Smucker Company: Announces Q2 Fiscal 2020 Results

Orrville / OH. (sc) TheJ. M. Smucker Companyannounced results for the second quarter ended October 31, 2019, of its 2020 fiscal year. Financial results reflect the divestiture of the Company’s U.S. baking business on August 31, 2018. All comparisons are to the second quarter of the prior fiscal year, unless otherwise noted.

Executive Summary

  • Net sales decreased USD 63.7 million, or 3 percent. Net sales excluding the noncomparable divested business and foreign currency exchange decreased 1 percent.
  • Net income per diluted share was USD 1.85. Adjusted earnings per share was USD 2.26, an increase of 4 percent.
  • Cash from operations was USD 224.0 million, an increase of 10 percent. Free cash flow was USD 160.6 million in the quarter, compared to USD 125.1 million in the prior year.
  • The Company updated its full-year fiscal 2020 net sales, adjusted earnings per share, and free cash flow outlook.

Chief Executive Officer Remarks

«While our second quarter sales performance did not meet our expectations, we delivered EPS growth ahead of our projection, reflecting our commitment to maintain financial discipline and strengthen our bottom line,» said Mark Smucker, President and Chief Executive Officer.

«Despite continuing softness for our premium dog food offerings, we were pleased with the performance for the balance of our portfolio, as the momentum for our cat food and pet snacks businesses continued with year over year sales increases, our high growth coffee brands improved household penetration and market share, and Smucker’s® Uncrustables® grew 19 percent, helping accelerate growth in snacking. Looking ahead, the actions we are taking across the Company, including the recently announced leadership changes, position us well for future long-term growth and shareholder value creation.»

Second Quarter Consolidated Results

(Dollars and shares in millions, except per share data) Q2/2019 Q2/2018 % Change
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Net sales USD 1,957.8 USD 2,021.5 (3%)
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Operating income USD 329.8 USD 330.5
Adjusted operating income 391.0 415.7 (6%)
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Net income per common share – assuming dilution USD 1.85 USD 1.66 11%
Adjusted earnings per share – assuming dilution 2.26 2.17 4%
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Weighted-average shares outstanding – assuming dilution 114.1 113.7

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Net Sales

Net sales decreased 3 percent, including the impact of USD 32.8 million of net sales in the prior year attributed to the divested U.S. baking business. Excluding the noncomparable baking results and USD 1.8 million of unfavorable foreign currency exchange, net sales decreased USD 29.1 million, or 1 percent. Net price realization reduced net sales by 1 percentage point, primarily driven by lower net pricing for coffee and peanut butter, partially offset by higher pricing for pet food and pet snacks. Volume/mix impact was neutral as decreases for dog food and shortening and oils were mostly offset by increases for coffee and Smucker’s® Uncrustables®.

Operating Income

Gross profit decreased USD 17.3 million, or 2 percent, primarily driven by the impact of the U.S. baking business divestiture and the net impact of lower prices in excess of lower costs, partially offset by favorable volume/mix. Operating income was comparable to the prior year, as the impact of a USD 26.6 million pre-tax gain related to the sale of the U.S. baking business in the prior year and the decrease in gross profit were mostly offset by decreases in special project costs and selling, distribution, and administrative (SD+A) expenses.

Adjusted gross profit decreased USD 18.3 million, or 2 percent. Adjusted operating income decreased USD 24.7 million, or 6 percent, with the primary difference from generally accepted accounting principles (GAAP) results being the exclusion of other special project costs, which decreased USD 22.1 million compared to the prior year.

Interest Expense, Other Income (Expense), and Income Taxes

Net interest expense decreased USD 4.5 million, reflecting the benefit of reduced debt due to net repayments of USD 566.9 million during the past twelve months.

Net other expense decreased by USD 5.9 million, primarily due to legal expenses incurred in the prior year.

The effective income tax rate was 24.3 percent compared to 30.0 percent in the prior year. The effective income tax rate in the prior year included increased income tax expense associated with the sale of the U.S. baking business.

Cash Flow and Debt

Cash provided by operating activities was USD 224.0 million, compared to USD 202.9 million in the prior year, primarily reflecting the increase in net income adjusted for noncash items, partially offset by an increase in cash required to fund working capital. Free cash flow was USD 160.6 million, compared to USD 125.1 million in the prior year, reflecting the increase in cash provided by operating activities and a USD 14.4 million reduction in capital expenditures. Net debt repayments in the quarter totaled USD 72.9 million.

Full-Year Outlook

The Company provided updated full-year fiscal 2020 guidance as summarized below:

Current Previous
Net sales increase (decrease) vs prior year (3%) (1%) – 0%
Adjusted earnings per share USD 8.10 to USD 8.30 USD 8.35 to USD 8.55
Free cash flow (in millions) USD 850 USD 875 to USD 925
Capital expenditures (in millions) USD 300 to USD 320 USD 300 to USD 320
Effective tax rate 24.5% 24.5% – 25.0%

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Net sales are expected to be down 3 percent compared to the prior year, which included the loss of USD 105.9 million of sales in the first 4 months of fiscal 2019 related to the divested U.S. baking business and USD 25.4 million of incremental noncomparable sales for Ainsworth Pet Nutrition LLC. On a comparable basis, net sales are expected to be down 2 percent. The revision versus previous guidance includes the impact of second quarter sales results and greater than anticipated softness in the back half of the fiscal year, primarily for certain brands within the U.S. Retail Pet Foods segment.

Adjusted earnings per share is expected to range from USD 8.10 to USD 8.30, based on 114.0 million shares outstanding. Earnings guidance reflects the reduced contribution from sales, gross profit margin of approximately 38.5 percent, and SD+A expenses declining approximately 2 percent compared to the prior year. Free cash flow is expected to be approximately USD 850 million.

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