J M Smucker Co (SJM) 2005 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J.M. Smucker Company third-quarter 2005 earnings conference call. At this time, I would like to turn inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Mr. Mark Belgya. Please go ahead, sir.

Good morning, everyone, and welcome to the J.M. Smucker Company's third-quarter 2005 earnings conference call. I'm the Company's Vice President and Chief Financial Officer, and I'd like to thank you for joining us this morning.

On the call this morning from the Smucker Company are Tim Smucker, our Chairman and Co-CEO who is currently out of the country and joins us from Europe, Richard Smucker, President and Co-CEO, Vince Byrd, our Senior Vice President of Consumer Markets, Fred Duncan, Senior Vice President of Special Markets, Steve Oakland, Vice President and General Manager of our Consumer Oils and Baking business, Mark Smucker, Vice President and Managing Director of Canada who is joining us from Toronto, and Paul Smucker Wagstaff, Vice President and General Manager of our food services market.

After this brief introduction, I will turn the call over to Richard for opening comments and a recap of the quarter. I will then review the financial results for the quarter and Tim will provide an update on Scottsville and closing comments. At the conclusion of these comments, we will be available to answer your questions.

If you've not seen our press release, it is available on our Web site at Smuckers.com. If you have any follow-up questions after today's call, please feel free to contact George Sent, Director of Corporate Finance and Investor Relations, or me.

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.

I also want to point out that the Company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussions on non-GAAP information is also detailed in our press release.

With that, I will turn the call over to Richard.

Good morning, everyone, and thank you for joining us.

Let me begin with a brief summary of the quarter. First, we had another quarter of strong financial performance, as we completed a successful "Fall Bake" period, resulting in non-GAAP earnings per share of 70 cents. Second, the base business continued to perform well with the Smuckers, Jif and Crisco brands all recording solid sales growth. Third, the integration of Multifoods continues on track and the new brands once again added significantly to our results. Fourth, we continue to resolve the production issues at our plant in Kentucky and are now fully applying demand for Uncrustables. Finally, we have executed on our strategy to own and market leading North American Icon brand and have aggressively exited businesses that do not fit that strategy.

The Multifoods brands, Pillsbury, Martha White, Hungry Jack, Robin Hood and Bick's, continue to have a positive financial impact. Results have been encouraging, with a good response to our increased support behind these brands and to our introduction of new products.

In the fourth quarter, we will have our first key cross-promotion with Pillsbury and Crisco. As a leading presence in the baking aisle, we look forward to the many opportunities to leverage these brands together.

The integration of the Multifoods business continues on-plan. We recently achieved 2 key integration milestones. First, in Canada, we completed the integration of the order to cash and administrative processes onto 1 operating system. In conjunction with this conversion, we formally introduced our new company name in Canada, Smuckers Foods of Canada. Second, we completed the conversion of our Toledo, Ohio plant to the Smucker's system platform. The Toledo plant provides approximate one-half of our U.S. baking mixes sold in the retail channel.

We also look forward to completing several other initiatives in the near future. Specifically, we began the expansion of our R&D center in Orville, Ohio to include the baking operations previously located in Minnesota. We expect this addition to our existing Tech Center to be completed by midsummer. Finally, we anticipate the Minneapolis headquarters will close by the end of June. Our progress to date continues to confirm our original synergy projection, and we remain enthusiastic about the future growth of the brand.

In looking at our base business, we experienced strength across all brands and all business areas except industrial. Combined sales for Smuckers, Jif and Crisco were up 6 percent over a strong quarter last year. In addition, our beverage business was up 7 percent and our foodservice business was up 10 percent. Both the traditional, portion-control and school businesses were up in foodservice. We are no longer on allocation to schools for Uncrustables and are now experiencing continued growth in that channel.

We are particularly pleased with the Crisco results. The oil category has been competitive over the last year with very aggressive pricing but we've learned some lessons. First of all, we continue to believe that our fundamental strategy is sound. We have reached out to our consumers with new and innovative products and have better aligned our marketing dollars across the year. Second, we are better managing our price spread. Last year, soybean oil prices reached a 30-year high. At those record levels, it was difficult to pass through these costs. As soybean oil prices have fallen, we have been able to reduce our price and achieve better key price points.

In summary for the brand, we continue to innovate and develop new products. (technical difficulty) -- in a more coordinated effort and we have weathered a very difficult pricing period. We are confident in the profitable growth opportunities for Crisco and believe that our fundamentals are on track.

As we continue to aggressively implement on our branded strategy, we are focused on exiting non-strategic businesses and improving our cost structure. During this quarter, we announced the sale of our U.S. industrial businesses, which are not branded. We also entered into an agreement to sell the Multifoods U.S. service and bakery products businesses. As part of our ongoing supply chain initiatives, we announced plans to close our Salinas, California plant and restructure our distribution operation. While these have been difficult decisions, they are important in positioning the Company for future growth.

In conclusion, we had a strong quarter. Financial results look solid, the integration is moving ahead quickly, we continue to see positive results from all our brands, and are executing on our strategy.

I would now like to turn the call back to Mark to have him walk through the financials with you.

Thank you, Richard.

Company sales for the quarter were 550 million, up 60 percent compared to last year. Excluding the contribution from Multifoods and the industrial business area, which is being invested, sales for the quarter increased 7 percent.

On a GAAP basis, income from continuing operations was up 14 percent. GAAP earnings per share include restructuring charges and merger integration costs that were detailed in our earnings release. Earnings per share were 60 cents this year versus 62 cents last year. Excluding these charges, income from continuing operations increased 25 percent with a corresponding increase in earnings per share of 8 percent. Earnings per share were 70 cents compared to 65 cents last year.

GAAP operating income increased 21 percent, while our operating margin for the quarter was 10.9 percent compared to 14.4 percent last year. As expected, gross margin for the quarter declined due to the addition of the lower-margin Multifoods businesses, higher raw material costs, and the Scottsville start-up. Over time, with our integration activity and the resulting synergies, we would expect margins to improve. Excluding restructuring, merger and integration costs and the Scottsville start-up, operating margin was 13.5 percent compared to 15.1 percent last year.

SG&A as a percent of sales declined from 21.8 percent to 19.3 percent. This marks the second consecutive quarter where SG&A has decreased by at least 150 basis points, reflecting the benefit of adding the Multifoods business to our existing infrastructure. This decrease occurred despite an increase in marketing expenses of over 30 percent. Approximately one-half of the acquired Canadian Multifoods operation are industrial and foodservice, which do not require significant marketing spending. Therefore, the overall increase in marketing expense is less than the sales -- (technical difficulty).

Interest expense increased due to the additional debt outstanding resulting from the acquisition, and the Company's third-quarter tax rate decreased to 36 percent, reflecting a year-to-date adjustment of income tax to the projected rate for the year of 36.4 percent.

Now, let us take a look at the results of the quarter by our 2 business segments. First, sales in our U.S. retail segment were $381 million, up 50 percent compared to last year, with Multifoods contributing 111 million. Excluding the Multifoods brand, the retail business was up approximately 6 percent. In the consumer business area, sales were up 21 percent for the quarter, driven by the addition of Hungry Jack, growth in the Smuckers and Jif brands, and continued growth of Uncrustables. In the consumer oils and baking area, sales more than doubled due to the addition of Pillsbury, Martha White and Pet brands and in our oils business, Crisco sales were up 6 percent compared to last year.

Special market sales were 169 million, nearly doubling last year. The addition of Multifoods, primarily in Canada, contributed 77 million to the segment's overall growth. All business areas were up except industrial and excluding the industrial business and the contribution from Multifoods, special markets increased 10 percent in the quarter.

Last quarter, we announced an authorization by the Board to repurchase up to 1 million shares. During the quarter, the Company acquired over 350,000 shares through a combination of the voluntary odd-lot program and open market purchases. As a result of the odd-lot program, we were able to reduce our shareholder base by approximately 15 percent.

Now I want to comment on some of the financial impacts of our strategic announcements. First, we previously announced our intent to sell the Multifoods U.S. foodservice business. The results were included in discontinued operations. The sale is expected to close this month and there is no anticipated gain or loss.

Second, after the sales of the industrial businesses, we will continue to co-pack certain products into next fiscal year. The results of this co-packing arrangement will remain in continuing operations. The net impact of the sale on fiscal 2005 results are not expected to be material, as the loss of operating income is expected to be mostly offset by a gain on the divestiture.

Finally, with the announcement of the additional supply chain initiatives, restructuring costs for the year will approximate 10 to $12 million, an increase from our prior estimate of 6.5 million.

I would now like to turn the call over to Tim.

Thank you, Mark, and good morning, everyone. I will say upfront that I have heard -- we checked this sound system and it was good in the beginning. Sometimes it's going in and out, so if I don't come through clearly, Richard will take over.

As Richard mentioned, we had another solid quarter. Our base Smucker business continued its strong performance and the Multifoods businesses added to that. We appreciate the efforts of all of our employees in integrating these businesses and executing on our many initiatives while maintaining their focus on the continuing improvement of the base business.

I would like to spend a few minutes updating you on the current status of our Uncrustables plant in Kentucky. The most important point is that demand for Uncrustables continues to be strong and we remain very excited about the growth platform that that product offers in both the retail and the school channels. Production improvements have allowed us to fully supply our customers. We are now expanding our schools' customer base, including selling for the next school year. Through the first 9 months, sales of Uncrustables across all channels were 45 million, a 22 percent increase over last year. We continue to make progress, and we expect to have sufficient supply to meet our future forecasted demand.

Last quarter, we estimated that we would incur approximately $10 million in additional costs over the last 6 months of the fiscal year, and that continues to be our forecast. We expect to continue to make good progress in improving production. We are on track for the plant to reach profitability during the fourth quarter of next fiscal year. Based on our progress, we look forward to introducing new products early in calendar year 2006. So while we expect the plant to become profitable on a production basis by the end of next fiscal year, the Uncrustables' product line profitability will depend on a number of new products and the corresponding marketing spend. The most important factor is that the product is doing extremely well in the marketplace and continues to achieve high consumer acceptance. So naturally, we're very enthusiastic about our Uncrustables platform.

Now, looking at our fiscal year, the remainder of fiscal year 2005 outlook, since our original announcement in June 2004 regarding our 2005 outlook, we continue to experience increases commodity, energy, packaging and employee benefit costs. The start-up at the Kentucky plant has also carried a significant earnings impact. However, despite these many variables and on the strength of our brands, we remain committed to increasing our 2005 earnings per share from continuing operations by our stated long-term annualized growth goal of 8 percent. As you recall, our original base 2004 earnings per share from continuing operations was $2.36 cents. Due to our divestiture activity and the restatement of our continuing operations, the current base 2004 earnings per share has increased to $2.40. This equates to a growth rate for 2005 of approximately 23 percent on earnings from continuing operations. An increase in 8 million shares issued as part of the Multifoods acquisition accounts for the difference in the growth rates.

So, in closing, let me summarize some key points. First, we are pleased with our non-GAAP earnings of 70 cents this year -- this quarter, excuse me. Our base business, excluding industrial, grew 7 percent over strong comparables last year, and the acquired brands performed well. Second, while the Kentucky plant costs were significant for the quarter with an impact of 7 cents earnings per share, we are now filling all customer orders, continuing to achieve good progress and expect to be able to supply future demand. Third, the integration of Multifoods is on track, and we remain comfortable with our synergy projections. Fourth, we remain focused on our strategy. Finally, we remain committed to our 2005 guidance, recognizing that we take a long-term view of running the business and growing our brands productively, resulting in proven returns for our shareholders.

We are on track for another year of record results. We appreciate the dedicated support of all of our employees. Their efforts will enable us to continue to enhance our performance in the years to come. We thank you for your time today and now we are happy to answer any of your questions.

Thank you, gentlemen. The question-and-answer session will begin at this time. (OPERATOR INSTRUCTIONS). John Mcmillin with Prudential.

Good morning, everybody. Tim, I could hear you fine! The only concern -- I mean, this is basically an in-line quarter but you have a -- you're kind of a victim of your past success. You have a history of positive surprises, particularly when integrating your first or -- Jif/Crisco. Now that you've kind of integrated Multifoods, you've kind of done in-line numbers and now you've got a lower tax rate. First of all, can you kind of go through why this lower tax rate suddenly appeared and why you just didn't kind of go into the -- pull a rabbit out of your hat to kind of do the numbers?

This is Richard. Let me comment first upon your comment about getting closer to the numbers. When we bought Jif and Crisco a couple of years ago, that was a doubling of our business basically, and we were cautious and not knowing how well we would integrate. We've done a pretty good job of integrating, and we know the businesses much better now, so I think that's why we are much closer to your projections, the Street's projections than we were historically. I think that's probably going to continue in the future, just the experience we now have. Then I will let Mark answer the question about taxes.

John, in terms of the tax, let me just explain what we did. At the end of our third quarter, we filed our prior-year tax return, our federal returns are in January. So with that, we've had a good opportunity to see that return and what impact it has on our projected rate for the year. So typically, in the third quarter, what happened, when there is an adjustment, we have a 9-month adjustment to date to get that rate up to what we think our year-end is going to be. So while it was a 100 basis point adjustment for the quarter, when you look at it for the full year, it's only expected to be a 20 basis point adjustment. So it's a 9-month catch-up in the quarter.

Could you just -- again, if you went over this earlier, I'm sorry. I was running doing Campbell's Soup. But just this (indiscernible) seems totally in-line with expectations. Is this just a case of higher costs, a little bit of margin squeeze? Can you take some pricing or are you taking some pricing to offset it?

John, this is Vince. We are seriously looking at our pricing structure and the costs and nothing to announce today, but we are seriously looking at it, as most consumer packaged goods companies have done today. As you know, we are all experiencing similar cost increases.

John, in the bakery business and the Crisco business, we've had commodity costs decline more than enough to offset costs like energy and resin in that business. So we've been able to factor that into our price declines.

Okay, so basically Crisco is fine. It's just the other businesses where you might need some pricing relief?

That's correct. That's a good summary.

Okay. We'll see you in a couple of days.

George Askew with Legg Mason.

Good morning. On the Uncrustables plant, really 2 things -- you say in the press release that we've got adequate capacity, or we believe we will have adequate capacity to achieve our growth objectives. Have those growth objectives changed over the last 9 months?

This is Paul Wagstaff. The answer to that question is no. Really, our growth objectives have stayed the same. We are confident we're going to be able to hit those growth objectives that we have looking out in the future.

Even as you postpone some of the new product activity?

Yes.

I have seen TV ads for Uncrustables running here in the last few weeks. That's obviously a very bullish thing. It tells me that you're in demand-creation mode. Can you give us a sense of -- have you been operating at a higher level of throughput at the plant in Kentucky for 6 or 8 weeks, and that's why you have confidence that you able to go out and run ads and you are off allocation for schools and what not? Can you give us a little bit of quantitative information around the plant in Kentucky to give us confidence that there are no more problems?

George, this is Fred. I think the best way to answer that question is, as Tim noted, we basically now are fully meeting all of the demand, which is both the retail side and the school side. We got to that position roughly in December. So looking forward and based upon the progress that we've made to date and the continued anticipation of further progress, we are comfortable, as we said, that we will be able to meet the future demands.

George, I would add that, as you know, we've not shorted to any retail customers all year. The advertising you are seeing was our normal support plan that we had in place -- and because the business is still growing significantly and we want to continue to support it.

Also, Tim mentioned -- just to add a little bit more to that, Tim mentioned that we expect the plant in the fourth quarter of next fiscal year to be up to our full production capacity, but it's not there yet, and that's why we have that scheduled out by the end of next fiscal year.

I got you okay. I actually kind of blistered my notes here. It's actually about a quarter before that that you will introduce new products, is that right? The end of this year? Did I hear that correctly?

George, this is Mark. We said they would be the beginning of calendar year 2006. That would be correct.

So a year from now. Is that -- will cheese being reintroduced be considered a new product, or should we expect something other than that?

I think it will be a combination of -- we're going to have some new varieties that we're going to consider and test. Grilled cheese, because of the number of issues we've experienced, has not done as well as we would like, but I think it's too early to tell whether it's a success or not. We still remain encouraged. The numbers where we've supported have been very good, so certainly we are strongly considering resupporting it and relaunching it.

Okay, good. Then on Crisco, just to confirm, the price decrease, as I recall in January, was going to be about 6 percent. Is that still the right number to think about?

Yes, that is correct.

Christina Mcglone with Deutsche Bank.

Thank you, good morning. I'm following on George's question with respect to the price decrease for Crisco. It's still early but are you seeing sort of a volume bump from that, or is it just pretty much aligning your pricing with private label?

Well, I think it is doing that, and that is helping our volume. We did see not just the dollar increase for the quarter but we saw shipments' volume increase for the quarter modestly. So we're seeing improvements in both -- both.

Okay. I guess, Tim, just to go back to your comment about Uncrustables, so the plant is profitable in the fourth quarter '06, new products are going to be introduced in early calendar year '06. Were you kind of implying that profitability for the actual Uncrustables brand would be later than fourth quarter '06 because of these new product introductions?

Yes, I think that is the idea. Clearly, the plant will be probable but as we introduce new products, depending upon how many there are and what kind of margin you spend and how many markets they go into, that will have an impact because that's an investment in the market. But clearly, if the brand or the product is profitable in the next -- the last part of next year, that's going to be great news for us.

Okay. Then last question -- (multiple speakers).

(Multiple Speakers) -- expected to be.

It is expected to be late fiscal '06?

The plant.

The plant, okay. Last question -- Mark, do you know what D&A was in the quarter and do you have guidance for the year?

We are still sticking to approximately $60 million for the year. We will release the quarter along with our segment information later with the Q. We are just booking the valuation for the Multifoods asset that was done, so we will take a look at that and probably update that here in the near term.

Okay, because that 60 million seems a little high versus what it's been running at. Okay, thank you. See you next week.

Mark Chekanow with Sidoti.

Let's talk a little about the peanut butter category. I would imagine that the natural -- your natural products are slowly (ph) driving the growth in Jif maybe coming off a hot period here. Now, you've done some things with Crisco for new products and innovations; you've done some things on the sugar-free jams. Is there anything in the pipeline for new innovation on the Jif brand?

Absolutely. We have, in fact, introduced a couple of new products this year in both Jif and in the Smucker brand. We have a honey-sweetened product in both of those. We did baking sticks this past baking season, and there are others that I'm not necessarily in a position to talk to, but the pipeline is full.

Let me just comment. The peanut butter business is in pretty good shape, ship, though. Again, we continue to say that you only see a certain percentage of the business in that syndicated data information, and even though it was up about 5 percent for the quarter and coming off a tough comparison -- because last year we had taken a price decrease and our volume was up 7 percent last year for this quarter. So overall I think we're very pleased with the business.

When we look out into next year once all of these divestitures are through, can you kind of give us a rough split, retail versus special market, just maybe kind of a 70/30 or is it going to be different than that in one direction or the other?

I think 70/30, Mark, is probably roughly a good estimate.

Ann Gurkin with Davenport has the next question.

Hello. If we look out into fiscal '06, I wonder if you'd comment on how much of your sales growth will come from new product introductions.

Long-term, our goal is 1 percent a year of our growth is from new products; that's our strategic guideline. We've actually done a little bit better on that historically. We've done between 1.5 and 2 percent. But we have a 1 percent goal.

Then I was wondering if you could talk about, with the changes in your plants, kind of your capacity utilization in your various plants and businesses, where there is too much capacity or not enough, given recent changes.

Well, what we've done is our whole supply-chain initiative is to bring that in balance. As we've noted, we are aggressively pursuing that and over the last -- (technical difficulty) -- years, we've announced 4 plant closings and consolidated those productions into existing plants. So we are aggressively making sure that there's a right balance there and are going to continue to do that.

So you are pretty far along in that plan, would you say or -- (Multiple Speakers)?

Well, we are far along in the sense that we've -- from our existing plants, but we still have a ways to go. When we bought Multifoods, we inherited about 40 co-packing operations. You know, there's an opportunity there.

We announced, as you know, the Salinas plant closing at the end of this calendar year. So, we will be transferring the volume from that facility to our Orville and Memphis facilities. We are also working on what we call our Smucker Quality Management Systems, and that's also helping the throughput of those facilities. So we're not concerned about capacity.

All right, that's great! See you next week.

Chuck Cerankosky with key/McDonald.

Good morning. Can you hear me? Okay, that was my end. Could you get into some of the Multifoods' brands or product lines a little bit and give us perhaps some color on how they did during the quarter and how you see them developing from this point, now that they are getting more focus?

This is Steve Oakland. I can speak to the baking brands. We have a number of initiatives. First of all, we really inherited similar to what happened when we acquired Jif and Crisco. We inherited a plan for "Fall Bake", so our team got out, got that executed. Where you will see the new activity will really start at Easter, where we've been able to put plans to leverage Crisco and leverage a baking aisle presence. The combination of these brands and the Crisco brands make us if not the largest one of the largest manufacturers in the baking aisle, so t gives us a chance to do different consumer events, gives us a chance to do different merchandising events, and that process is ongoing.

We've introduced some new items, all in the Dessert Kits, which were successful for the quarter. They are in a small percent of the country, so we would like to expand on that if we can. Whipped frosting was a great pipeline item that was in the pipeline. We got that in; that was a great item. So, I think there's new items in the future but mostly, it's merchandising between the brands and leveraging that strength.

Also, (indiscernible) our big part of the business was the Canadian business that we acquired from Multifoods. Mark would comment on that. Mark, do you want to comment on Bick's and Robin Hood? Oh, we lost Mark. Mark Smucker? Well, it sounds like we lost Mark out of Canada.

Hello?

Can you give us a little update on Robin Hood and Bick's?

Yes. Most notably of the 2 brands that we did pick up in Canada were Robin Hood flour and Bick's pickles. Bick's -- both of which have over a 40 share of market, so those are clearly Icon -- Canadian Icon brands. We're very pleased with the performance of both of those brands. We have -- under the Robin Hood brand name, there are other items as well, notably some baking mixes. But we have a new product, which is Robin Hood pancakes, both -- a couple of different fruit flavors, so we've been very pleased with the performance of the new brands here in Canada.

Chuck --

That's helpful. Thank you very much!

(OPERATOR INSTRUCTIONS). Bob Simonson with William Blair.

Mark, you said that the D&A might be 60 million this year. Do you have an estimate for next year, as well as just an update on your CapEx expectation for this year and next?

We don't have a D&A estimate yet this year, Bob. As I said, with the valuation adjustment (indiscernible) we will provide that in the near term.

In terms of CapEx, the CapEx estimate that's out there today we would continue. Next year though, we would expect to see a slight decline. This year and of course last year, the expenditures on the Uncrustables facility in Kentucky drove a lot of that spending, but we would expect that to decline and really decline going forward as well.

The use of -- as you get into next year, you're going to be again generating some significant free cash flow. Kind of what's your priorities in terms of either paying down the debt or increasing the dividend or share buybacks? I know a lot of that -- much of that is decisions of the Board, but just if you could -- where the emphasis might be?

Sure. When we look at the cash, acquisition will always be if not the top one of the top uses of our cash, going forward, as it is a good portion of our growth. The other component that you mentioned that we will also consider -- next year, we will look at opportunities to lower our debt. We will have a paydown of 17 million against our long-term debt. We continue to look at our dividend; we typically look at that in the next couple of months, and then, as we mentioned earlier, CapEx is also a key use. Then of course, we do have some remaining shares on our authorization for stock buyback, so if it's appropriate, we would also consider that.

How many are left on that now?

Roughly 650,000.

Okay, thank you.

At this time, it appears there are no further questions. Gentlemen, I will now turn the conference back to you to conclude.

Thank you very much for all of you participating today and your interest -- always, and we look forward to seeing you next week. Have a great day!