J M Smucker Co (SJM) 2007 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J.M. Smucker Company's fourth-quarter 2007 earnings conference call.

At this time, I would like to inform you that this conference is being recorded and that 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 Mark Belgya. Please go ahead, sir.

Good morning, everyone, and welcome to the J.M. Smucker Company's fourth-quarter 2007 earnings conference call. I am the Company's Chief Financial Officer, and thank you for joining us. Also on the call from the Company are Tim Smucker, Chairman and Co-CEO, Richard Smucker, President and Co-CEO, Vince Byrd, Senior Vice President for Consumer Markets, Steven Oakland, Vice President and General Manager of our Consumer Oils and Baking Business, Mark Smucker, Vice President-International, and Paul Smucker Wagstaff, Vice President of Foodservice and Beverage Markets.

After this brief introduction, I will turn the call over to Tim for opening comments and a recap of the year. I will then review the financial results for the quarter and Richard will provide commentary on our outlook and closing remarks. 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. A replay is available on the Web site in downloadable MP3 format. If you have any follow-up questions or comments after today's call, please feel free to contact 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 discussion on non-GAAP information is also detailed in our press release.

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

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

I would like to begin by summarizing key highlights for the year. First, the financial results of our fourth quarter show sales up 8%, and record earnings per share up 21%, a strong finish to the year achieved despite a challenging cost environment. Second, we grew or maintained market share across all of our major brands -- Smucker's, Jif, Crisco, and Pillsbury. Third, we continued our emphasis on developing innovative new products that provide consumers with new choices that are easy for you, good and good for you, and that make you smile, as stated in our strategic new products architecture. Finally, we continued to refine our portfolio, divesting businesses that did not fit strategically and completing three acquisitions that complement our core business and expand our overall presence in the baking aisle, both in the U.S. and Canada.

As we look at the year's performance, it really comes down to successfully implementing our strategy, which as you have heard before is to own leading brands sold in the center of the store with an emphasis on North America. Most importantly, we maintain a strong focus on the consumer, monitoring and responding to their ever-changing needs and practices. That has always been the key to our ability to grow and nurture our brands. Many of our brands realized share of market and sales gains for the year as a result of consistent, creative marketing efforts.

Let me highlights a few examples. This past year, we introduced our first joint Smucker's and Jif television commercial celebrating the great American peanut butter and jelly sandwich, generating positive consumer results with a key back-to-basic period -- back-to-school period. Our in-store merchandising featuring the iconic Pillsbury Dough Boy proved popular with our retailers and consumers, drawing attention to our Pillsbury brand and the baking mix category. We expanded our multi-brand event in the fall, resulting in a successful fall bake in both the U.S. and Canada. Finally, we emphasized the power of family meals in many of our promotions and will continue to build on that theme in 2008. As illustrated in Miriam Weinstein's book, "The Surprising Power of Family Meals", research shows that families who eat together are stronger, smarter, healthier and happier. We feel privileged that people invite our brands into their homes and lives every day, making us a part of that important ritual, the family meal.

Shifting to the acquisition component of our strategy, we added the White Lily and Five Roses baking brands during the year. These two acquisitions, although modest in size, add complementary brands with leading baking positions in their regional markets in the U.S. and Canada, respectively.

We continued our momentum, completing the acquisition of Eagle Family Foods, the third-largest acquisition in the Company's history, on May 1. These three transactions add approximately $250 million in annual sales and strengthen our position in the baking aisle.

While adding complementary brands, we also divested businesses that did not fit strategically. We sold our Canadian non-branded businesses last fall and just two weeks ago completed the sale of our industrial ingredients business in Scotland. These two transactions complete a series of divestitures we began several years ago as we focused on our North American branded business. In addition, we exited certain less-profitable customers to concentrate on the higher-margin growth. With these moves, we are able to focus our resources on the core businesses and customers.

In addition to acquisitions, new products continue to play a key role in our growth. This past year, we introduced over 40 new products and expanded distribution on others. In particular, we added a number of new products that are good and good for you. This includes the introduction of Pillsbury reduced-sugar cake mixes and frostings and additional varieties of Smucker's sugar-free fruit spreads and toppings. We also expanded our offerings of Smucker's organic fruit spreads and the R.W. Knudsen Family juices and introduced healthier baking items such as Martha White whole-grain muffin mixes and Robin Hood [Nutra Flour] blend, up better-for-you baking flour that earned a nomination at the Canadian Grand Prix New Products Awards.

Perhaps most notable was the reformulation of Crisco shortening to contain 0 g trans-fat-free per serving. We believe these innovations reflect our ability to respond to many consumers' growing interest in eating healthier. This clear strategy and a strong focus on implementation enabled us to produce record earnings for the year. Our sales, excluding divested businesses, were up 5% with every business up over the prior year. On a non-GAAP basis, earnings per share grew 9% to $2.89 from our 2006 base earnings per share of $2.65, despite raw material cost increases for the year of approximately $30 million.

We also realized a record year in terms of cash generated from operations, which provided the financial resources to continue to implement our strategy of gaining market share, introducing new products, and making complementary acquisitions.

With a strong finish to 2007, we have good momentum going into the new year. Costs continue to be a challenge, but our fundamentals are strong and we are excited about the many opportunities we have to grow our brands.

It is important to recognize our employees. They are responsible for our record results. That are committed to our basic beliefs and to each other, creating a culture of doing the right things and doing things right. This ensures our ability to provide the quality food products we are proud to stand behind. We believe that each of our employees can and do make a difference.

I would like now to turn over the call back to Mark to have him review the financial results.

Thank you, Tim.

Sales were up 8% for the quarter, excluding divested businesses, as defined in our release. Growth was led by volume and pricing gains in our Smucker's, Jif and Pillsbury brands, a strong performance in foodservice, and the contribution of the recently acquired Five Roses and White Lily brands. Peanut butter had a particularly strong quarter as a temporary interruption of supply in the market added to demand.

GAAP earnings per share were $0.75 this quarter and $0.62 in the fourth quarter of last year, including restructuring and merger and integration costs detailed in our press release. Excluding these charges in both years, earnings per share were $0.75 this quarter and $0.68 in last year's quarter, a 10% increase. Excluding a $0.06, non-recurring tax benefit last year, earnings per share were $0.62, resulting in a 21% increase this quarter.

Operating margin for the quarter, excluding non-recurring charges, increased from 11.6% to 14.3%. Operating margin for the year, excluding charges, improved 60 basis points to 12.5%. The margin improvement over last year was primarily due to the divestiture of the lower-margin Canadian business, a favorable product mix, and the effect of price increases. These improvements were partially offset by higher raw material cost.

SG&A costs were up slightly as a percent of sales due to increased administrative overhead and higher selling expenses, which more than offset lower distribution expenses, which were down for the quarter and the year.

Sales in our U.S. retail segment were $366 million in the fourth quarter, up 8% compared to last year. Sales in the consumer business area were up 12%, and sales in the oils and baking business were up 2%. But excluding industrial oils, it was up 5%. Increases in peanut butter, fruit spreads, toppings, and Uncrustables led the consumer area growth, while gains in baking mixes and frostings and the contribution of White Lily offset declines in oil sales. For the year, sales in the U.S. retail market segment increased 4%. Sales in the consumer business area were up 7%, and sales in oils and baking were up 3%, excluding a $15 million decrease in the sale of industrial oils.

Sales of Uncrustables across all channels increased 20% for the quarter and 24% for the year, both ahead of our expectations. As we look toward 2008, we expect Uncrustables to continue to increase, although we do anticipate a somewhat slower rate of growth. The overall Uncrustables venture was profitable in the fourth quarter as a result of continued progress at our Scottsville facility and the impact of price increases.

In the Special Market segment, sales were $128 million for the quarter, up 6%, excluding divested businesses. The foodservice business area was up 21% with gains in both traditional and schools channels, and up 13% for the year. Canada was down slightly in the quarter but up 5% for the year, driven primarily by the addition of the Five Roses flour bread.

Sales in the beverage and international areas were down 1 and 3% in the quarter, both as a result of timing, but up 11% and 14% respectively for the year. Full-year sales in the Special Market segment increased 9%, excluding divesting businesses, as all business areas recorded sales growth.

Cash from operations reached a record level in 2007 at over $273 million, an increase of 38%. This reflected the increase in net income and certain non-cash items of depreciation and amortization and a collection of trade receivables related to the divested Canadian business. We also benefited from the use of tax loss carryforwards obtained as part of the Multifoods acquisition. This yielded free cash flow after dividends of approximately $153 million.

EBITDA was 335 million, or 15.6% of net sales, this year, compared to 305 million or 14.2% in 2006.

During the quarter, no additional shares were repurchased. For the year, we repurchased 1.067 million shares. This leaves approximately 1.7 million shares remaining available under the Board's authorization. We will continue to evaluate future actions against the authorization as appropriate.

I will conclude my remarks with an update on our recent financing. On May 31, we issued $400 million in senior notes at a favorable rate of 5.55% due April 1, 2022. These notes include scheduled prepayments beginning in 2013. A portion of the proceeds was used to repay short-term debt under a revolving credit facility which financed the acquisition of Eagle Family Foods. The remainder will be used to finance other strategic and long-term business initiatives as needed.

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

Thank you, Mark, and good morning, everyone.

As Tim mentioned, we had a very good year, in fact another record year, and have strong momentum going into fiscal 2008. We are excited about the addition of Eagle Brand to our portfolio and look forward to the opportunities across all of our brands.

Before I comment on 2008, I would like to provide an update on our Eagle integration. Everything is progressing as planned. The first key milestone is to integrate the customer-related activities into our existing infrastructure by August 1. This will allow the Eagle products to be ordered, shipped and invoiced alongside our other products in time for this year's Fall Bake. We are also integrating Eagle into our Fall Bake promotional plans as much as possible. We expect to have most of the integration complete by the end of the calendar year.

Since we announced the acquisition, milk costs have continued to increase significantly over the past few months. In response, we announced a price increase effective in July. We remain confident in our expectations and are excited about the opportunities for profitable growth in the Eagle business.

Let me now turn to our outlook for 2008. We remain committed to our long-term strategic objective of topline growth of 8% per year and earnings at 8% or greater. One-half of this topline growth will come from increased share of market and the introduction of new products, the other half from acquisitions.

It is important to note that we have exceeded both of these targets for the most recent five-year period as sales and EPS have achieved compounded average growth rates of 27% and 16%, respectively.

Based on our current views, we estimate raw material costs, primarily soybean oil, peanuts, milk, corn sweetener and wheat, along with certain energy-related costs, will increase significantly over 2007 levels. Despite these higher costs, we expect earnings per share to grow in line with our long-term growth objective and sales increasing at a slightly greater rate, reflecting the Eagle acquisition.

We expect to continue to generate strong cash flows. Key components affecting this year's cash flow include capital expenditures of approximately $75 million to $80 million, dividends of 68 million based on our current rates, payment of $33 million in debt maturing in September of this year, depreciation and amortization, including amortization of share-based compensation of approximately 75 million, and finally, restructuring and merger and integration costs of approximately 12 million.

In light of the acquisition of Eagle foods and the enhanced demand for peanut butter during the fourth quarter, we felt it would be helpful to provide a general sense of how these items might impact financial results across the quarters in fiscal 2008. Last year, 41% of Eagle's sales occurred in the months of October, November and December, which correspond to our second and third quarters. We would expect those trends to continue. Further, we would not expect our peanut butter sales in the fourth quarter of 2008 to repeat the levels experienced this past year. Our expectation is that demand for peanut butter is likely to remain higher than normal through most of the first quarter. Longer-term, it will be up to the consumer to ultimately decide.

In summary, we understand the nature of commodity cost. While we will deal, near term, with these cost impacts, we will continue to manage for the long term and are confident that our investments in our brands and the initiatives to improve our costs will continue to provide long-term, profitable growth. Our strong result in 2007 confirms our brand-building strategy and provides momentum for 2008. We remain focused on the principles that are instrumental to our success and look forward to the future.

We thank you for your time. Now, we will be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Farha Aslam, Stephens, Inc.

Congratulations on a great year.

One general question -- as we face such a tough commodity environment, could you share with us, when you put through your price increases, how retailers and customers are reacting to the price increases, and in particular how you feel the consumer is able to withstand the inflation in food overall?

This is Vince, and Steve can respond as well, but as you know, we are not the only company taking increases to the trade after a very long period of virtually no inflation and quite frankly they're being accepted pretty readily.

How do you think the consumer is reacting to these? Do you think there is a trade-down or do you think they are sticking with their normal buying pattern and maybe trimming back in other areas?

I think it depends upon the category, but also I think, if you look from the [shipment] to foodservice to maybe going back to eating at home, that tends to benefit most of our categories.

Have you seen the sort of shift of more consumers going back and eating at home away from foodservice?

Yes. This is Paul Wagstaff, and we have seen that. However, in the foodservice area, some of the growth areas we are seeing are in the healthcare, elder care, retirement areas, and our products do very well in that category, and that continues to grow.

Great, thank you. I will pass it on.

(OPERATOR INSTRUCTIONS). Eric Serotta, Merrill Lynch.

I'm just wondering whether you could provide a little bit more detail or quantification as to how much the competitor dislocation in the peanut butter market added to sales or margin in the fourth quarter.

Eric, this is Vince. Clearly, we did benefit in the fourth quarter by the disruption. Let me just say, though, upfront that we did not have the capacity in our supply chain to fill that entire void. As you know, as Richard mentioned in his comments, we continue to see that in the first quarter. In terms of a specific number, it's difficult but we would say in the range of $10 million to $15 million of sales, incremental sales in the fourth quarter.

Okay. How much was the peanut butter business up in terms of year-over-year percent sales increase?

On the year, we were up about 7%, but we still would have been up probably 5% without the disruption.

Okay. Then move to your 2000 and fiscal '08 guidance, I'm just wondering whether you could break that out a little bit. In terms of the 8%, how much you are expecting from base business growth in fiscal 2008 versus acquisition contribution? If I remember correctly, the Eagle was only expected to be modestly accretive in fiscal '08, significantly accretive in fiscal '09. I'm wondering. Are you looking for a greater than 4% earnings growth from the base business in fiscal '08?

Eric, this is Mark. Yes. As we have stated, we expect organic growth to generate 4% acquisition, and of the 8, the majority of that is still coming from grown in [OR], our organic or base business, with three acquisitions we mentioned contributing but the base business being the largest portion.

In fiscal 2008?

That's correct.

Great, I will pass it on. Thanks.

(OPERATOR INSTRUCTIONS). Ann Gurkin, Davenport.

I wonder if I could spend a little time on commodity costs. Have you hedged all your wheat needs for '08?

Hello Ann, Steve Oakland. Given the fact that our retailers require us -- at least the larger ones -- to give them pricing for Fall Bake prior to now, obviously we look at that market and when we make those commitments in price, we cover them.

So the answer is yes?

Again, that would be yes.

Would have you included in your outlook for commodity costs for sweetener prices?

Well, we have -- we are on a contract, and our sweetener costs did go up significantly, effective with our new fiscal year. That drove our price increase that we announced on fruit spreads at the end of last fiscal year that was effective in May.

So are you forecasting another double-digit increase, or experiencing another double-digit increase in sweetener prices?

Yes, we were (inaudible).

Okay. Then can you comment on how is the Fall Bake season looking? Have you executed a sell-in for that segment?

Yes, I think the merchandising plans for those look very good. They are on track. We're trying to add as much Eagle to that as we can. Eagle had a nice plan of their own. We're trying to see where we can benefit from leveraging the two together, but those plans are on track. I think the commodity costs are starting to -- it's starting to be clear where those price points are going to be for this fall. They are up, but they are up in all commodities with all competitors.

Okay. Then the 200 million in cash on your balance sheet, can you comment on that?

Sure, Ann, this is market. Look, as you know, we closed our acquisition on May 1. That was a $250 million that we paid in cash, so I guess, in essence, used that up, and then brought on the $400 million at the end of May.

Okay, that's great; that helps. That's great. Okay, thank you.

Christina McGlone, Deutsche Bank.

The commodity cost increase of 30 million -- that had -- I guess that had been bumped up from your 20 million estimate last quarter. Is that right, Mark?

Yes, that's probably right.

Was it a function of just some things not hedging or -- because it's a lot to swing in one quarter.

30 million was for the year. In our script you mean? Is that what you are talking about?

Yes. I thought that the estimate -- when you had the conference call in mid-February, I thought your estimate for the year was 20 million. Then it came in at 30 million.

It was a little bit -- I think, just to clarify a little bit, Christina, I think the 20 million back then was a little more just raw material. The 30 million, although it was primarily raw materials, there were some costs like energy fuel that we kind of aggregated into that 30. So it wasn't just (multiple speakers) raw material that went up from 20 million to 30 million. Soybean oil and some of the costs we have seen increase (multiple speakers).

Yes, in the last 12 weeks, we've seen significant increases in wheat and soybean oil, particularly wheat and soybean.

Okay. Then in terms of CapEx, that looked like it came in lighter than you had originally guided. Then I guess the expectation for '08 is a little bit higher than I had thought. Do you have some shifting of projects from '07 to '08?

It's just a little bit more of just the timing, no real significance. It's probably just where they are in the process. That really is the reason that you're seeing the $75 million to $80 million is some of the '07 projects are sliding in.

Okay. Just to go back to confirm what you had said to Eric's question, so '08, you're thinking about 8% EPS growth because the bulk of it is coming from the core business; that's the three acquisitions that you made, even though Eagle Foods is really not going to contribute to the bottom-line much until '09? So you're thinking about 8% EPS growth for next year?

We always look at -- you know, we try not to give annual guidance; we try to give long-term guidance. Our growth rate, over the long-term, is 8%. So we shoot for that and we hope to hit that every year, but that's our long-term growth objective. As you know, in recent years, we've been able to do a little better than that. But our long-term growth objective is 8%.

Okay. Then I guess last question, for Paul, the beverages was down in the quarter and I think, Mark, you said it was due to timing. But I remember you had commented that there were shortages in organic supply, fruits supply. Is that limiting you at all or it was purely a timing issue?

Christina, this is Paul, and yes, it was just a timing issue. We were not hindered by the fact that we couldn't get raw materials. We were able to supply or get all the raw materials we needed.

You continue to see that -- it's not going to be a problem in securing that supply but just be priced higher?

I think the answer to that is that costs will continue to probably increase on some of the organic fruit that we're looking for, and there is the possibility that some of those varieties we could have the challenge of getting in FY '08 but right now, things looks pretty good.

Okay. Actually ,one more for Vince -- how much did you increase fruit spreads pricing effective May?

4%.

Okay, thank you.

Eric Serotta.

I'm just wondering where marketing expense came in for the year. I know that, earlier in the year, in response to the higher commodity costs, you talked about a little bit of tactical pullback in premier marketing expense. I'm just wondering where it came out on the year and what your outlook is for next year.

Eric, this is Mark. As we had said earlier in the fiscal, we have trimmed back marketing. It finished down slightly. For that reason, as we look into next year, we will look to reinvest behind not only our existing brands but of course with Eagle. So we should see in increase in marketing in '08. But we were down just slightly in '07.

Okay. Would that be overall -- when you refer to marketing, are you referring to consumer advertising in particular, or advertising and consumer promotion?

It would be all of those activities. It could be advertising; it could be consumer promotions; it could be other forms of activity. But as [Paul had] stated, because of the peanut butter demand, we did have to pull some support in the fourth quarter.

Okay, great. Thanks a lot.

There are no further questions at this time. I will turn it back over to our speaker panel for any additional or closing comments.

We thank you very much for the call and we appreciate your support.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by dialing 888-203-1112 or 719-457-0820 with a passcode of 6343621, or by accessing the Web site for a download MP3 format.

This concludes the conference call for today. Thank you for all participating and have a nice day. All parties may now disconnect.