J.M. Smucker (SJM) has reported earnings. Shares are moving, up 9% at the time of this writing. But why? Well both earnings and guidance were above our expectations, and as such the Street is bidding up the name. Below are the earnings highlights to be aware of:

Net Sales

Net sales increased $9.7 million, or 1 percent.  Net price realization contributed 1 percentage point of growth, driven by higher net pricing for peanut butter and the Smucker’s® brand.  Lower volume/mix impacted net sales by 1 percentage point, as declines in the oils and baking categories were partially offset by gains in pet food.  Favorable foreign currency exchange contributed $5.4 million to net sales.

Operating Income

Gross profit increased $12.1 million, or 2 percent.  A net benefit of higher pricing and costs more than offset lower volume/mix, primarily attributed to the oils and baking categories.  Selling, distribution, and administrative (“SD&A”) expenses decreased $2.2 million, driven by incremental synergy realization and the Company’s cost savings initiatives.  Operating income increased $27.4 million, or 9 percent, further reflecting a reduction in special project costs.

On a non-GAAP basis, adjusted gross profit decreased $11.2 million, or 1 percent, with the primary difference from GAAP results being the exclusion of a $23.9 million favorable change in unallocated derivative gains and losses.  Adjusted operating income decreased $13.0 million, or 3 percent.

Other

Net interest expense increased $0.6 million.  Income taxes increased $9.0 million.  This was primarily attributed to higher income before income taxes, as the effective tax rate was 33.3 percent in the current year, compared to 33.2 percent in the prior year.

FULL-YEAR OUTLOOK

The Company updated its full-year fiscal 2018 guidance as summarized below:

Current Previous
Adjusted earnings per share $7.75 – $7.90 $7.75 – $7.95
Free cash flow $775 million $775 million
Capital expenditures $310 million $310 million
Effective tax rate 32.5% – 33.0% 32.5% – 33.0%

 

Net sales are expected to be in the range of flat to down slightly, compared to the prior year.  Adjusted earnings per share is expected to range from $7.75 to $7.90, based on 113.6 million shares outstanding.  The change in earnings guidance further reflects anticipated freight cost increases for the remainder of the fiscal year, driven by industry-wide headwinds.  The above guidance excludes any potential impact following completion of the Company’s previously announced definitive agreement to acquire the Wesson® oil brand from Conagra Brands, Inc., which is pending regulatory approval.

SECOND QUARTER SEGMENT RESULTS

Dollar amounts in the segment tables below are reported in millions.

U.S. Retail Coffee
Net Segment Segment
Sales Profit Profit Margin
FY18 Q2 Results $552.7 $152.6 27.6%
Increase (decrease) vs prior year (18%) -620bps

 

Segment net sales increased $0.9 million, reflecting a slight increase in net price realization.  Lower volume/mix for the Folgers® brand was mostly offset by gains for the Dunkin’ Donuts® and Café Bustelo® brands.  Segment profit decreased $33.9 million primarily due to higher green coffee costs and the unfavorable impact of volume/mix.

U.S. Retail Consumer Foods
Net Segment Segment
Sales Profit Profit Margin
FY18 Q2 Results $531.5 $130.9 24.6%
Increase (decrease) vs prior year (5%) 10% 330bps

 

Segment net sales decreased $25.8 million.  Volume/mix reduced net sales by 9 percentage points, primarily driven by the Crisco® and Pillsbury® brands.  Net price realization increased net sales by 4 percentage points, primarily attributed to the Jif® and Smucker’s® brands.  Segment profit increased $12.0 million due to improved net pricing and reduced marketing expense, partially offset by lower volume/mix.

U.S. Retail Pet Foods
Net Segment Segment
Sales Profit Profit Margin
FY18 Q2 Results $552.1 $122.9 22.3%
Increase (decrease) vs prior year 4% 7% 70bps

 

Segment net sales increased $21.1 million.  Favorable volume/mix, driven by the Nature’s Recipe® and Meow Mix® brands, increased net sales by 5 percentage points.  A slight decline in net price realization was primarily attributed to the Meow Mix® brand.  Segment profit increased $8.4 million primarily reflecting synergies and cost savings initiatives, which more than offset increased marketing expense.

International and Away From Home
Net Segment Segment
Sales Profit Profit Margin
FY18 Q2 Results $287.3 $53.7 18.7%
Increase (decrease) vs prior year 5% 4% -20bps

 

Segment net sales increased $13.5 million, reflecting $5.4 million of favorable foreign currency exchange and higher volume/mix driven by the Jif® and Smucker’s® brands.  Net price realization increased net sales by 1 percentage point.  Segment profit increased $2.0 million as the contributions from favorable volume/mix and foreign currency exchange were partially offset by expenses related to the construction of the Smucker’s®Uncrustables® production facility in Longmont, Colorado.

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