Smucker reports fiscal Q4 net earnings of US$118.5M, down 9% from year-ago period as net sales fall 8% to US$1.23B
Nevin Barich
ORRVILLE, Ohio
,
June 5, 2014
(press release)
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-- Record earnings for fiscal 2014 Industry Intelligence Editor's Note: This press release omits select charts and/or marketing language for editorial clarity. Click here to view the full report.
-- Q4 U.S. Retail volume up 1 percent in Coffee and up 3 percent in Consumer Foods
-- Q4 net sales decreased 8 percent reflecting pricing actions
-- 2015 net sales and earnings outlook provided
The J. M. Smucker Company (NYSE: SJM) today announced results for the fourth quarter and year ended April 30, 2014. Results for the quarter and year ended April 30, 2014, include the operations of Enray Inc. ("Enray") since the completion of the acquisition on August 20, 2013, and the impact of the Company's licensing and distribution agreement with Cumberland Packing Corp. ("Cumberland"), which commenced on July 1, 2013.
Executive Summary
Fourth quarter net sales decreased 8 percent in 2014, compared to 2013, driven by pricing actions in the quarter. As expected, pricing actions in U.S. Retail Coffee in the quarter reflect decisions made to pass through lower costs realized earlier in the year. The impact of the exit of certain portions of the Company's business in its International, Foodservice, and Natural Foods segment and unfavorable sales mix also contributed to the net sales decrease.
Operating income excluding the impact of restructuring, merger and integration, and certain pension settlement costs ("special project costs") decreased 11 percent in the fourth quarter of 2014, compared to 2013, as a result of a decrease in gross profit which was somewhat offset by a decrease in marketing and corporate administrative expenses.
Income excluding special project costs decreased 10 percent in the fourth quarter of 2014, compared to 2013, reflecting the decrease in operating income and the impact of a higher effective tax rate partially offset by the benefit of other income items and lower interest expense.
Fourth quarter income per diluted share, excluding special project costs, decreased 6 percent in 2014, compared to 2013, yet benefited from the Company's share repurchase activities over the past year, including 2.9 million shares repurchased during the fourth quarter.
"Our 2014 record earnings per share achievement once again demonstrates that the principles that have guided our Company for 117 years continue to deliver results regardless of the headwinds encountered," said Richard Smucker, Chief Executive Officer. "We delivered 5 percent non-GAAP earnings per share growth and returned over $730 million in cash to shareholders through dividends and share repurchases in 2014. These accomplishments are a product of our long-term, forward-looking growth strategy, the strength of our iconic brands, an aggressive innovation pipeline, and the commitment and perseverance of our team."
"We made progress in fiscal 2014 growing volume in our U.S. retail businesses, optimizing price points, enhancing merchandising, and investing in the future of our Company," commented Vince Byrd, President and Chief Operating Officer. "Our brand portfolio's celebration of the U.S. Olympic and Paralympic Teams was a success. We further optimized our supply chain, and in several areas, continued expansion of needed manufacturing capacity. We also introduced more than 100 new products, and are excited about the opportunities presented by the newly integrated Enray business. As we move into fiscal 2015, we know that there is more work to be done with our foodservice coffee business, but are encouraged by the strength of our brand plans and the momentum across the businesses."
Net Sales
Net sales decreased 8 percent in the fourth quarter of 2014, compared to the fourth quarter of 2013, primarily due to the impact of an 8 percent reduction in net price realization largely due to retail and foodservice coffee. As expected, pricing actions in U.S. Retail Coffee reflect decisions made to pass through lower costs realized earlier in the year, whereas foodservice coffee was impacted by higher trade spending, including an accrual adjustment. A combined $22.4 million from the acquired Enray business and the Cumberland distribution agreement contributed to net sales in the fourth quarter of 2014. Sales mix and foreign exchange were both unfavorable to net sales in the fourth quarter of 2014, compared to the fourth quarter of 2013, and reduced net sales by 2 percent and 1 percent, respectively.
Volume gains were realized in Crisco® oils, the Company's flour brands, and Folgers® coffee, and were partially offset by the impact of the previously announced business exits in the International, Foodservice, and Natural Foods segment and declines in Pillsbury® baking mixes and frosting.
Margins
Gross profit decreased $39.4 million, or 8 percent, in the fourth quarter of 2014, compared to 2013. The prior year's fourth quarter gross profit benefited from the recognition of lower manufacturing overhead. Excluding special project costs as previously defined, gross profit decreased $40.6 million, or 8 percent, and decreased from 36.1 percent of net sales to 35.9 percent during the same period. Overall commodity costs were lower, primarily for coffee, peanuts, flour, and oils, but were more than offset by lower net price realization, most significantly for retail and foodservice coffee, and resulted in the gross profit decline. Included as a component of lower net price realization was a $7 million trade accrual adjustment related to the Company's foodservice hot beverage business.
The additions of Enray and Cumberland contributed to gross profit in the fourth quarter of 2014, but were more than offset by the impact of the exited businesses in the International, Foodservice, and Natural Foods segment. Unrealized mark-to-market adjustments on derivative contracts were a loss of $1.8 million in the fourth quarter of 2014, compared to a loss of $2.3 million in the fourth quarter of 2013.
Selling, distribution, and administrative expenses decreased $15.5 million in the fourth quarter of 2014, compared to the fourth quarter of 2013, yet increased as a percentage of net sales from 17.4 percent to 17.7 percent. Marketing expenses decreased 19 percent in the fourth quarter of 2014, with a portion of the decrease redirected to promotional spending, compared to 2013 which included a significant level of brand building investment. General and administrative expenses decreased 6 percent, selling expenses increased 3 percent, and distribution expenses were flat during the same period.
Operating income decreased $22.6 million in the fourth quarter of 2014, compared to 2013. Excluding special project costs in both periods, operating income decreased $25.3 million, and decreased from 16.8 percent of net sales in the fourth quarter of 2013 to 16.2 percent in the fourth quarter of 2014.
Interest Expense, Other Income, and Income Taxes
Net interest expense decreased $5.4 million in the fourth quarter of 2014, compared to 2013, reflecting the impact of an interest rate swap the Company entered into earlier in the fiscal year, converting a portion of its debt from fixed-rate to variable-rate.
Net other income was $9.0 million in the fourth quarter of 2014 and included realized gains on the sale of investment securities in the Company's nonqualified pension plan as well as insurance proceeds and other miscellaneous items, compared to net other expense of $0.1 million in the fourth quarter of 2013.
Income taxes increased $3.7 million in the fourth quarter of 2014, compared to 2013, as an increase in the effective tax rate more than offset a decrease in income before income taxes.
The effective tax rate increased from 32.1 percent in the fourth quarter of 2013 to 35.5 percent in the fourth quarter of 2014 primarily due to higher foreign and state and local income taxes.
Segment Performance
U.S. Retail Coffee
The U.S. Retail Coffee segment volume increased 1 percent in the fourth quarter of 2014, compared to a strong fourth quarter of 2013, as the Folgers® brand and Dunkin' Donuts® packaged coffee both increased 1 percent. As previously discussed, net price realization reflecting planned actions taken to pass through lower commodity costs realized during the year caused segment net sales to decrease 12 percent in the fourth quarter of 2014, compared to the fourth quarter of 2013. Net sales of K-Cup® packs decreased 10 percent compared to last year's fourth quarter and resulted in full fiscal year K-Cup® pack net sales being down 1 percent, compared to 2013.
The U.S. Retail Coffee segment profit decreased $14.7 million, or 10 percent, in the fourth quarter of 2014, compared to a record fourth quarter of 2013, as the expected lower net price realization more than offset the benefit of lower green coffee costs. For the fiscal year, lower net price realization did not offset the benefit of lower green coffee costs. Unrealized mark-to-market adjustments on derivative contracts were a loss of $2.5 million in the fourth quarter of 2014, compared to a loss of $0.2 million in the fourth quarter of 2013. Segment profit was favorably impacted by a decrease in marketing and other support costs.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment volume increased 3 percent in the fourth quarter of 2014, compared to the fourth quarter of 2013. Segment net sales decreased 4 percent in the fourth quarter of 2014, compared to 2013, reflecting lower net price realization primarily for the Crisco® and Jif® brands. Net sales and volume of Smucker's® fruit spreads decreased 2 percent and 1 percent, respectively, in the fourth quarter of 2014. Jif® brand volume was flat and net sales decreased 1 percent as favorable mix associated with Jif® Whips and alternate nut butters helped to offset overall lower price. Smucker's® Uncrustables® frozen sandwiches achieved another strong quarter, up 16 percent and 23 percent in net sales and volume, respectively.
Crisco® brand volume increased 20 percent, while net sales decreased 5 percent in the fourth quarter of 2014, compared to 2013, impacted by a 9 percent list price decrease taken in the fourth quarter of 2014 and higher promotional expense. Net sales and volume for the overall Pillsbury® brand decreased 14 percent and 4 percent, respectively. Canned milk net sales decreased 2 percent and volume increased 5 percent during the fourth quarter of 2014, compared to 2013.
The U.S. Retail Consumer Foods segment profit increased $5.5 million, or 6 percent, in the fourth quarter of 2014, compared to the fourth quarter of 2013. Unrealized mark-to-market adjustments on derivative contracts were a gain of $3.9 million in the fourth quarter of 2014, compared to a loss of $0.6 million in the fourth quarter of 2013, and contributed $4.5 million to the increase in segment profit growth. Overall commodity costs were lower, primarily for peanuts, flour, and oils, and benefited segment profit slightly as they were mostly offset by lower net price realization. A decrease in marketing expenses also contributed to segment profit growth while manufacturing costs increased in the fourth quarter of 2014, compared to 2013.
International, Foodservice, and Natural Foods
Net sales in the International, Foodservice, and Natural Foods segment decreased 7 percent in the fourth quarter of 2014, compared to 2013. Excluding the impacts of Enray, Cumberland, and foreign exchange, segment net sales decreased 12 percent. The net sales decrease was driven by the exited portions of the Company's hot beverage business and Smucker's® Uncrustables® frozen sandwiches with foodservice customers. Unfavorable sales mix and higher trade spending related to the Company's foodservice hot beverage business, including a $7 million accrual adjustment, also contributed to the net sales decrease. Segment volume decreased 3 percent, excluding the impact of Enray and Cumberland, as increases in the Robin Hood® and Five Roses® brands in Canada were more than offset by the impact of the exited foodservice businesses.
Segment profit decreased $18.0 million, or 36 percent, in the fourth quarter of 2014, compared to 2013, driven by increased foodservice trade spending, including the accrual adjustment in the quarter. Lost profit on the exited foodservice businesses and foreign exchange also contributed to reduced segment profit. Unrealized mark-to-market adjustments on derivative contracts were a loss of $3.1 million in the fourth quarter of 2014, while the impact in the fourth quarter of 2013 was not significant. The additions of Enray and Cumberland were not significant to segment profit in the fourth quarter of 2014.
Other Financial Results and Measures
Cash provided by operating activities was $856.0 million for 2014, essentially flat compared to 2013. Free cash flow was $576.5 million for 2014, and decreased $72.8 million compared to 2013, primarily due to a record level of capital expenditures in 2014.
During the quarter ended April 30, 2014, the Company repurchased approximately 2.9 million common shares for $281.4 million. During 2014, the Company returned $732.9 million in cash to shareholders, reflecting an 11 percent increase in annual dividends paid per share and the repurchase of approximately 5 percent of shares outstanding.
Outlook
For fiscal 2015, the Company expects net sales to increase approximately 5 percent, compared to 2014, reflecting the U.S. Retail Coffee price increase announced earlier this week. Non-GAAP income per diluted share is expected in the range of $5.95 to $6.05, which excludes certain noncomparable items of $0.15 per share.
Effective in fiscal 2015, the Company will no longer elect to qualify commodity and foreign exchange derivatives for hedge accounting treatment. Additionally, the Company has modified its segment profit calculation and redefined non-GAAP income and income per share measures to exclude gains and losses on commodity and foreign exchange derivatives until the related inventory is sold. The Company believes this change more accurately aligns the derivative gains and losses with the underlying exposure being hedged and allows the realization of the economic effect of the derivative without the mark-to-market volatility within segment profit and non-GAAP income and income per share. Consistent with the Company's treatment in 2014, special project costs will continue to be excluded from segment profit and non-GAAP income and income per share measures, and together with these gains and losses on commodity and foreign exchange derivatives will represent certain noncomparable items.
Conference Call
The Company will conduct an earnings conference call and webcast today, Thursday, June 5, 2014, at 8:30 a.m. E.T. The webcast can be accessed from the Company's new website at jmsmucker.com/investor-relations. For those unable to listen to the live webcast, the webcast replay will be available at jmsmucker.com/investor-relations following the call. An audio replay will also be available following the call until Thursday, June 12, 2014, and can be accessed by dialing 888-203-1112 or 719-457-0820, with an access code of 7130736.
Non-GAAP Measures
The Company uses non-GAAP financial measures including: net sales adjusted for the noncomparable impact of the Enray acquisition, the Cumberland distribution agreement, and foreign exchange rate; gross profit, operating income, income, and income per diluted share, excluding special project costs; earnings before interest, taxes, depreciation, and amortization ("EBITDA"); and free cash flow as key measures for purposes of evaluating performance internally. The Company believes that these measures provide useful information to investors because they are the measures used to evaluate performance on a comparable year-over-year basis. The special project costs relate to specific restructuring, merger and integration, and pension settlement projects that are each nonrecurring in nature and can significantly affect the year-over-year assessment of operating results. These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with U.S. GAAP. Rather, the presentation of these non-GAAP financial measures supplements other metrics used by management to internally evaluate its businesses, and facilitates the comparison of past and present operations and liquidity. These non-GAAP financial measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments. A reconciliation of certain non-GAAP financial measures to the comparable GAAP financial measure for the current and prior year periods is included in the "Unaudited Non-GAAP Financial Measures" tables.
About The J. M. Smucker Company
For more than 115 years, The J. M. Smucker Company has been committed to offering consumers quality products that bring families together to share memorable meals and moments. Today, Smucker is a leading marketer and manufacturer of fruit spreads, retail packaged coffee, peanut butter, shortening and oils, ice cream toppings, sweetened condensed milk, and natural foods products in North America. Its family of brands includes Smucker's®, Folgers®, Dunkin' Donuts®, Jif®, Crisco®, Pillsbury®, Eagle Brand®, R.W. Knudsen Family®, Hungry Jack®, Café Bustelo®, Café Pilon®, truRoots®, White Lily®, and Martha White® in the United States, along with Robin Hood®, Five Roses®, Carnation®, and Bick's® in Canada. The Company remains rooted in the Basic Beliefs of Quality, People, Ethics, Growth, and Independence established by its founder and namesake more than a century ago. For more information about the Company, visit jmsmucker.com.
The J. M. Smucker Company is the owner of all trademarks referenced herein, except for the following, which are used under license: Pillsbury® is a trademark of The Pillsbury Company, LLC; Carnation® is a trademark of Societe des Produits Nestle S.A.; and Dunkin' Donuts® is a registered trademark of DD IP Holder LLC.
Dunkin' Donuts® brand is licensed to The J. M. Smucker Company for packaged coffee products sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores. This information does not pertain to Dunkin' Donuts® coffee or other products for sale in Dunkin' Donuts® restaurants. K-Cup® is a trademark of Keurig Green Mountain, Inc., used with permission.
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