Orrville / OH. (sc) 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 USD 39.6 million, or 2 percent, primarily reflecting anticipated declines within the U.S. Retail Pet Foods segment.
- Net income per diluted share was USD 1.64. Adjusted earnings per share was USD 2.35, an increase of 4 percent.
- Cash from operations was USD 521.6 million, an increase of 24 percent. Free cash flow was USD 465.1 million in the quarter, compared to USD 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 USD 465 million, and net debt repayments exceeding USD 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
| (USD and shares in millions, except per share data) | |||||
| Three Months Ended … | 2020-01-31 | 2019-01-31 | Change | ||
| Net sales | USD 1,972.3 | USD 2,011.9 | (2)% | ||
| Operating income | USD 289.0 | USD 217.6 | 33% | ||
| Adjusted operating income | 395.8 | 406.2 | (3)% | ||
| Net income per common share – assuming dilution | USD 1.64 | USD 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 USD 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 USD 71.4 million, or 33 percent, primarily reflecting a USD 54.8 million decrease in intangible asset impairment charges, a USD 15.5 million decrease in other special project costs, and a USD 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 USD 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 USD 24.4 million, or 3 percent, with the difference from generally accepted accounting principles (GAAP) results being the exclusion of a USD 10.6 million favorable impact, as compared to the prior year, of unallocated derivative gains and losses. Adjusted operating income decreased USD 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 USD 6.5 million, primarily as a result of reduced debt due to net repayments of USD 700.6 million during the past twelve months.
Net other expense decreased by USD 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 USD 521.6 million, compared to USD 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 USD 465.1 million, compared to USD 333.0 million in the prior year, reflecting the increase in cash provided by operating activities and a USD 31.6 million reduction in capital expenditures. Net debt repayments in the quarter totaled USD 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) versus prior year: | (3)% | ||
| Adjusted earnings per share: | USD 8.10 to USD 8.30 | ||
| Free cash flow (in millions): | USD 850 | ||
| Capital expenditures (in millions): | USD 300 to USD 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 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.
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 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 USD 850 million.
