Rowland Coffee acquisition boosts Smucker income

by Staff
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ORRVILLE, OHIO — The acquisition of Rowland Coffee Roasters helped contribute to an 8% increase in income during the first quarter at The J.M. Smucker Co. Margins were under pressure across all the Smucker business segments.

For the quarter ended July 31, Smucker net income was $111,523,000, equal to 98c per share on the common stock, which compared with $102,881,000, or 86c per share, during the same quarter of the previous year. Sales for the quarter were $1,188,883,000, up 14% from $1,047,312,000 during the same quarter of the previous year.

“We delivered strong sales and earnings growth this quarter with net price realization across most categories and contributions from the recently acquired Rowland Coffee business,” said Richard K. Smucker, executive chairman and co-chief executive officer. “While the marketplace remains very competitive, we are confident in our team’s ability to respond swiftly in the current environment to meet the needs of our consumers. Additionally, we are encouraged that costs have moderated in the green coffee markets. As a result, we are confident in confirming our earnings outlook for the fiscal year. Further, we remain committed to building our brands for the long-term.”

Responding to coffee futures markets weakness, Smucker in August said it was lowering prices by 6% for most of its coffee products.

Operating profits of U.S. Retail Consumer Foods in the first quarter were $79 million, down 15% from $93.4 million in the first quarter last year. Net sales were $459.5 million, up 2%. The segment’s profit margin narrowed to 17.2% from 20.8%.

Commenting on the pressure on profits, Smucker pointed to higher raw material costs, “most significantly” for flour, shortening and milk.

“While price increases were taken in most of these categories, they did not fully offset the higher recognized costs, most notably in milk,” the company said. “The net unfavorable impact of a $5.8 million change in unrealized mark-to-market adjustments on commodity contracts in the first quarter of 2012, compared to the first quarter of 2011, also contributed to the segment profit decline.”

From a sales perspective, the company experienced mixed results. Jif peanut butter sales volume fell 4% versus last year, “primarily due to temporary item rationalizations and a reduction of promotional activity.”

In an Aug. 18 conference call with investment analysts, Vince Byrd, president and chief operating officer, said the rationalization left Smucker well positioned for fall back-to-school promotions. Still, he predicted significantly higher peanut costs for the 2011 peanut crop year.

Asked by an analyst to elaborate on what transpired in peanut butter, Paul Wagstaff, president of the retail foods business, said actions were taken in response to what was a poor 2010 peanut crop.

“We temporarily discontinued eight of our items to focus on our core 18-oz and crunchy and creamy products, to make sure that we had those products on shelf during the summer first quarter,” he said. “In line with that, what we decided to do is basically reduce our first-quarter promotional activities. We made sure that we had enough inventory build in our warehouse, which we do have right now. And that basically led to some lower volume in peanut butter as well as in our jam and jelly business, because we couldn't cross-promote with peanut butter.

“So, where we are now is we have inventory levels that are solid.”

Mr. Wagstaff did not offer a forecast of the 2011 crop or prospective supply adequacy in the year ahead.

Better results were achieved in the company’s baking products business, with a 14% sales gain driven primarily by Pillsbury brand mixes.

“The impact of price increases and sales mix more than offset flat volume in the overall baking category,” the company said.

Crisco shortening and oils net sales rose 4% because of price increases, but volume was down 6%.
In canned milk, net sales were down 4% and volume tumbled 10%.

Looking beyond the elements of the company’s business under serious pressure, Smucker said the company grew share overall during the quarter in its four key categories: peanut butter, fruit spread, oils, baking and milk.

Operating profits of the U.S. Retail Coffee business were $139.7 million, up 25% from $111.9 million in the first quarter of fiscal 2011. Net sales were $500.1 million, up 27%. The segment’s profit margin narrowed slightly to 27.9%, from 28.4%.

Smucker ascribed the profit increase in coffee to earlier price increases that more than offset gains in green coffee costs. The company recorded $6 million in mark-to-market commodity contract gains. The company said the impact on profits of the higher green coffee costs were expected to be felt in future quarters.

The sales gain reflected price increases (four taken since May 2010), but overall segment volume declined 8% in the first quarter, excluding the impact of the Rowland acquisition. The acquisition accounted for 5 percentage points of the 25% sales increase.

Contributing to a favorable sales mix were the continued rollout of Folgers Gourmet Selections and Millstone K-Cups, launched in the second quarter of 2011 (adding 6 percentage points of the sales increase but only 1 percentage point to volume), Smucker said.

For the full-year 2012, the company said it expects net sales to increase significantly as the result of net price realization. Yet the 6% decrease on the majority of coffee products sold in the United States is expected to lower 2012 sales growth from its 20% growth estimate. The company expects income per diluted share in the range of $5 to $5.15.

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