https://www.jmsmucker.com/The J. M. Smucker Company announced results for the third quarter ended January 31, 2020, of its 2020 fiscal year. All comparisons are to the third quarter of the prior fiscal year, unless otherwise noted.
EXECUTIVE SUMMARY
- Net sales decreased $39.6 million, or 2 percent, primarily reflecting anticipated declines within the U.S. Retail Pet Foods segment.
- Net income per diluted share was $1.64. Adjusted earnings per share was $2.35, an increase of 4 percent.
- Cash from operations was $521.6 million, an increase of 24 percent. Free cash flow was $465.1 million in the quarter, compared to $333.0 million in the prior year.
- The Company reaffirmed its full-year fiscal 2020 net sales, adjusted earnings per share, and free cash flow outlook.
CHIEF EXECUTIVE OFFICER REMARKS
"Third quarter results were in-line with our expectations, benefiting from continued investment in our strategic growth imperatives and the decisive actions we are taking to improve certain areas of the business. Net sales performance reflected strong growth for the Smucker's® Uncrustables® brand and improved volume fundamentals for our coffee and peanut butter brands, which supported market share and household penetration growth in both categories. This helped partially offset the anticipated decline for our dog food business," said Mark Smucker, President and Chief Executive Officer.
"Our results in the quarter reinforced our commitment to operate with financial discipline, highlighted by adjusted earnings per share growth of 4 percent, strong free cash flow of $465 million, and net debt repayments exceeding $300 million. As we look forward, we are confident in delivering on our full-year guidance, while positioning the business for consistent long-term growth and shareholder value creation."
THIRD QUARTER CONSOLIDATED RESULTS
|
|
Three Months Ended January 31, |
||||
|
|
2020 |
|
2019 |
|
% Increase |
|
|
(Dollars and shares in millions, except per share data) |
||||
|
|
|
|
|
|
|
|
Net sales |
$1,972.3 |
|
$2,011.9 |
|
(2%) |
|
|
|
|
|
|
|
|
Operating income |
$289.0 |
|
$217.6 |
|
33% |
|
Adjusted operating income |
395.8 |
|
406.2 |
|
(3%) |
|
|
|
|
|
|
|
|
Net income per common share – assuming dilution |
$1.64 |
|
$1.07 |
|
53% |
|
Adjusted earnings per share – assuming dilution |
2.35 |
|
2.26 |
|
4% |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – assuming dilution |
114.0 |
|
113.8 |
|
— |
Net Sales
Net sales decreased 2 percent, driven by reduced volume/mix in the U.S. Retail Pet Foods segment, primarily driven by dog food. Lower net price realization for the remaining segments was primarily driven by lower net pricing for coffee and peanut butter, which was mostly offset by favorable volume/mix for coffee and the Smucker's® Uncrustables® brand.
Operating Income
Gross profit decreased $13.8 million, or 2 percent, driven by a reduced contribution from volume/mix and the net impact of lower prices in excess of lower costs. Operating income increased $71.4 million, or 33 percent, primarily reflecting a $54.8 million decrease in intangible asset impairment charges, a $15.5 million decrease in other special project costs, and a $14.2 million decrease in selling, distribution, and administrative ("SD&A") expenses, partially offset by the decline in gross profit. The third quarter of 2020 included a noncash impairment charge of $52.4 million related to the Natural Balance® brand within the U.S. Retail Pet Foods segment, primarily driven by the market environment and the re-positioning of the brand within the Pet Foods portfolio.
Adjusted gross profit decreased $24.4 million, or 3 percent, with the difference from generally accepted accounting principles ("GAAP") results being the exclusion of a $10.6 million favorable impact, as compared to the prior year, of unallocated derivative gains and losses. Adjusted operating income decreased $10.4 million, or 3 percent, further reflecting the exclusion of intangible asset impairment charges, other special project costs, and amortization.
Interest Expense, Other Income (Expense), and Income Taxes
Net interest expense decreased $6.5 million, primarily as a result of reduced debt due to net repayments of $700.6 million during the past twelve months.
Net other expense decreased by $7.4 million, primarily due to pension and litigation settlements in the prior year.
The effective income tax rate was 22.7 percent compared to 22.8 percent in the prior year. On a non-GAAP basis, the adjusted effective income tax rate was 23.1 percent compared to 25.8 percent in the prior year.
Cash Flow and Debt
Cash provided by operating activities was $521.6 million, compared to $421.1 million in the prior year, primarily reflecting a decrease in cash required to fund working capital. The decrease in working capital requirements was primarily driven by an increase in accounts payable due to working capital initiatives. Free cash flow was $465.1 million, compared to $333.0 million in the prior year, reflecting the increase in cash provided by operating activities and a $31.6 million reduction in capital expenditures. Net debt repayments in the quarter totaled $319.7 million.
FULL-YEAR OUTLOOK
The Company reaffirmed its full-year fiscal 2020 net sales, adjusted earnings per share, and free cash flow guidance as summarized below:
|
Net sales increase (decrease) vs prior year (3)% |
||
|
Adjusted earnings per share $8.10 - $8.30 |
||
|
Free cash flow (in millions) $850 |
||
|
Capital expenditures (in millions) $300 - $320 |
||
|
Effective tax rate 24.0% |
Net sales are expected to be down 3 percent compared to the prior year, which includes the loss of $105.9 million of sales in the first 4 months of fiscal 2019 related to the divested U.S. baking business and $25.4 million of incremental noncomparable sales for Ainsworth Pet Nutrition, LLC ("Ainsworth"). On a comparable basis, net sales are expected to be down 2 percent.
Adjusted earnings per share is expected to range from $8.10 to $8.30, based on 114.0 million shares outstanding. Earnings guidance reflects the contribution from sales at a gross profit margin of approximately 38.2 percent, SD&A expenses declining approximately 2.5 percent compared to the prior year, and an effective tax rate of 24.0 percent. Free cash flow is expected to be approximately $850 million.
THIRD QUARTER SEGMENT RESULTS
Dollar amounts in the segment tables below are reported in millions.
U.S. Retail Pet Foods
|
|
|
Net Sales |
|
Segment |
|
Segment |
|
FY20 Q3 Results |
|
$721.9 |
|
$146.0 |
|
20.2% |
|
Increase (decrease) vs prior year |
|
(5%) |
|
(1%) |
|
70bps |
Segment net sales decreased $37.1 million, reflecting a 5 percentage point reduction due to volume/mix, which was mostly related to the Natural Balance® brand and private label dog food. Net price realization was neutral, as list price increases implemented during the second half of the prior fiscal year were mostly offset by increased trade spend.
Segment profit decreased $1.9 million, as a decline from volume/mix was mostly offset by an $8.1 million recovery from a legal settlement related to a prior year supplier issue, synergy realization, and reduced marketing expense.
U.S. Retail Coffee
|
|
|
Net Sales |
|
Segment |
|
Segment |
|
FY20 Q3 Results |
|
$558.8 |
|
$189.5 |
|
33.9% |
|
Increase (decrease) vs prior year |
|
— |
|
3% |
|
120bps |
Segment net sales decreased $2.8 million. Net price realization reduced net sales by 5 percentage points, primarily driven by the Folgers® and Dunkin' Donuts® brands, which reflected promotional activity mostly supported by lower green coffee costs. Favorable volume/mix mostly offset lower net pricing, reflecting growth for the Dunkin' Donuts®, Café Bustelo®, and Folgers® brands.
Segment profit increased $5.8 million, primarily due to the favorable volume/mix and reduced marketing expense, partially offset by the net impact of lower net pricing in excess of lower costs.
U.S. Retail Consumer Foods
|
|
|
Net Sales |
|
Segment |
|
Segment |
|
FY20 Q3 Results |
|
$422.9 |
|
$84.2 |
|
19.9% |
|
Increase (decrease) vs prior year |
|
— |
|
(12%) |
|
-280bps |
Segment net sales increased $0.2 million, reflecting a 4 percentage point increase from volume/mix driven by growth for the Smucker's® Uncrustables® and Jif® brands. Lower net pricing reduced sales by 4 percentage points, primarily attributable to the Jif® brand.
Segment profit decreased $11.7 million, which included a $7.5 million equipment write-off related to discontinuing Jif® Power Ups®, due to a re-prioritization of resources toward initiatives with greater projected returns. Excluding this impact, segment profit decreased $4.2 million, primarily reflecting the net impact of lower pricing in excess of lower costs, partially offset by favorable volume/mix.
International and Away From Home
|
|
|
Net Sales |
|
Segment |
|
Segment |
|
FY20 Q3 Results |
|
$268.7 |
|
$49.0 |
|
18.2% |
|
Increase (decrease) vs prior year |
|
— |
|
(7%) |
|
-130bps |
Segment net sales increased $0.1 million, reflecting $1.3 million of favorable foreign currency exchange, offset by slight declines from net price realization and volume/mix.
Segment profit decreased $3.5 million, primarily reflecting a decline from volume/mix.
Conference Call
The Company will conduct an earnings conference call and webcast today, February 26, 2020, beginning at 8:30 a.m. Eastern time. Speaking on the call will be Mark Smucker, President and Chief Executive Officer and Mark Belgya, Vice Chair and Chief Financial Officer. To access the webcast, please visit investors.jmsmucker.com/.
The J. M. Smucker Company Forward-Looking Statements
This press release contains forward-looking statements, such as projected net sales, operating results, earnings, and cash flows that are subject to risks and uncertainties that could cause actual results to differ materially from future results expressed or implied by those forward-looking statements. The risks, uncertainties, important factors, and assumptions listed and discussed in this press release, which could cause actual results to differ materially from those expressed, include: the ability to achieve cost savings related to cost management programs in the amounts and within the time frames currently anticipated; the ability to generate sufficient cash flow to meet the Company's cash deleveraging objectives; volatility of commodity, energy, and other input costs; risks associated with derivative and purchasing strategies employed to manage commodity pricing and interest rate risks; the availability of reliable transportation on acceptable terms; the ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period; the success and cost of marketing and sales programs and strategies intended to promote growth in the businesses, including product innovation; general competitive activity in the market, including competitors' pricing practices and promotional spending levels; the impact of food security concerns involving either the Company's or its competitors' products; the impact of accidents, extreme weather, and natural disasters; the concentration of certain of the Company's businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and the ability to manage and maintain key relationships; the timing and amount of capital expenditures and share repurchases; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in useful lives of other intangible assets; the impact of new or changes to existing governmental laws and regulations and their application, including tariffs; the outcome of tax examinations, changes in tax laws, and other tax matters; foreign currency and interest rate fluctuations; and risks related to other factors described under "Risk Factors" in other reports and statements filed with the Securities and Exchange Commission, including the Company's most recent Annual Report on Form 10-K. The Company undertakes no obligation to update or revise these forward-looking statements, which speak only as of the date made, to reflect new events or circumstances.
