyond the 1 to 2 cents per share range previously announced.

The Crisco brand was up 13% on a comparable basis as brand gained share during the quarter. The fall bake period is in progress and this year we have an integrated plan with both consumer and trade support of the Crisco brand. The early results are very encouraging.

As you may be aware, soybean costs increased over the past several months as a result of a smaller than anticipated crop. While we've been able to cover our fall bake volume, we have found it necessary to increase prices to offset the ongoing increase in raw material costs. As a result, the company has announced a price increase averaging approximately 7% effective in January 2004. Our oils procurement group has been and will continue to be actively managing the pricing situation.

Now let us turn to our special market segment. Sales in this segment were down 5% from last year's second quarter as a result of the planned decreases and weakness in the industrial area. The planned decreases for the quarter were approximately $8 million which brings the year to date total to $16 million.

In addition to the planned decrease, softer sales to certain existing industrial customers are continuing to impact the results in the industrial area. If you exclude the industrial area, the special market segment actually increased 10% as sales in the food service, international, and beverage areas were up for the quarter.

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. As you can see, our performance for the quarter was strong. All three categories, fruit spreads, peanut butter, and oils, are responding to the marketing initiatives that we have put in place.

Our market leading position in each of these categories will allow us to take advantage of growth opportunities. Our sales continue to pace somewhat stronger than we forecast and we expect that trend to continue in the second half of the year.

Based on this sales strength, we are raising our guidance for fiscal 2004. We expect to see sales growth of 9% in fiscal 2004 to approximately $1.43 billion. We anticipate growth in our higher margin retail segment will drive most of this increase in sales. As a result, we expect GAAP earnings for the year in the range of $109 million to $111 million, which represents an increase in net income of 13% to 15%.

This income range results in earnings per share of $2.17 to $2.22, which includes restructuring costs of approximately $12 million or 15 cents per share during the year. Excluding these restructuring charges would produce an earnings per share range of $2.32, the $2.37, an increase of 7 cents over our previous range.

Included in this estimate are the following assumptions which impact our outlook for the remainder of the fiscal year. First, we will continue to lose sales from the planned exit of the low margin contracts in our industrial business. We expect the trends we experienced during the first half of the year to continue. For the year, we expect industrial sales to be approximately $40 million below last year's level.

Second, we have seen a modest increase in employee related costs during the first half of the year. This is in addition to the increase in pension expense of $4 million, or 5 cents per share that we previously communicated. While we do not believe this will have a significant impact on earnings, we would expect additional costs of approximately a penny to 2 cents per share for the last six months.

Finally, we expect construction of the Scottsville, Kentucky, plant to be completed by May 2004. The impact of additional one time cost at Scottsville, which are specific to the new facility total approximately 9 cents per share in 2004 and have been included in the range of estimated earnings.

This reflects an increase of approximately $2 million or over 2 cents per share from our previous estimate nearly all these costs will occur during the remainder of the year.

To accommodate future growth for Uncrustables, we have approved additional spending at the Scottsville facility. Capital expenditure for 2004 increase from $80 million to $95 million. And based on these estimates free cash flow before dividends will be approximately $50 million to $55 million, a decrease from previous estimated $60 million due to the higher capital expenditures.

In closing, let me say that we are on track for another year of record results and we look forward to continuing the momentum we have created strengthening our leadership positioned by investing behind our brand and improving our cost structure. We appreciate the efforts of the entire Smucker's team, our talented and dedicated employees in turning these many opportunities into strong financial performance.

We thank you for your time and now we are happy to answer your questions.

Thank you, gentlemen. (Operator’s instructions) Our first question comes from John McMillin of Prudential Equity group.

Congratulations, everybody.

Thanks, John.

: Can you give us in terms of the third and fourth quarter can you give us a little clarity in terms of how you expect the quarters to work out.

We haven't given quarter by quarter guidance in the past and we really are trying -- We don't think that's appropriate because it would take a longer term look as you know. You guys are pretty good at doing that on your own.

Well, we always seem to be a little low, don't we?

I will make one comment on that, John. As we get more comfortable are noting these businesses we think we are getting tighter and tighter on the range, so we are pretty confident in our guidance.

Can I ask Steve Oakland a question?

Sure.

Historically -- and I know you do have a corn oil product out there now -- but historically, when you've gotten in these markets where soybean has gone way up and corn stays low, I remember when CTC owned the business they used to love Mazola (ph) and that kind environment because people would trade the corn oil. Do you worry about that and to the extent you can talk about procurement, Steve, what advantage has that given you locking in your costs early this year?

John, there's a couple things. We have seen soy bean prices go up and our prices in our retail commitments, the retails work so far out now that those commitments match those commitments with our retailer so that's why our price increases would be announced for next year.

As far as corn oil's concern it has not seen the run up that soybean oil has seen but actually experienced about a year ago and corn oil is trading right now some 30% above historical averages. We've seen a lot of industrial processors, the big french fry and potato chip folks switched to corn oil, and you will see that on the big packaged goods brands.

So corn oil prices have been high for some time, but that's been built into our model all along. Our corn oil competitors have reflected those higher prices. So I agree with you in the past there's been times even when the vegetable oil people have blended corn oil into their product, because it was lower cost but those fundamentals don't work right now.

And you don't see consumers looking at these numbers you certainly don't see consumers moving to corn oil instead of so I bean oil.

No. Typically the bland oils, can a know la and soy bean are used for different purposes. Corn oil markets especially in the Hispanic areas used as an ingredient. It provides flavor. The brand bland oils are designed to not impart flavor, just impart a good going medium.

On the class action lawsuit that was against the against the Simply Fruit (ph) brand--it doesn't have any impact on your core Smucker's business. Why was that up so strong? And if you could, give us a number without Uncrustables, I know you said the business was up 10%, what was the core fruit spread business up?

John, this is Vince Byrd. For the quarter, basically, our fruit spread business remains very strong. As you have seen in the RI numbers, the categories have actually been growing. Down on the four week but up on the 12 and 52 week.

Actually, our fruit spread business is up nearly 10% for the quarter and some of that attributed to growth in alternative channels that you don't necessarily see through [our eye,] but again it goes back to the issue Richard referenced in terms of getting benefit of joint merchandising with the Jif brand.

Okay. Well, congratulations again.

Thank you, John.

Thank you. Our next question comes from George Askew of Legg Mason.

Yes. Good Morning. Good quarter. Could you—some data you generally provide in the 10 Q, but I wonder if you have that available now--the segment operating income for each of the two segments, U.S. retail and special markets for the quarter?

George, we will supply that again in the queue.

Okay, okay. Could you characterize a little further the additional cap ex of the new Uncrustables plant. Is it -- is your goal to have greater productive capacity at the time of opening or is your goal to build a bigger footprint so that you've got, you know, square footage for expansion in the future?

It's really both of those things. We are anticipating some future growth and we are also putting in an additional line because we've seen the demand already there.

And then you refer to the decrease in one of our industrial customers, bakery fruit fillings sales down. Is there a timing thing going on there, or are you seeing that market deteriorate? And can you characterize what may be going on with some of your customers in that business?

It is mainly in a convenience breakfast food area and the category till continues to do well but some of the products we are providing fillings for are maturing in their life cycle and that's really what we are seeing.

Are you giving a shot at some new product development?

Yes, we are working on new products with these customers and anticipate that we will see some new business in the future.

Okay. And then I guess, finally, the SKU reduction program, what's the latest update on the timing there? Is that still second half or should we think of is it going to straddle the fiscal year more?

George, if you look at the SKU it will probably straddle the year. It is diligent to track but roughly a third of SKUs have been rationalized to date but the later half of this fiscal and probably cross into next year.

Good deal. Well, thank you. Congratulations.

Our next question comes from Christina McGlone of Deutsche Banc.

Good morning. Richard, I just wanted to clarify something you talked about earlier when you talked about your program queue beverage mark bench mark corporate cost. I don’t know if I heard it correctly, but I thought you said that it would allow you to grow but or to achieve were your growth objectives without increasing corporate costs. But would it also enable you to reduce your corporate costs?

Well, help us reduce our corporate costs as a percentage of sales.

Okay. And then in terms of the cap ex so is this just an absolute increase or any sort of shifting from' 05 to '04.

No, this is an absolute increase. We would not expect to see next year's range which is roughly $40 million to $50 million impacted.

Okay. And then question for Steve. Has anyone else announced a price increase in soybean oil or has anyone taken it yet?

We were the first branded that we know of to take one private label manufacturers have been out for some time and depending on when each retailers contracts come up. We heard rumors this week one of our branded competitors has done the same but I don't have confirmation of that yet.

So private labels prices higher than yours for a while?

I wouldn't say higher than ours but we have seen them increase their prices over the last probably six weeks across the country in retailer by retailer.

Is there a concern that as prices get too high that the volumes really start to deteriorate? Or is it just all substitutes oils increasing as well or the corn oils same thing kind of happening.

Historically that's what we've seen. If you go back on a long term chart, soy bean oil's been very, very low price the last couple years. Those commodities are still very cheap. I don't think we are anywhere near a point where we would be concerned about that.

Okay. I guess last question. The expenses for Uncrustables that's being absorbed, it went up 2 cents a share. What does that relate to specifically and could that increase -- could we hear about another increase maybe next quarter or is that pretty much, you know, the best guess for the year?

This is Fred Duncan. To answer your question, really there were two major factors. Richard spoke to our SQMS program, which is basically a zero based approach. And in order to ensure that we start the new Scottsville facility off, we basically increased the number of internal employees that were transferring from other Smucker's facilities, and the impact of that has been both on salaries and relocation costs. So, that's one area. And the second is just to make sure that we minimize any likelihood of extended down time due to equipment failures, we are assuring we are assures level of spare parts and we don't expect that to escalate any further.

Thank you very much.

Our next could he comes from Scott Van Winkle.

On the Uncrustables, the impact from the capacity constraints you have currently are there significant costs increases due to the capacity constraints or is it a loss of opportunity on the revenue?

It is more just a loss of opportunity on the revenue side. And we're looking at our marketing support basically given that trend. So lost revenue.

Any comments on how the cheese Uncrustables are doing?

Well, I'd say overall we are pleased with it but given the capacity constraints it has been difficult to read the take away. At this point we are pleased with it but I think it could do much, much better with the support that's up and running.

There's a few companies talking about the low car bow hydrate diet. That you seen any impacts or what are your thoughts. Most of your products go on bread.

We just read something yesterday, I guess the bread manufacturers are concerned about it. But at this point, again the volume is basically up and so we have not seen a significant impact and of course again we have a number of offerings and some of those happen to be lower carbs than other.

Also as you know we cut the crust off so you are getting less bread with our product.

And just one last question. What were the outside services you mentioned adding to your SG&A costs.

Those were primarily consulting costs associated with our corporate overhead and some other legal and those types of costs.

Thank you.

Our next question comes from Mark Chekanow from Sidoti.

Good morning. All the categories performing very well. How long, though, do you think it will be before you see a step up in promotional activity from your competition, whether it be Skippy, Peter Pan or Welch’s jelly? And are you prepared to react to that to keep your market share by selling at more promoted prices.

The first thing would be that we have seen activity to date. I don't know that we would say we have seen any backing off from history levels. Again our objective is to grow one share point per year, but keep within prudent measures of a plan and spending levels that we feel are adequate to maintain the growth of the business.

Are you all expecting a heightened competitive level and promotional activity as you have more success.

These categories are highly promoted on a regular basis anyway and we've seen, you know, especially when we first took over the business we saw a lot of activity and I guess in spite of that we were able to put together some very effective programs. So.

I guess on the contrary, Mark, we haven't seen any backing off of our competitive activity at all. In fact, I think even when you look back at when we first acquired the Jif brand that there's been a lot of activity.

I guess one other additional positive thing when there's a lot of activity in the category, the whole category gross and we actually have seen for everyone in the industry a positive effect of that because all these categories probably in the last 12 months have grown more than their historical averages.

Okay, shifting now. Mark Chekanow: A lot of food companies talking about trade deloading, companies like Wal-mart, pushing the inventory back, they want to carry less, the strike in California, the Fleming bankruptcy. We haven't heard that come up much in your company. Is there a specific reason these issues aren't affecting you much?

Your first extent comment, there is a lot of emphasis on reducing inventory within the supply chain and we are working with a number of customers to maximize efficiencies in that front.

In terms as it relates to the strike in California, there may be a minor impact on our business, but it is relative as I said relatively minor this stage because the business is being picked up through other customers or other channels. Time will tell how long the strike goes on. But at this point we don't feel so.

in long term in terms of one of the things, again, we see from a positive side is that the whole industry is focusing much more on keeping the product on the shelf all the time. And that's going to benefit everybody. I mean, that takes costs out of supply chain.

So that awareness of both manufacturers and retailers which is more heightened than it's ever been to going to accrue to benefits for the whole industry.

Okay. Last question. The oil price increase going into effect in January, how far forward have you contracted already or are you actually going to profit from this price increase or more just a pass through that's not going to affect profits?

I think historically, it's been, and this one is too, a pass through of the costs. We managed through two of these last year and have taken that stand and Crisco's done it for years.

So we don't speculate in it. We don't buy oil forward and try to speculate, especially as volatile as the market has been.

Great. Thanks.

Our next question comes from Chuck Cerankosky from Mc Donald's Investments.

Nice quarter, gentlemen. Looking at the SG&A line, is that getting to a level where it's going to sort of plateau as a per cent of revenues as you get more comfortable with the Jif and Crisco businesses and the promotional levels required to run those businesses.

That's probably a true statement, Chuck. I think in the near term, the back half of the year with the costs around Scottsville you will see a pump there because moth of those costs will be reflected. But the project we talked about controlling corporate costs, we feel pretty comfortable with the level.

It does reflect the marketing expended, the infrastructure we believe is in place for the next several years so the numbers you are seeing are pretty realistic is what we would expect going forward.

Anything to add regarding a shortening product with reduced heavy of hydrogenated levels.

We are working to have a product in the market at the end of our fiscal year that will be zero transfat. We are fortunate that Proctor worked a lot of that years ago and we inherited some technology that will make a great alternative shortening project this way our customers expect Crisco to perform.

Thank you.

Our next question comes from Scott Van Winkle of Adams, Harkness, and Hill.

Any comments on success of your coordinated marketing efforts using multi-brands?

Scott, in what regard? I'm sorry. It was Scott?

Yes.

Basically, what it's allowed us to do is to join merchandise and obviously peanut butter and jelly go very, very well together.

So there's efficiencies that we gain and more important to our customers in that record so it has been a very effective way and virtually every promotion with exception of things around holiday bake will be joint promotions have been and will probably continue to be so.

When we tied Crisco, Smucker's and Jif together this Summer, the event wasn’t so much together, but it was much more efficient to deliver. So that event this summer was one of our more efficient to deliver.

Thank you.

Our next question comes from Bob Simonson of William Blair.

Good morning. Walmart has said that they're not quite terribly San Quentin about the second half outlook overall in their stores. We have taken more aggressive aspect on retail pricing on certain categories and they are also seem to be in the price of beating on everybody's head as suppliers.

Could you kind of review to the degree you can the impact on not only your costs or your pricing but also the stimulation that you might be getting at the sales level, just kind of an overview of how it's going with Wal-mart?

We can't give a specific on customer by customer. As you know they are a very good customer and we've done very well with Wal-mart. And continue to do so.

Uh-huh. Is there anything out of the ordinary or you just don't want to go there?

Yeah. Well, there's really nothing out of the ordinary. It is a good ongoing business.

Okay. Thank you.

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

Okay. Thank you very much for your support and your interest. We look forward to another continuing rest of the year and appreciate again your support. And obviously, if you have comments or questions please get a hold of Richard or Mark. Thanks a lot and have a great day.

Ladies and gentlemen, if you wish to access the rebroadcast you may do so by dialing 1-800-428-6051 or 1-973-709-2089, with a pass code of 311526.

This concludes your conference call for today. Thank you all for participating and have a great day. All participants may now disconnect.