Simple wins at Smucker

by Monica Watrous
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Smucker's Jif Natural products performed well in the quarter....

ORRVILLE, OHIO — The J.M. Smucker Co. reported softer-than-expected results from its Pillsbury, Jif and Crisco brands in the recent quarter, prompting the Orrville-based company to lower its sales target for the fiscal year. But within its weaker categories, the company sees growth from products positioned as natural or gluten-free.

Mark Smucker
Mark Smucker, president of Smucker's Consumer Foods segment

“What's interesting, and where we have seen good growth, is on the on-trend items like gluten-free and the more simple ingredients,” said Mark Smucker, president of the company’s U.S. Consumer Foods segment, during a Feb. 23 earnings call with financial analysts. “Those businesses seem to be doing very well, albeit not enough to offset the decline in the mainstream business.”

The same proves true for Smucker’s fruit spread and peanut butter businesses, he added.

“Even though we had a down quarter in peanut butter, our Jif Natural, our no-stir natural product, is actually up significantly, as well,” he said.

Products such as Smucker’s Natural Fruit Spreads command a higher price point because of their simple ingredient claims.

Products such as Smucker’s Natural Fruit Spreads, Pillsbury Purely Simple baking mixes and similar products with simple ingredients command a higher price point, he said.

“All of those products, which have possibly slightly higher ingredient costs, we're able to command a premium for those,” Mr. Smucker said. “And… because we've seen growth there, it does validate the fact that the consumer is willing to choose with their pocketbook.”

For the third quarter ended Jan. 31, Smucker net income rose 15% to $185.3 million, equal to $1.55 per share on the common stock, which compared with $160.9 million and $1.58 per share for the prior-year period. Net sales increased 37% to $1,973.9 million from year-ago sales of $1,440 million, driven by the addition of Big Heart Pet Brands, which Smucker acquired last February. Excluding acquisitions, divestitures and foreign currency exchange, net sales declined 1%, reflecting volume declines in Smucker’s U.S. Consumer Foods business and a price decline within the U.S. Retail Coffee segment.

Operating income advanced 25% to $318.3 million from $255.1 million, reflecting the contribution from Big Heart Pet Brands and the gain on the U.S. canned milk divestiture, which was offset partially by higher merger and integration costs.

Dunkin' Donjuts K-Cup pods saw  gains in the quarter.

U.S. Retail Coffee segment profit rose 17% to $175.9 million, driven by favorable manufacturing overhead costs and the benefit of lower commodity costs and pricing actions, which were offset slightly by higher marketing expense. Net sales advanced 1% to $575.5 million, reflecting gains in Dunkin’ Donuts K-Cup pods and Folgers mainstream roast and ground offerings.

Mark Belgya, Smucker
Mark Belgya, c.f.o. of Smucker

“For the Folgers brand net sales declined 9%, mostly attributable to a 6% reduction in net price realization,” said Mark Belgya, chief financial officer. “Unfavorable mix driven by declines in Folgers K-Cups also was a factor. Sales for the Dunkin' Donuts brand increased 55% for the quarter driven by Dunkin' Donuts K-Cups. And, lastly, Cafe Bustelo sales were up 16% as the momentum for this brand continues.”

Segment profit for U.S. Retail Consumer Foods grew 6% to $128 million, due to the benefit of Smucker’s divestiture of its U.S. canned milk business that was offset by lower price realization and higher manufacturing overhead costs. Segment sales declined 5% to $569.8 million as a result of lost sales from the divested business and declines in Jif peanut butter and Pillsbury baking mixes and frosting that were offset partially by growth in Smucker’s Uncrustables frozen sandwiches.

Smucker's Uncrustables experienced double-digit volume growth.

“Smucker’s Uncrustables frozen sandwiches achieved a 16th consecutive quarter of double-digit volume growth,” said Richard Smucker, chief executive officer. “In addition, net sales for Smucker fruit spreads were in line with last year's third quarter, and the brand continues to gain volume and dollar share within the fruit spreads category.”

In the company’s other segments, U.S. Retail Pet Foods profit was $97.2 million, and sales were $570.9 million, representing a low single-digit decline compared to Big Heart Pet Brands’ results for the third quarter of the previous year reported under different ownership. Segment profit for International and Foodservice increased 4% to $43.3 million, as sales fell 4% to $257.7 million, driven by the unfavorable impact of foreign currency exchange.

The company updated its full-year earnings guidance to include the gain on the U.S. canned milk divestiture. The company has lowered its net sales outlook to $7.8 billion from its previous target of $7.9 billion. Net sales are expected to increase approximately 37% over sales in fiscal 2015, reflecting the addition of Big Heart.

“For Consumer Foods, this reflects the softer-than-anticipated third-quarter results, which we expect to continue into the fourth quarter, particularly for our oils and baking businesses,” Mr. Belgya said. “With stronger than expected coffee segment profits and an increase in synergies, we expect to offset the net sales shortfall at the bottom line.”
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