The J. M. Smucker Management Discusses Q3 2012 Results - Earnings Call Transcript

The J. M. Smucker (SJM)

Q3 2012 Earnings Call

February 16, 2012 8:30 am ET

Executives

Sonal P. Robinson - Director of Corporate Finance, Vice President of Investor Relations and Assistant Secretary

Richard K. Smucker - Chief Executive officer and Director

Vincent C. Byrd - President, Chief Operating Officer and Director

Mark R. Belgya - Chief Financial officer and Senior Vice President

Paul Smucker Wagstaff - Director and President of U.S. Retail Consumer Foods

Mark T. Smucker - President Of Us Retail Coffee And Director

Steven T. Oakland - President Of International, Foodservice And Natural Foods

Analysts

Eric R. Katzman - Deutsche Bank AG, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

David Driscoll - Citigroup Inc, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Charles Edward Cerankosky - Northcoast Research

Andrew Lazar - Barclays Capital, Research Division

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Farha Aslam - Stephens Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Robert Dickerson - Consumer Edge Research, LLC

Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division

Presentation

Operator

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Good morning, and welcome to The J.M. Smucker Company Third Quarter 2012 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Sonal Robinson, Vice President of Investor Relations. Please go ahead, Ms. Robinson.

Sonal P. Robinson

Good morning, everyone, and welcome to our third quarter earnings conference call. Thank you for joining us today.

On the call with me are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Steve Oakland, President, International, Foodservice and Natural Foods; Mark Smucker, President, U.S. Retail Coffee; and Paul Smucker Wagstaff, President, U.S. Retail Consumer Foods.

After this brief introduction, I will turn the call over to Richard for opening remarks. Vince will then provide commentary on the dynamics occurring within our business segments, and Mark will close with additional comments on our financial results for the quarter and our outlook for the year.

During the call today, we may make forward-looking statements that reflect the company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates, and actual results may differ materially due to risks and uncertainties. I invite you to read the full disclosure statement in the press release concerning forward-looking statements.

Let me also remind you that the company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is detailed in our press release located on our website at smuckers.com. A replay of this call will also be available on the website. If you have any follow-up questions or comments after today's call, please contact me or Mark Belgya.

I will now turn the call over to Richard.

Richard K. Smucker

Thank you, Sonal. Good morning, everyone, and thank you for joining us. By now, you have seen our financial results for the third quarter, which were obviously below our historical performance levels, as well as our and your expectations. On today's call, we will provide an update on the dynamics that challenged the business in the quarter and discuss our plans to address the issues going forward and why we remain optimistic and confident in our plans.

First, to ground everyone. We now anticipate cost increases in excess of $500 million for the full year, which we have been covering primarily with price increases, along with expense cuts and productivity gains. To put this into perspective, our net pricing increased approximately 16% for the quarter, which we believe is more than double the average inflation rate in the food sector. With leading brands in most categories where we compete, we have maintained price leadership and transparency with our retailers and have been responsible with both price increases and decreases when commodity cost warrants such adjustment. Although we expected volume to decline during the quarter, the magnitude of the decline was unexpected.

Consumer takeaway declined sharply in a number of our categories during the Fall Bake and Holiday season. This is consistent with IRI data, which indicated that year-over-year, the overall volume of food and beverage sold through measured channels decreased 4% for the 12-week period ended January 22, reaching a new 5-year low. This time period, of course, aligned fairly closely with our own quarter.

Other factors, notably, significantly higher price points on a number of our key items, consumer pantry loading of peanut butter ahead of our November price increase, a reduction in retail inventory levels and aggressive pricing by a few key competitors and retailers further impacted the volume shortfall.

In a moment, Vince will discuss these dynamics as they relate to our 3 largest categories. Sell-through was disappointing, considering we entered the period with sound marketing and merchandising plans in place, as we discussed on our call last quarter. As our marketing and sales teams performed post-holiday reviews, we saw an increase in the number of bake centers and Smucker items included on these bake centers as we expected. In addition, our holiday advertising and social media were well executed. The difference played out in the actual consumer takeaway relative to what we had expected from our promotional activities. For example, in our core Folgers Coffee offering, this year's promoted price point of $8.99 was 30% less than the unpromoted everyday price, but it was substantially higher than last year's promoted price of $6.99. As stated, we expected the volume to be down somewhat, but it was down greater than we thought.

Having identified the reasons for the overall volume decline, we are actively addressing the issues with pricing, along with taking other actions aimed at strengthening the business. First, let me say that we do not view our quarter's results or the consumers' behavior as fundamental changes that would affect our business model. We want to emphasize that we are confident in our long-term strategy and expect the consumer to adapt to adjusted market prices over the coming quarters.

Over the past several months, commodity costs have generally declined, with the exception of peanuts and sugar. Coffee, which is our largest purchased commodity, has seen recent Arabica futures average around $2.20 a pound. This compares to over $2.75 a pound just a few months ago. If costs continue at the current levels, we would likely take a coffee price decrease early in fiscal 2013 and expect a positive volume impact from this action. As commodity costs moderate, we will continue evaluating opportunities to adjust pricing and promotional activities in other categories as well.

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