J M Smucker Co (SJM) 2004 Q3 法說會逐字稿

Good morning and welcome ladies and gentlemen to the J.M. Smucker Company's third quarter 2004 earnings conference call. At this time I'd like to inform you that this conference is being recorded and that all participants are on a listen-only mode. At the request of the company we will open up the conference for questions and answers after the presentation. I would now like to turn the conference over to Mr. Mark Belgya. Please go ahead, sir.

Good morning, everyone. Welcome to the J.M. Smucker Company's third quarter fiscal 2004 earnings conference call. I am Mark Belgya the company's Vice President and Treasurer. Thank you for joining us.

Joining me on the call this morning from the company are Tim Smucker, our Chairman and Co-CEO, Richard Smucker, President, Co-CEO and Chief Financial Officer, Vince Byrd, our Senior Vice President, Consumer Market, Fred Duncan our Senior Vice President, Special Markets, and Steve Oakland, Vice President and General Manager of our Consumer Oils business.

After this brief introduction I will turn call over to Tim Smucker for opening comments and an update of certain key initiatives. Richard will then recap the quarter and 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 this morning 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 Richard or me.

Before we begin I would 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 Reform Act of 1995. I invite you to read the full disclosure statement concerning such forward-looking statements in the press release.

With that I'll turn the call over to Tim.

Thank you, Mark, and good morning everyone and thank you for joining us on our call today.

The third quarter of 2004 marked another record quarter for this company. Our three leading brands, Smucker's, Jif and Crisco, maintained their positive momentum and once again gained market share in their respective categories.

As a result we experienced solid sales and profit performance for the quarter with sales and GAAP earnings up 4 and 12% respectively.

As you know this quarter included the important fall bake period for our Crisco business. For the first time in several years Crisco was supported with an integrated consumer and trade promotion plan and the results were positive.

Crisco's financial performance during this critical period was strong, exceeding expectations. It also provided further support to our belief that there are significant growth opportunities for the Crisco brand.

Soy bean costs have been increasing over the last several months and in response to these rising costs we announced the price increase averaging approximately 7% effective January, 2004. However, prior to the effective date we decided to take an additional increase which brought the total price increase to approximately 12%.

These rising soy bean costs and the competitive response to our ongoing share gains will make for a very competitive and dynamic market during the fourth quarter.

As always, we are taking a long-term view of the brand and we recognize there will be fluctuations from quarter to quarter. We are pleased with the ongoing progress we continue to make in the oils category.

In addition to our three primary brands we remain enthusiastic about the growth prospects for Smucker's Uncrustables. Last quarter we spoke about the short-term capacity constraints we were experiencing at our two manufacturing facilities due to the strong demand.

The capacity constraints continue to affect our ability to fully supply our customers. We have been working diligently to minimize the impact of the shortages and to alleviate these capacity constraints.

At this point we expect the capacity situation to be fully corrected in time for the important back-to-school period later this summer in conjunction with the start up of our new Uncrustables facility in Scottsville, Kentucky. We continue to expect on time and on plan start up for May 1.

I would like to now provide a brief update on the status of major initiatives currently in the process of the company. Those being our restructuring project which includes our SKU rationalization and our Smucker's quality management systems.

Our restructuring project continues to proceed on plan. We have closed down operations at our Woodburn, Oregon, facility and the fruit operations at our Watsonville, California plant.

The Uncrustables production at Watsonville continue until the new Scottsville site is fully operational. We are currently working on the sale of both facilities and I hope to bring these transactions to a close over the next several months.

We also continue to make inroads with the SKU rationalization portion of the project. To date we estimate that we have eliminated approximately 75% of the total SKUs identified to be discontinued. The remainder will be rationalized over the next six to nine months.

We remain comfortable with the overall restructuring charge of approximately $18 million and the current year expectation of $12 million, or 15 cents per share.

We are also moving forward with the Smucker's quality management systems program for SQMS. You may recall this project consists of analyzing plant operations and instituting improvements to drive productivity, improve efficiency and ultimately lower costs.

SQMS continues in its early stages. And it's really more of a journey than an end point based upon our continuous improvement philosophy.

Finally, I want to talk about two industry issues that are very much in the news these days. We have been receiving a number of questions and we thought it would be appropriate to address them this morning. These issues revolve around health and obesity specifically around carbohydrates and transfats.

As you know we have always maintained a strong focus on the consumer and are sensitive to our consumers needs. We always have been and we always will be.

This is the basis for our product development both in terms of new products and improving our current products. We provide a range of choices to our consumers, a broad array of products that meet their individual needs.

Our current product offerings provide high quality alternatives for the consumer who is watching their daily carbohydrate intake and we have products that have been specifically developed for this health conscious consumer such as our low sugar and sugar free line of fruit spreads and our simply Jif peanut butter.

In the fourth quarter we are introducing our Crisco shortening with zero grams transfat per serving. We believe this product will provide the consumer a shortening alternative with all the baking qualities of our long time consumers have come to expect from Crisco.

In addition we have modified our Crisco oils label to point out that it, too, has zero grams transfat per serving. These two actions signify the leadership role that Crisco is taking in the oils and shortening category.

We have not seen any identifiable impact on our business as a result of the high media profile that carbohydrates and transfats are experiencing. We will continue to listen to our consumers and respond to what we hear them saying. This has been our history and will continue as we look forward to continuing to respond to our consumers going forward.

With that broad overview I'd like to now turn the call over to Richard to focus on our third quarter financial results and our year end outlook. Thank you, Tim, and good morning, everyone.

The company's sales for the third quarter were $355 million up 4% compared to last year. Excluding the industrial area which is experiencing declining sales due to the decision to exit certain contracts sales were up 6%.

As we have seen all year our top line also continues to benefit from foreign exchange. Net income was $31.3 million an increase of 12% over last year's net income of $28 million. Earning per share for the quarter were 62 cents compared to 56 cents last year.

Excluding restructuring and merger related costs as detailed in the release, the company's net income for the third quarter of 2004 and 2003 would have been $32.9 million and $28.9 million respectively. An increase of 14%. Earnings per share would have been 65 cents and 58 cents respectively.

It should be noted that last year's third quarter results included approximately $1.4 million or two cents per share of expenses associated with the company's decision to write off certain equity investments.

Our gross margin increased 30 basis points from 36.1% last year to 36.4% in this year's third quarter. This improvement reflects the growth of the higher margins Smucker's, Jif and Crisco businesses and improved overhead absorption resulting from the higher production volume. These improvements have been partially offset by higher benefit costs.

While our gross profit increased over 5%, higher SG&A expenses caused our operating margin to increase at a rate slightly less than our sales growth. SG&A expenses as a percent of sales increased from 21.1% to 21.7%.

The increase was primarily a result of higher ongoing employee benefit costs, notably pension and healthcare. Also contributing to the increase in SG&A were legal costs and start up costs associated with the new consumer call center that we located in Oreville in November.

Below the operating income line we were able to improve our overall interest position during the quarter and again benefited from a slightly lower tax rate as compared to the prior year.

Let's now take a look at the results of the quarter by our two business segments. Sales in our U.S. retail segment were $254.3 million, up nearly 5% over last year.

In the consumer business area, sales were up over 4% for the quarter due to growth in both the fruit spreads and peanut butter categories. Both Smucker's and Jif brands continue to gain market share.

Sales of Smucker's branded products were up nearly 9% in the quarter due to fruit spreads and natural peanut butter. Uncrustables also contributed to the increase in sales in the quarter.

Jif volume was up approximately 7% for the quarter. However, due to the impact of the price decrease in January of 2003, dollar sales for the quarter were basically flat.

Crisco sales were up 7% as the brand gained share during the quarter. Sales of Crisco corn oil and olive oil sprays contributed to the year-over-year increase.

As Tim mentioned, during the fourth quarter we will be introducing Crisco shortening with zero grams transfat per serving. In fact, we are already receiving orders for this product.

As we have said many times we are excited about the growth prospects that we have for the Crisco brand and the new products that we have developed are one way of taking advantage of these opportunities.

Sales in the special market segment were $101 million up 2% over last year. The segments top line performance was helped by favorable exchange rates which resulted in a benefit of approximately $5 million in the quarter. Strong sales in beverage and our food service business also contributed to the increase.

The segments results were negatively impacted by the ongoing effect of the planned exit of certain industrial and food service contracts. Excluding these planned reductions, special market sales would have been up nearly 8%.

Overall sales in the food service area were down slightly due to the discontinuance of the Lee & Perrins distributor business. The food service business itself remains in good shape as sales of traditional portion control items, primarily the Smucker's branded items, were up approximately 6%.

In the schools market, sales of Uncrustables increased over 12% despite the capacity constraints.

Based on our results to date and our outlook for the fourth quarter, we expect to slightly exceed our previously announced earnings range of $109 million to $111 million, or $2.17 to $2.22 per share. This includes approximately $12 million or 15 cents per share of restructuring cost. Excluding restructuring charges the previous earnings per share range was $2.32 to $2.37.

Before closing, I want to recognize out entire Smucker's team. The talented and dedicated employees who are responsible for turning our opportunities into strong financial performance.

During the quarter we were recognized by Fortune Magazine as the number one company to work for in America. In our conference calls we talk about our financial performance, our future financial goals and our growth and profitability strategies. But it is the people of Smucker's who execute these plans that make our performance possible.

In closing let me say that we're on track for another year of record financial results. We look forward to continuing the momentum we have created, strengthening our leadership position by investing behind our brands and improving our cost structure.

We thank you for your time and now we'd be happy to answer any questions you might have.

Thank you, gentlemen. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your pushbutton telephone. If you wish to withdraw that question, please press star two. Your question will be taken in the order that it is received. Please stand by for your first question, gentlemen. Our first question comes from John McMillin of Prudential Securities. Please state your question, sir.

Congratulations, everybody.

Good morning, John.

I actually wanted to ask Mr. Oakland, Steve a question just on Crisco where there's just been such meaningful market share gains. One, I was just trying to get an idea, what have your competitors taken in terms of pricing, to [fedx] of pricing of competitors followed? What have driven these market share gains and do you believe they're sustainable?

Okay. A couple things. As we look at the price increases that first of all, we did see the competitive environment match our first price increase. We were able to get our second price increase out just sort of under the wire of the deadlines that we have with our customers, the lead times that we provide them.

So we really haven't seen that response yet competitively and probably wouldn't expect to because our competitors haven't had a chance to do that yet. So we expect them to but we haven't seen it yet. We have seen the first one. And we are seeing shelf prices across the board of all brands and private label raise. And that's really in response to higher commodity costs.

As far as market share gains, there's a couple of things. We've been committed to reconnecting the Crisco brand with the consumer. And we increased our advertising spend and put new creative and our creative is testing great with our target customers.

So I think we have the right message and we have more weight than ever and we've had time to integrate that with consumer promotion, advertising and we hope the new products will help us to continue with it. New products are just starting to have some impact.

And as you look to next year, is the basic earnings growth goal, Tim or Richard, the bottom line? In the beginning of this merger and you should be complimented for the last two years, the earnings surprises were in the nickels and dimes, now we're still getting them, which is a lot better than what we're seeing with other food companies but they're more in the pennies. I don't know if that reflects the fact that we figured out how conservative you guys are or you're just getting into a tougher period where you start getting in the third, the easy food has been picked. Can you just kind of comment, are you going to start off next years earnings guidance with some kind of traditional, you know, high to mid-single digit growth rate on earnings?

I think as we said before we have a better understanding of the business now than when we did when we first got into it two years ago. And so I think just from our own experience this time I think we're better than the earnings expectations by 2 cents as you pointed out it's getting closer and I think that's just we're getting a better understanding of the business and so I think our guidance better reflects what we see out there and our understanding of the business. So and I think that's what's going to continue. I think it will get tighter as we go on.

Okay. Well congratulations. And, Mark, just the segment numbers that you mentioned aren't in the press release. We have to wait for the 10-Q to get all of those?

That is correct, John.

Okay. Thank you.

Have a good time next week.

Okay.

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

Hi, congratulations as well, guys.

Thanks, Scott.

On the juice business, you anniversaried the price decrease in the beginning of January, I believe. Did you see the volume gains continue after you anniversaried that price increased and therefore we should see a nice uptick in dollar sales growth?

As Richard mentioned, the price decrease went in effect in January. So for the quarter, as I think is in our release the business was basically flat in dollars but it was up about 7% in tonnage during the third quarter so, yes, we have lapped that price decrease. So assuming that going forward we grow in volume the dollars should correspondingly increase.

The only thing that I would comment is that as you look at share and market numbers, again, you do not see certain channels. And there has been a slight shift in some of our business to the alternative channels and so you may not necessarily see all of the gains reflected in market share. And also the southern California strike has shifted some of our volume as well.

Okay. And Fred if you could just enlighten us after you anniversaried the price increase but if you don't want to be specific that's fine. Next question, which channels are you placing priority on for the Uncrustables business given that you're constrained on capacity?

Well, I think between special markets in food service and consumer we've been basically splitting that business fairly equally and treating all customers the same during this transition period. In terms of future with the capacity constraints being eliminated I think both of us feel that we'll have equal opportunity to focus on all the key accounts.

Obviously we're not as well represented on the consumer side in club business and we hope to expand some of that distribution as well as the few accounts on the grocery side that don't have current distribution and maybe Fred can speak to the school and food service side.

Well, I think you've said it. Our first priority was to service our loyal existing customers. We continue to pursue new customers but really targeting the fall back-to-school time period for implementing that new business. And so we feel very optimistic that the capacity issue will be behind us shortly and we'll be back to again expanding our customer base across all different segments.

As far as the new capacity and the new facility coming on in May, how are the logistics going to work around operating, opening that new facility? How long of an overlap will you have with your existing facilities? Do you feel comfortable that the plans to date are in place to make that smooth? That seems like the only kind of near term risk at this point.

To answer your question, although it's a different timeframe, essentially it's from three to six months that we'll be overlapping with our existing facilities. We feel very confident that that will provide us the flexibility to get our new plant up and running and insure that we don't have any further capacity issues.

Thank you.

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

Yes, good morning. Was there a buy-in for Crisco prior to the price increase at the beginning of the year?

Traditionally and in this one there are buy-ins and the policies that we've used historically and the one we use now is where we allocate a certain amount of business by customer and that happened. The benefit to both us and the customer by having those price increases come at the same time is we only had to do that once. A year ago we had two separate price increases and we went through those mechanics and our customers had to change their shelf prices in their systems twice. We had to provide two buy-ins. This time we were able to do that just once.

Okay. Good. You touched on the competitive environment for Crisco. As you look over to the, kind of the Easter bake season, should we expect some new programs around that timeframe as well or is the creative that you talked about been in place this fall and will continue through Easter?

I think the mass media creative television will be the same creative and that creative we still think is very fresh and on target. The print media is specific by season and the recipes and the things we use to drive usage especially for shortening, are Easter specific. So all of the magazine activity, that will be Easter specific and is done and we're really proud of it. So the mass media the TV will be the current spots.

But we do expect that the fourth quarter will be probably very competitive because we've gained such good market share we don't expect our competitors to sit back. We know it's going to be a competitive Easter bake period. Total number down well over double-digits volume and that inventory is going to work it's [inaudible].

Okay. You touched on this a moment ago but I just want to clarify, by the back-to-school, on Uncrustables, by the back-to-school season you expect to be off allocation both food service and retail?

That's correct, yes.

Okay. Good. And then lastly on the zero transfat shortening, it sounds like you said you are getting orders now. Is it the kind of thing where it's going to be shipping right at the end of the fourth quarter or do you expect to have it out, could you?

It's going to ship by the second week of March. Our customers all have samples in their hands right now. The presentations are going on and raw materials are in our Cincinnati facility. We start running it I think next week and actual production quantities, we run sample quantity and we expect to ship I think the first or second week of March depending on the customers.

Okay. Good. All right. Fair enough. Thank you very much.

Thank you. Our next question comes from Christina McLone of Deutsche Bank. Please state your question, ma'am.

Thank you. Is there any way to quantify the impact of the capacity restraints on Uncrustables growth in the quarter, you know, both in consumer and food service?

That's very difficult to do. That's the short answer. I mean, we haven't tried to say if we didn't have it how much more sales we could get. I mean.

And so basically we don't expect an acceleration in those sales until the back-to-school season. Is it just taking awhile for the new plant to ramp up when starts in May?

Well, I think basically we're taking a very conservative approach at least from the consumer side during the first quarter so that we don't get into the situation again given that we're starting up a new plant and all that and back-to-school is the ideal time. So because we've been allocating customers for several months, we just want to make sure we build enough inventory to be prepared for that back-to-school period.

And the other part of difficulty is estimating how much that we haven't shipped is that we have quite a bit of support for the brand as well so that once we get back up to full support then at that point we'll have a better feel for the growth.

Okay. Then in terms, just a financial question. There was a big swing in other income and expense. Could you explain what that was?

Yes, Christina, this is Mark. A couple of things. One, we mentioned that last year we actually wrote off some minor equity investments that we had been carrying on our books and that was about $1.5 million or roughly 2 cents. And then there was also some miscellaneous losses on some disposition assets that were included. I think the total number on that line was a little over $2 million. Those obviously were non-recurring and then this quarter we just had some miscellaneous income that went the opposite way.

And, Tim, you had reviewed the various restructuring initiatives. I'm wondering to the extent you can comment on next year, if we should see a margin improvement, if it's going to grow throughout the year and or if we can maybe even see it straight off starting in the first quarter with the Uncrustables plant up and running?

As we mentioned it will be slowly starting. It's really a five-year project and we hope to see some of that next year but it will be a smaller part of it. It's going to really be two or three years out. As I said it's a journey as opposed to an end-date, where this is about continuous improvement. We really have seen a significant impact of this but it takes awhile to have, see it on the bottom line.

Okay. And then last question, Steve, could you tell us what the incremental cost is for the zero transfat product? I know a lot of the replacement oils cost, I mean sometimes double the amount of what you currently could be using.

Yeah, that's true. And the key ingredient in this is a sunflower oil that gives us the baking properties and the extra properties and it is more expensive. The one-pound can which is the first item is 32% more than the regular shortening.

Thank you.

Our next question comes from Farha Aslam of Merrill Lynch. Please state your question, ma'am.

Good morning. Congratulations. Could you share with us your priorities on uses in cash, particularly given that you're probably going to cash in from the sale of your two plants and now that your anniversarying in the summer your two-year sort of period where you couldn't do share repurchases?

Well, obviously our first choice is to do acquisitions if we had one available. That's always our first opportunity. We will look at share repurchase where it makes sense and as you said the anniversary is after June so that is a potential, a use of that cash, and then third is primarily capital expenditures and dividends.

But I think those are kind of the priorities and we don't have anything to announce but we will, the two-year anniversary is up in June so it does give us more flexibility than we have now.

On the acquisition front are you seeing increased competition in that sort of 100 to $500 million area where it's your target zone given that a lot of food companies have recently been talking about the same range?

I guess we'd have to say we haven't seen any additional competition. We haven't been in any bidding contests recently so it would be hard to really judge that. So just mother-in-law research we haven't seen any real change yet. And I guess I would add to that is that we will still expect basically the same competitors in the event that there is an option so until that happens I think Richard's right but I don't know if there's a bunch of new players and so we think it's primarily the same ones we've talked about in the past.

Great. Thank you.

Thank you. Our next question comes from Mark Chekanow of Sidoti. Please state your question, sir.

Good morning. You talked a little on the last call that you would have about 9 cents of one time expenses from the new facility in the back half of the year. Could you quantify the dollar amount, where that hit on the income statement and also the EPS for that if any hit the third quarter?

Yeah, Mark. We did have a little bit hit during the quarter. Most of it is going to be in the fourth quarter as we've talked about as we gear up and do the testing of the new plant and everything. I think roughly 7 cents of the total will hit the fourth quarter.

Okay. And also could you give us a little bit more color on the type of intelligence that you have regarding increased competition in oils? And you've taken a lot of market share there, why wouldn't you expect the same type of intense competitive response in peanut butter and fruit spreads?

I'll speak to the oils and Vince can speak to the peanut butter. I think historically the oils business has been very competitive and I do think it's a category that responds to promotion. So you can't bring short-term volume back quickly.

So our approach has been long-term. It's been by connecting with the consumer, it's new products, it's those thing and our competitors can use short-term tactics. So they work in the oils business and I think there's some inventory out there given the pricing changes that have happened, volume declines, that our competitors would like to get rid of. That's it for oil.

I guess I would say that even though the categories are significantly different in terms of share and dynamics and we're not experiencing the situation that Steve is on the cost side, we're not under-estimating the impact of competition.

Normally, though, we view competition as good, as I believe we said on the last call in that it brings attention to the category. And so we're certainly not under-estimating it. The categories continue to grow despite concerns of carbohydrates and other things but we're certainly not under-estimating our competitors given our share growth.

And lastly, throughout the launch of Uncrustables, I'm sure you've been doing a certain amount of trade and promotion expenses that come as a reduction of revenue, next year do you expect that to level off? How many millions of incremental revenue do you think you would see just from a reduction in some trade spending for Uncrustables?

I don't think we're in a position to answer that. And given the fact that we've had to for all intents and purposes pull back our support as I mentioned earlier, we're going to be, invest significantly investment spending in that product again next fiscal year.

I think just to comment, that this is still and our feeling still, a new platform. There's a lot of new products that will have to continue to communicate with the consumer about so it's still very new on the horizon for many of our consumers.

Great. Thank you very much.

Thank you. Our next question comes from Bob Simonson of William Blair & Company. Please state your question, sir.

Good morning. There's a lot of moving parts for next year with changes in mix and costs and both on your cost of goods and some of these expenses that you've noted and benefits. Are you reasonably comfortable with the fact that you can get more margin improvement on the gross side than erosion on the expense side and let the operating margin, allow the operating margin to continue rising? And the second part of that is, is there a targeted range of your operating margin assuming no major change in the mix that you now have for some period in the future?

Bob, I guess addressing the first part of the question, as we talked about on our restructuring, we do feel over time that there is margin improvement. Now whether or not that's going to be next year or it's more likely the next several years but our intent would be to drive that.

In terms of the, on the SG&A side and the ultimate operating profit, we do realize that our SG&A had increased. We do feel that we have things in place that over time we'll be able to level that cost out and level out that operating margin impact.

In terms of a target we don't really have a target. I guess what we said in the past is that we realize that most of the large food companies are probably in the high teens as far as operating profit. We're something short of that and we feel based on our size and our ability we should be somewhere in the middle of that range.

That's great. Thank you very much.

Thank you. As a reminder, ladies and gentlemen, should you have any further questions at this time, please press star one on your pushbutton telephones. Gentlemen, please stand by for any further questions. Our next question comes from George Askew of Legg Mason. Please state your question.

Yes, thanks. Just a quick follow-up. Beverages were strong in the special markets group there. Was there any new product activity there or was it around new customer wins on the end branded side?

I think it's the latter. Really it's not driven significantly by new products. I think the strike situation in California has also helped our beverage channel. As you know we sell through the health foods. But we saw both in terms of our branded business and our non-branded business. But we believe again it's just a result mainly of our focus on our brands and really communicating the quality of those brands.

Okay. Great. Thanks.

Thank you, gentlemen. At this time I'm showing no further questions and I will now turn the conference back to you to conclude.

Again, thank you for the time, interest and let me add to Richards' comments earlier. We really appreciate the focus that our people have provided to turn opportunities into results. And so we thank our people at Smucker's and we thank you all for your interest and support and good questions. Have a great day.

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 passcode of 318127. This concludes our conference call for today. Thank you all for participating and have a great day. All participants may now disconnect.