J M Smucker Co (SJM) 2008 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J.M. Smucker Company's second-quarter 2008 earnings conference call. At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open 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 second quarter 2008 earnings conference call. I am the Company's Chief Financial Officer. Thank you for joining us this morning.

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, Consumer Market; Steve Oakland, Vice President and General Manager, Consumer Oils and Baking; Mark Smucker, Vice President, International; and Paul Smucker Wagstaff, Vice President of our Foodservice and Beverage market.

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

If you have not seen our press release, it is available on our website at Smuckers.com. A replay is available on the Website in downloadable MP3 format. If you have any follow-up questions or comments after today's call, please feel free to contact me or our new Director of Corporate Finance and Investor Relations, Sonal Robinson. Sonal has been with the Company for 14 years and has held several positions in our finance and accounting organization. Her most recent position was Director, Shareholder Relations.

I would like to mind 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'll turn the call over to Tim.

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

I would like to begin by summarizing key highlights for the quarter. First, we continue to execute our strategy of owning and marketing leading North American food brands, acquiring the rights to the Carnation milk business in Canada. This acquisition adds approximately $50 million in annual sales, increases our revenue in Canada by over 20% and is complementary to our recent Eagle acquisition in the canned milk category.

Second, we achieve the highest quarterly sales and earnings results in the Company's history at a time of recorded-high commodity costs. Sales were up 23% for the quarter with all business areas realizing increases and non-GAAP earnings per share were up 10%.

Third, we essentially completed the integration of the Eagle acquisition during the quarter. In less than six months, we integrated multiple locations and our projections remain on plan. By January, we expect to begin to recognize synergies associated with transitioning the Columbus headquarters.

And finally, we entered this year's fall bake period with strong multi-brand promotional programs both in the U.S. and Canada. This multi-faceted marketing event in the U.S. incorporates nearly all of our major brands and focuses on the consumer under the theme of "Meals Together...Memories Forever."

Let me briefly comment on our business performance. We had a good sales growth -- we had good sales growth in our U.S. retail segment as acquisitions and new and existing products all contributed. Sales of the Smucker's brand were up as fruit spreads continue to gain market share. We introduced a new advertising campaign in August designed to remind consumers that the brand stands for quality you can taste. We also realized another strong quarter from Jif and Uncrustables continued its impressive growth trend.

In the oils and baking area, the addition of Eagle Brand contributed to a strong quarter, with sales up 38%. Pillsbury also realized good sales performance during the quarter. The work we did to fill distribution gaps, improve packaging and product formulations, along with a strong pipeline of new products, has positioned as well for sustained sales growth.

Crisco's volume was down for the same period last year due to competitive activity. However, we have maintained our margin levels for Crisco as the impact of price increases taken over the course of the last 12 months offset the shortfall in volume. Looking ahead, we expect a strong second half for Crisco.

Our special market segment experienced another strong quarter and the overall segment profit continues to improve. Foodservice experienced growth in both the traditional and schools channels and benefited from the addition of Eagle. In Canada, the Thanksgiving holiday is behind us, and we are well on the way to another successful fall break.

For the quarter, our consumer baking and condiments businesses were up, offsetting planned rationalizations. Canada also benefited from the impact of the Eagle and Carnation acquisitions and favorable exchange rates. The addition of the Carnation milk brand, with its long history and leading position, is an excellent fit with our strong portfolio of brands in the baking aisle.

In summary, we delivered a solid quarter and have achieved strong financial results at the halfway point of the year. As we look ahead, we are committed to responsibly managing our business for the long-term. We expect cost to remain high, but, as we have done consistently over the last several quarters, will use a combination of pricing actions and prudent cost management to help offset the impact. In addition, our ongoing investments in our plants have resulted in operating efficiencies, providing additional benefits to help offset rising costs.

We will continue to support our brands with marketing spending and investments in new product development. We expect our strategy to continue to generate long-term profitable growth.

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

Thank you, Tim.

Sales were up 23% for the quarter, excluding the non-branded Canadian businesses divested in September of 2006. Excluding the impact of Eagle, sales were up nearly 9%. This increase in sales was primarily attributable to price with volume mix, foreign exchange and smaller acquisitions also contributing. Growth was lead by our Smucker's, Jif, Pillsbury and Uncrustables brands, a strong performance in foodservice and the contribution of the acquired Carnation and White Lily businesses.

In October, we resumed promotional activity for Jif contributing to its strong quarter. We estimate the incremental sales for the quarter was approximately $5 million to $7 million, comparable to last quarter. A competitor out of the marketplace for the last six months returned during the second quarter. Although our momentum is strong, we do not expect peanut butter sales to be able to continue to experience the kind of year-over-year increases we have enjoyed now that the competition has returned, but would expect to return to more historical growth levels.

GAAP earnings per share were $0.87 this quarter and $0.80 in the second quarter of last year, including restructuring and merger and integration cost detailed in our press release. Excluding these charges in both years, earnings per share were $0.91 this quarter and $0.83 in last year's quarter, a 10% increase.

Operating margin for the quarter, excluding charges, declined from 12.8% to 12.3%. Gross margin for the period decreased approximately 110 basis points, excluding charges, reflecting the impact of higher milk and wheat costs.

SD&A cost of a percentage of sales decreased from 19.2% to 18.6% as corporate overhead expenses increased only 3%, well below the topline growth rate. It is important to note that we are able to deliver overall lower SD&A for the quarter despite a 23% increase in our marketing cost as compared to the prior year. The increase in marketing expense accounted for a reduction of approximately 30 basis points in the operating margin.

We commented in the past that bolt-on acquisitions, which we are able to integrate into our corporate infrastructure, provide an opportunity for margin improvement. We expect to realize future benefits from the Eagle integration as we begin to recognize synergies associated with the transition of the Columbus headquarters.

Now turning to segment results, sales in our U.S. retail segment were $535 million in the second quarter, up 7% compared to last year, excluding the addition of Eagle. Sales in the consumer business area were up 10%, lead by increases in peanut butter, fruit spreads and Uncrustables. Sales of Uncrustables across all channels increased 20% for the quarter.

Sales in the oils and baking business were up 3%, excluding Eagle, as increases in baking mixes and frostings more than offset the decline in the Crisco business. In the special market segment, sales were $173 million for the quarter, up 21%, excluding the Canadian divestiture. Foodservice was up 19%, excluding Eagle, with gains in both the traditional and schools channels, while sales in our beverage business were up 8%.

Canada sales were up 22% primarily due to the impact of the acquired Eagle and Carnation businesses and a favorable exchange rate.

Our tax rate for the quarter declined from 35.5% to 33.9%. For the full-year, we continue to expect a lower rate ranging between 34% and 34.5%.

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

Thank you, Mark, and good morning everyone.

As Tim mentioned, we had another record quarter with solid sales and earnings growth. It all comes down to the execution of our strategy. Our recent acquisition activity has provided the Company with a number of strong complementary brands and reinforces our strategic focus on leading brands.

Our recent financial performance has been gratifying since we've been operating in such a challenging cost environments. I'm sure you will hear similar discussions from other food companies that you follow, but what we are seeing is truly unprecedented. Last year, we told you that our costs for fiscal 2007 were up $30 million. For fiscal 2008, we indicated that they would increase at an even greater amount than last year.

Since then, costs have continued to rise and we are currently expected an increase in cost of $150 million over last year. While about one-third of the increase is in milk, which is not included in last year's numbers, you can understand the magnitude of the costs that we will continue to have to manage. Over the long-term, cost will stabilize, but likely at levels well above historical averages.

In response to the rising level of cost, we continue to implement price increases. For example, we recently announced price increases on peanut butter, toppings, oils and flower, which would take effect in the third quarter. At the same time, we support our brands, as evidenced by the significant increase in marketing spending this quarter compared to last year. With the long-term view that we take, we are willing to do what is right for the brand since we are leaders in most of our categories.

In summary, we will continue to implement our strategy; second, we achieved the highest quarterly sales and earnings results in the Company's history; third, we have essentially completed the Eagle integration; and finally, we are off to a good fall bake period. We have spoken at great lengths regarding our cost challenges. However, we remain extremely confident in our brands and the opportunity for growth that they offer.

Thank you for your time, and we are happy to now answer your questions.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) Eric Serotta with Merrill Lynch.

Good morning,. First of all, the $150 million in input cost inflation this year that you are looking at seems pretty staggering, particularly in relation to the $30 million increase last year. You mentioned about one-third of that is milk. Could you give us some context as to how much of that you expect to be able to cover with price, productivity, mix improvement and the like?

Eric, this is Mark. I will start and then maybe some of the other guys can jump in. I guess if you take it from a higher-level view, I think our first line of defense, if you will, is price increases. So as a Richard mentioned, we have any number of those going into effect in the third quarter. Again, we've looked at our overhead spending, again, indicative of what we performed, as a way that we can offset some of that, as well. So that will be a key driver going into the back half of the year, but price, I think, is probably the way we will recoup the majority of that.

And do you expect to recoup the majority of that this year?

We do. As you see, the first half of the year, we have been able to cover a good portion of those costs, but we still have some more cost yet to cover and we still have a number of ways to do that, including pricing and looking at our cost within the Company. But, yes, we do expect to cover those.

Okay. And I noticed that you didn't make any comment and I didn't see any in the press release or didn't hear anything in the call about your longer-term topline and bottomline growth targets of 8% each. I presume that you are maintaining those long-term targets, but any comments as to whether you expect to achieve those this year?

This is Tim. Actually, we are committed to the long-term targets, but as you know, we don't give annual guidance and so -- but where committed to them long-term.

Just a note, just looking at some information recently, if you look at over the last five years, our sales have grown significantly. Our sales per employee are up about 250%, our earnings per employee are up about 400%. And also our employee base is up 40%. So clearly that is -- we've been very efficient. And that's a time when we've had nine acquisitions and ten divestitures. So we really our delivering on our long-term approach and that is what -- we really think were in this for the long-term and committed to the long-term growth, but we don't think it's productive to have annual guidelines.

Great, and just one housekeeping item. I was a little bit surprised about the year-on-year gross margin decline considering the substantial benefit that you had in the quarter from the divestiture of the Canadian business. Could you give us a little bit of a bridge on gross margin year-over-year as to what some of the factors were? How much cost is offset by improved manufacturing efficiencies, offset by the Canadian divestiture, sort of bridge the gap between last year and this year?

I will bridge some of it. I don't think I'll go into quite that level of detail, but I think one thing -- and I don't believe we did comment on it on the release, but to keep in mind -- the divestiture of the Canadian business did have a significant impact on our last couple of quarters, but we actually lapped that during the quarter. So we only got about six weeks of benefit from that. That was actually divested in September of '06. So that wasn't quite the same effect that we have seen in the two prior quarters.

I think probably the other key thing is just some of the cost increases have really driven the majority of that decline.

Okay, great. Thanks a lot. Good luck.

Christina McGlone with Deutsche Bank.

Good morning. First, just a housekeeping item, Mark, what was sales growth, excluding acquisitions and divestitures and foreign exchange, basically your core sales growth?

6%

6%? Okay. And then I guess given this immense amount of cost inflation, it definitely seems like there's a lot of pressure to continue to grow the topline. I'm curious what you are seeing in terms of pricing and consumer response to pricing with the economy slowing, if you are seeing any sort of trade-down to private label or any kind of demand destruction? And it seems like we may have seen that a little bit in Crisco, given sales were down with the -- despite all the pricing taken, I'm assuming volumes really fell pretty significantly.

Christina, this is Vince. I would say that, as we've said in the first quarter, typically when we take a price increase, for example, and we lead with whether it be fruit spreads or peanut butter, there is typically a volume implication in the first few months. But it -- sometime within the three to six month either competition follows and then closes that gap back. It is not as hard to get price increases through as it once was, obviously, because all companies are experiencing price inflation. But it has affected some volume, but that does typically come back over time. And I will let Steve talk to his business.

Sure. Christina, Steve Oakland. The two businesses most impacted by this were the flour business and the Crisco business. And those businesses are very promotionally sensitive and very elastic. So, it's very easy, if your not careful, to let the topline run your coverage up. And we did not allow that to happen. Crisco took it in the topline, did not take into bottomline. It is unprecedented for us to have a price increase during fall bake and we have one of those December 3rd this year on both businesses.

So, we passed on some volume early in Crisco. I think we've got it priced right, for the right amount of volume and the right margins. I think our Thanksgiving business looks really solid, but you are going to see some bumpy topline as we manage through. As the leader in business, we lead with price. You are going to see some bumpy topline through this.

Steve, how come it gets better in the second half?

You know, I just think as we look, the competitive set appears to be changing. I mean, these are not cost that just we are experiencing. I mean, we chose not to chase the topline, maybe some other folks did. So it appears that there is more opportunities for us at our new pricing as we go forward.

This is Richard. We are also seen now that to private label usually lags. We are now seeing private label in several categories starting to catch up in terms of taking price increases. And we think that will bode well for us and lower the gap in the future.

And they're substantial, the changes in private label flour and oil are substantial.

Okay. And in terms of the $150 million cost headwind, does year-over-year comparisons with that get worse as the year progresses? Or is it pretty much what we saw this quarter? What you absorbed this quarter is what the magnitude we will see the next few quarters?

I think for the most part it obviously varies a little bit business by business. But in the broad scheme skin is pretty even between the first and second half of the year.

Okay. And then in terms of marketing the same way, was this an extraordinary bump and then we won't see as much of a bump the next two quarters or is it going to be sustained at these levels?

We want to sustain it as much as we can, because were really looking at the long-term.

Okay. And then just last question, Tim, in your comments you talked about short-term volatility. Why do you think it is short-term? It seems like there is a number of structural changes that are keeping these commodity prices high for more than just the short-term?

Christina, I think maybe there was a misunderstanding, I think Richard commented that we expect cost will stabilize over time. But they probably will settle at a higher-than-historical average.

Okay.

(multiple speakers) What was your question?

It was in the press release, Tim's quote in the press release just said "commodity cost pressures remain, we anticipate further price increases as we navigate the short-term volatility."

Oh, well, I think that we do think that, as we said here, we have hopefully seen the peak here and everybody is experiencing the same thing. But short-term, we're taking response for the short-term, but we think it will be followed by our competitors.

And, Christina, let me go back to the marketing comment just so we are clear, as I think we said in the script, we do look at all options to help cover our cost and so we will be looking at some of the marketing budgets, for example, in the back half of the year. But no decisions have been made at this point.

Okay, thank you very much.

Farha Aslam with Stephens.

Good morning. You guys are in the heart of fall bake now. What are the trends you are seeing and how are competitors pricing their product, particularly in the cake mix category, compared to your levels?

Hi, Farha, Steve. I think frankly cake mix is a little more optimistic than normal. Usually that business is pretty -- it is competitive, as always, but we don't see an increase in activity there and I think everyone is facing the same cost challenges. But really, the cost challenges are in wheat and in soybean oil. A cake mix is really sugar, cocoa, corrugate overhead and four really doesn't impact that category like it does bag flour or vegetable oil. I would say those categories are more normal -- cake mix.

And then would share with us how competitors are reacting? Are you following pricing of competitors in flour or are you leading it and what level of pricing are you taking?

We have led and we've done that from the number-two position in flour and they've just been low double digits.

And do you anticipate competitors to follow or how long --?

We do. We do, and there is a lot of trade spend in these categories. In fact, for the first time, we took trade out of the cake mix business in the back half of the year. So list price is misleading, we are seeing promotional retails up dramatically over last year, both in cake mix and flour, so that tells us that it's a combination of trade spend and price, but it's really what net realized price that the manufacturer gets, so we are seeing those price points go up.

And when you look at oils, you had discussed that you had some coverage going through this fall bake period, but beyond that, you hadn't commented on your coverage versus your pricing. Kind of what type of pricing are you taking on oils and will that the adequate to offset the current inflation in oils that you are seeing?

Yes, I think it will over time. We are -- our coverage matches our pricing that we've got out there. We have a price increase December 3rd in Crisco and we do see that -- that business has been competitively priced very low early this fall bake. We were kind of surprised by that. We stayed out of that. It will probably cost of us some topline early and that is obvious in the IRI numbers. But from what we see price point competitive-wise for the back half, we are encouraged by the back half for Crisco.

Okay and my final question is when you look into the back half and look at your commodity cost, that $150 million, is that just based off the future curve or kind of where you expect your realized cost?

It's our expected realized cost.

Expected realized cost.

Interest curve would be much worse than that.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS) Chuck Cerankosky with FTN Securities.

Good morning, everyone. Getting back to price increases, I wanted to ask about it from a different perspective. Are you looking at the different product lines in very different ways? It sounds like to me on the Crisco side, you were willing to protect margin and give up a little share to private label. But are you having to think about some of the other branded products differently?

This is Vince. I guess we look at each product on -- make them stand on their own, if you will. And if we are the leader or the number two, typically, we will look at leading those pricing actions. Sometimes competition will go ahead of us. But, yes, and as Richard said, we are out there with other increases this month or next month.

Is that a correct view on Crisco, that you were willing to give up a little bit of market share to maintain margin because you are the leader?

Yes, that is fair and I think we look at this on a longer-term basis and we have a commitment to the Company for both top line and bottom line. Were going to balance those two things.

I think -- as I think what we have said before, this is Tim, we look at share as the long-term prospect. So when you say we give up share, our goal is to grow the share and so we do look at share -- we don't look at share bumps short term as significant. We are looking at it for the long-term business.

Chuck, this is Richard, I think you are right in the sense that every brand and every product category is a little different. Obviously oils is a very price-driven, very volatile, very promotable area, where maybe fruit spreads and peanut butter would be less so. So we do look at them a little different.

How would you characterize the retailers' receptivity to price increases as they think about their customers and also the willingness to promote their own private brands?

I think as I said earlier, certainly they don't like price increases and there are pushbacks from time to time, but we are not unique. Every food company is taking pricing to the trade and so to some degree, they understand. They also try to manage those private label gaps and sometimes those do tend to lag in terms of their pricing actions. But their costs are going up just as ours are.

I think it's interesting, I think both our customers and us look at the consumer, nobody likes to increase prices to the consumer. But when we work with our brands, I think we've always known we said that they are very compatible with the private label. And I think that as a leader, we have the responsibility to help the category and helping the category sometimes is increasing prices.

Thank you.

Having no further questions, I'd like to turn the conference back over to management for any additional or closing comments.

Well, thank you very much. We appreciate the listing and we look forward to another good six months.

Thank you. Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by dialing 1-888-203-1112, or 1-719-457-0820, with a pass code of 8703498, or by accessing the Website for a downloadable MP3 format.

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