Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The J. M. Smucker Company (NYSE:SJM)

Q1 2015 Earnings Conference Call

August 20, 2014 08:30 PM ET

Executives

Aaron Broholm - Director, Investor Relations

Richard Smucker - CEO

Vince Byrd - President and COO

Mark Belgya - CFO

Mark Smucker - President, US Retail Coffee

Paul Smucker Wagstaff - President, US Retail Consumer Foods

Steve Oakland - President, International Foodservice and Natural Foods

Analysts

Alexia Howard - Sanford Bernstein

Chris Growe - Stifel

David Driscoll - Citi

Mario Contreras - Deutsche Bank

Farha Aslam - Stephens

Matthew Grainger - Morgan Stanley

Akshay Jagdale - KeyBanc Capital Market

John Baumgartner - Wells Fargo

Robert Moskow - Credit Suisse

Jonathan Feeney - Athlos Research

Chuck Cerankosky - Northcoast Research

Jason English - Goldman Sachs

Operator

Good morning, and welcome to The J.M. Smucker Company's First Quarter 2015 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the company, we will open the conference up for question and answers after the presentation. Please limit yourself to two initial questions during the Q&A session and re-queue if you then additional questions.

I will now turn the conference over to Aaron Broholm, Director, Investor Relations. Please go ahead sir.

Aaron Broholm

Good morning, everyone, and welcome to our first quarter earnings conference call. Thank you for joining us today. Here with me on the call are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Mark Smucker, President, US Retail Coffee; and Paul Smucker Wagstaff, President - US Retail Consumer Foods.

Steve Oakland, President International Foodservice and Natural Foods is also on the line from another location.

Our prepared comments this morning will be organized as follows. Richard will begin with an overview of our first quarter performance, Vince will then provide an update on our business segments and Mark will close with additional comments on our financial results for the quarter and our outlook for the year.

During this conference call we will 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 encourage you to read the full disclosure statement in the press release concerning forward-looking statements. Additionally, please note the company uses non-GAAP results for the purpose of evaluating performance internally. Discussion on non-GAAP information is detailed in our press release located on our corporate website at jmsmucker.com. A replay of this call will also be available on the website.

If you have any follow-up questions after today’s call please contact me. I will now turn the call over to Richard.

Richard Smucker

Thank you, Aaron. Good morning everyone and thank you for joining us. With a record quarter of non-GAAP earnings per share we are pleased with the start of our fiscal year. I will begin with a few highlights for the quarter.

First, volume gains were achieved across a number of our major US retail brands and categories. In our Coffee segment, volume was up 2% driven by the performance of our Folgers, Café Bustelo and Dunkin’ Donuts brands. Low price realization resulted in the decline in net sales for this segment and for the company.

Within Consumer Foods volume gains were realized in several key categories including Jif peanut butter, Smucker’s fruit spreads and Crisco oils.

Total volumes for the entire segment was in line with the prior year. As anticipated, volume declined in our International, Foodservice and Natural Foods segments reflecting the prior year plan business rationalizations, which will be fully lapped by the end of the calendar year.

Second, as anticipated, significant improvement in Consumer Food segment profit primarily due to peanut butter drove operating income growth for the company. Lastly, this combined with lower interest expense and fewer shares outstanding, resulted in non-GAAP earnings per share increasing 11% to $1.34.

We are encouraged by these results, in light of the challenging economic environment that persists. As we look ahead to the holiday period and the balance of fiscal 2015, we are optimistic in delivering another year of earnings per share growth.

This is supported by our ability to manage our price to cost relationships, the expected contribution from innovation and new products, our strong marketing and merchandising plans, our ongoing investments to optimize our supply chain and the strategic deployment of our cash flow.

Let me briefly comment on our recent announcement regarding our agreement to acquire the Sahale snack business. This is an exciting enabling acquisition that adds a portfolio of innovative and on trend premium nut and fruit snacks.

With the growing snacking trend, Sahale provides a new platform for growth complementing our recent innovation efforts within our consumer foods business, where we have introduced several new snacking items such as the Jif To Go dippers.

We look forward to completing the acquisition next month and welcoming the Sahale employees to The Smucker Company.

Also supported by a strong balance sheet, we believe we are well-positioned to continue adding attractive brands and businesses to our portfolio.

In closing, we feel good about the start of the fiscal year and are encouraged to be moving beyond certain headwinds that we have spoken to you over the past few quarters, as we continue to show progress across our businesses.

We firmly believe with our commitment to our strategy, the strength of our leading brands, and our team’s ability to adapt and execute we remain well-positioned for long-term growth.

With that I turn the call over to Vince.

Vince Byrd

Thank you Richard and good morning everyone. We are pleased with our first quarter results and these reflect solid volume performance across a number of our major brands, supported by pricing actions and the contribution from innovation. Also during the quarter, we began to lap some of our recent headwinds.

Turning to the three business segments, in US Retail Coffee we achieved a 9th consecutive quarter of year-over-year volume growth, reflecting gains in each of our largest coffee brands.

Volume growth in mainstream roast and ground coffee led to the Folgers brand being up 2% for the quarter on top of a 4% increase last year. Folger’s Gourmet Selections K-Cup also realized solid volume gains.

Dunkin’ Donuts coffee continued its momentum with volume up 3% against a strong 6% prior year comp. In addition the Cafe Bustelo brand had strong volume growth with double-digit percentage gain. The introduction of Cafe Bustelo brand at K-Cups added to these results.

During the quarter, Coffee segment net sales were impacted by lower net price realization. While we announced a 9% list price increase on the majority of our portfolio in June, pricing on committed promotional programs along with continued price investment to remain competitive on shelf temporarily delayed the impact. We expect full reflection of the price increase in the second quarter.

Coffee segment profit was 4% below the prior years’ first quarter. In addition to comparing to a strong prior year results, other factors affecting comparability included a more favorable price to cost ratio in last year’s first quarter and lower K-Cup profitability as previewed on our year-end call.

As a reminder, we anticipated K-Cup margins to be compressed in fiscal 2015. We are encouraged by the initial contributions from new products and new distribution channels and our K-Cup business is on track to deliver our profitability expectations for the full-year.

Also during the quarter we made the decision to discontinue the Life is good coffee brand. This resulted in a small charge to segment profit.

Shifting to the Consumer Food segment overall volume was in line with a strong first quarter in the prior year. Gains in several key brands and categories were offset by declines in lower margin baking mixes and flour.

Looking at the performance within the spreads categories volume with the Jif brand was up 4% on top of an 8% increase last year. This result reflects a balance of price, brand support and innovation.

Smucker’s fruit spread volume grew 2% behind gains in traditional varieties as well as continued growth of our natural fruit spreads. Also within the brand, we remain pleased with the initial performance of Smucker’s Fruit-Fulls.

Lastly, Smucker’s Uncrustables frozen sandwich achieved double-digit volume growth in retail for the 10th consecutive quarter. The completion of our Scottsville manufacturing expansion provides the needed capacity to support our growth initiative for this product line.

Our overall PB&J business is in the midst of the back-to-school promotional season. We are encouraged by the merchandising plans we have in place and the initial consumer takeaway that will ultimately be the key to our performance for the period.

In the bake aisle, the Crisco brand continued its momentum with another quarter of strong volume growth. As soybean oil futures have declined to five-year lows, we have reflected lower cost in our pricing impacting net sales.

The primary soft spot in the Consumer Foods during the quarter was the Pillsbury brand. This reflects declines in the overall category and increased competitive activities primarily on flour and base cake items.

As we enter the Fall Bake period, we continue to focus our efforts on frostings and other higher margin products. We are also encouraged by the new Pillsbury items to be launched and another solidly year of holiday merchandising plans.

Segment profit was up 19% over the prior year. As expected, much of the increase was driven by improvements in peanut butter profitability. Prior year segment profit was negatively impacted by peanut butter price declines that were taken in advance of recognizing lower peanut cost.

For the full-year, we expect peanut butter margins to now be more in line with historical average of the past several years. Lastly within this segment, as Richard mentioned, we are excited about the acquisition of Sahale Snacks and look forward to the contributions of Sahale towards growing our overall Consumer Foods business.

In International Food Services and Natural Foods much out of the first quarter segment profit decline was expected primarily attributed to factors we discussed on our year-end call including the weaker Canadian dollar, as compared to a year ago and a higher grade on trade spent in Food Service coffee which will continue to impact our year-over-year comparisons until fully left beginning in the third quarter.

Our focus remains on growing the overall segment and we are encouraged by recent accomplishments including market share gains across most of our categories in Canada driven by innovation and merchandizing; within Food Service the ongoing conversion of our customers to our Folger’s branded liquid coffee offering.

In Natural Foods, our integrated sales organization is driving expanded distribution opportunities for the truRoots brand, and lastly our partner in China Seamild continues to grow and positively contributed to our first quarter results.

Overall for this segment we remain optimistic about achieving full-year sales and segment profit growth in 2015. In summary we are encouraged by the start to our fiscal year considering the current industry dynamics and we look forward to executing on our back-to-school and holiday programs.

We have a great team of passionate employees and as always we thank them for their efforts. I will now turn the call over to Mark.

Mark Belgya

Thank you, Vince, and good morning everyone. I will start by providing additional color on our first quarter results and then conclude with our outlook for the full-year. Net sales decreased $27 million or 2% in the quarter reflecting a 3% reduction in net price realization primarily attributable to the coffee segment.

The impact of lower volumes mostly resulting from declines in baking and business exits was essentially offset by the contribution from acquisitions. And finally mix added one percentage point of growth.

GAAP earnings per share were $1.14 this quarter down from $1.19 in the first quarter of last year. Included in this year’s GAAP earnings were $21 million of unallocated derivative losses compared to a gain of 5 million in the prior year. The current-year loss reflected change in election effective this quarter to no longer qualify commodity and foreign currency exchange derivatives for hedge accounting treatment.

Derivative gains and losses are now recognized immediately in earnings which may result in increased volatility in GAAP results going forward. In conjunction, we’ve revised our definition of segment profit and non-GAAP earnings to exclude these unallocated derivative gains and losses until the related inventory is sold.

Our Form 8-K was filed in July to recap segment profit and non-GAAP earnings for prior years to exclude previously disclosed unrealized mark-to-market adjustments on derivative contracts.

Excluding hedging gains and losses and other special project costs that are defined in our press release, non-GAAP EPS increased 11%, primarily attributable to three factors. First, gross profit drove an overall increase in operating income. Gross profit increased $11 million or 2% reflecting lower commodity costs which were only partially offset by pricing. Favorable mix also contributed.

This resulted in gross margin improving to 37.8%, an increase of 150 basis points over the prior year. Partially offsetting this was higher SD&A driven by an increase in selling expenses primarily due to incremental expenses associated with last year’s acquisitions and a charge related to the discontinuation of the Life is good coffee brand.

Second, lower interest expenses contributed to EPS growth reflecting the interest rate swap entered into during the prior year. The year-over-year benefit of the swap will be lapped as we proceed through the second quarter. And third, a decrease in the number of average shares outstanding resulting from last years share repurchase activity.

Turning to cash flow, cash used for operating activities was $8 million in the first quarter compared to a source of cash of $82 million in the prior year. This decline is primarily attributable to a greater current-year use of cash for working capital needs reflecting higher green coffee cost and ending inventory as well as certain timing factors.

Adding capital expenditures of $49 million for the quarter, free cash flow was 57 million negative. We continue to project capital expenditures of 240 million for fiscal 2015 reflecting an expected ramp up in spending for the last nine months of the year.

With no changes in our earnings guidance or CapEx from original estimates, we are not adjusting our free cash flow target of $625 million to $635 million. That said, we are currently tracking above working capital levels necessary to achieve this goal. We will see a reduction in working capital from current levels as we move through the holiday period and plan to provide an update to our estimate following the second quarter.

We ended the first quarter with short-term borrowings of $470 million against our $1.5 billion credit facility. With the upcoming closing of the $80 million Sahale acquisition and seasonal working capital needs, we expect short-term borrowings to peak near $700 million in the second quarter and then decline during the remainder of the year.

As noted in a Form 8-K filed earlier this month, we entered into a $1 billion commercial paper program allowing us to take advantage of favorable interest rates and providing additional flexibility to meet our short-term borrowing needs. We are now in the market improving our existing [revolver] borrowings to commercial paper

Considering the higher than anticipated levels of short-term borrowings yet at a more favorable interest rate resulting from the CP program, we continue to expect net interest expense in the range of $65 million to $70 million for the full-year. This range reflects our current projections and outlooks for short-term borrowings and interest rates.

Let me conclude with a sales and EPS outlook. We now anticipate 2015 net sales will increase at a rate slightly less than the 5% guidance provided on a year-end call. Despite this modest decline we are maintaining our non-GAAP earnings per share range of $5.95 to $6.05.

Sales of approximately $25 million associated with the Sahale acquisitions are included within a revived guidance. As we invest in the business to support distribution growth we do not expect material bottom-line contributions from this acquisition in the near-term.

And with that will open up the calls to your questions. Operator could you please queue up for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Alexia Howard of Sanford Bernstein. Please state your question ma’am.

Alexia Howard - Sanford Bernstein

I wanted to ask about the outlook for Coffee profit from here. You’ve obviously seen a rebound in the profit from the peanut butter side. Coffee, the cost have been rising it sounded as though last quarter you might have been expecting a little bit more of a bump in coffee profits from the decline (inaudible) time. [Inaudible] list price increases kicking in the next quarter how does the outlook look from here. Thank you.

Mark Belgya

Alexia, this is Mark Belgya. I guess it is a little hard to hear your question quite candidly, it was breaking up a bit. But I think what we would say generally across our businesses as opposed to getting into specifics of any three, you’ll recall at the end of the year we said that we expected our segment profits to be up in all three of our segments.

I think that’s still a fair comment despite you know where coffee came in. I think what I would say is that we expect overall to be up consistently in total because obviously we’re not adjusting guidance. I think the mix between the three segments may be a little bit different than what we expected out of the gate.

Alexia Howard - Sanford Bernstein

And then can I ask about share repurchases versus acquisitions going forward in usage of cash. Thank you.

Mark Belgya

Sure. I think just to restate our order of preference of spending our cash, we have our general umbrella statement of 50% shareholders, 50% for the business which we have held true to. M&A and finding the right strategic investment is clearly the number one use of cash and as we made a small acquisition and will be here in the next quarter would be our number one use.

But I think we have demonstrated that if there are not opportunities we still feel that buying back shares is a good use of our cash. Again just to remind everyone we sort of set a general guideline of a couple of percentage points of outstanding shares which is about 2 million shares currently.

Operator

Our next question comes from Chris Growe of Stifel. Please state your question sir.

Chris Growe - Stifel

I had two questions if I could, the first was when you talked the last quarter and you gave your outlook for fiscal ‘15 you talked a lot about some pretty aggressive new product activity across the company. I’m just curious, as you go through the different divisions, I guess the degree which that benefited the quarter, did you have a lot of these new products shipping, and I guess what sort of contribution do you expect from new products throughout the year?

Vince Byrd

Chris, this is Vince Byrd. I would say yes we are on target to still launch well over 100 new items this year. As you know we’ve also done that over the past couple of years. I believe we actually had about $80 million of new products contribute in the first quarter that are not in the portfolio three years ago, and we can turn to the three presidents but at this point we have not changed our innovation pipeline and what we plan to introduce.

Mark Smucker

This is Mark Smucker, Chris. And Just in coffee we are very pleased with the lineup of new products that we have coming out, obviously Bustelo and K-Cup is a notable one. But we do have new products in every segment and are launching a line of Folgers flavors it’s basically coffee flavoring in a very small container that is essentially a new segment. So we are excited about what we have in the pipeline, as these things go, during this time of the fiscal year it is a little bit early because shipments have just begun, but we are optimistic.

Paul Smucker Wagstaff

Chris, this is Paul, just from a Consumer Food perspective if I just add on to what Mark said, on the peanut butter side and overall we are excited about the snacking opportunity obviously with Sahale, but then also with Jif dippers and new product we’ve launched on the Jif side which is doing very well out of the gate.

Our seasonals and our bold frostings on Pillsbury continue to do well, we are excited about the upcoming fall bake, and in Fruit-Fulls for the Smucker brands, again that’s early launch, but we see some good results out of the gate and we are feeling comfortable that that’s going to be a great line in the future.

Richard Smucker

Steve, do you want to comment also on your areas?

Steve Oakland

Yeah, certainly, I think similar to what Mark said on timing, many of the new items in IF&F specifically Canada are around the baking season. So those are really not impacting the business yet, we expect those to impact the business in the second and third quarters. And I think we’ll start to see the impact of Enray as we get later in the fiscal year. There’s a lot of work on new distribution and new items from Enray. So we are excited about it but the impact has yet to be felt.

Chris Growe - Stifel

Okay, that will do. It’s a great overview. Just one quick follow-up may be for Mark on pricing in coffee, and I guess there was a recent K-Cup price increase, I’m sure you can’t discuss that if you have not filed that yet. But I guess my question would be that, as you look at the K-Cup business and you have seen some more aggressive promotional spending there. Is that category likely to see a continued heightened level of promotional spending, is that what’s proper for your business to try and regain some volume that’s there in K-Cups.

Mark Smucker

Chris, this is Mark. The short answer is, yes there is increased competitive activity. From a pricing perspective I would tell you that the increased competitive activity is more around the frequency of promotions than it is around going deeper, and so I think that across the category you’re just seeing more activity. But the relative pricing between brands remains more or less in line with our expectations just from being rational.

That said, you are right we can’t comment on our pricing actions, but in light of the competitive situation we certainly will evaluate it.

Operator

Next we’ll hear from David Driscoll of Citi. Please state your question sir.

David Driscoll - Citi

First question is just simply on the guidance. Did the first quarter results meet your internal forecast, and if the revenues are lowered for the full year, what’s the offset that keeps earnings unchanged?

Mark Belgya

David this is Mark Belgya. The result of the first quarter were a little below where we planned. But obviously it’s early in the year, so we’ve maintained guidance and what you’re going to see is we’re going to see some productivity gains we think through the course of the year. We are obviously looking at budgets.

There will be some marketing adjustments as well, but to that point you can imagine with 5.5% of our sales and marketing if you do the math it’s $300 million and at quarter end to the year there is some flexibility as far as addressing that without impacting the businesses too strongly. So we feel pretty confident to get that.

So it’s a combination of those things that we will see flow-through over the last three quarters.

David Driscoll - Citi

My second question, this goes to IF&F, I am curious here also about the quarter and the year in terms of profitability in sales in this segment. In fiscal 2014 that segment had, I think it’s fair to characterize it as a bad year. And I thought you guys had indicated last quarter that F’15 would be much better. I think Vince said in his prepared remarks that he did expect full-year profitability to be positive, but of course that’s not true in the quarter. So can just walk us through a little bit here, you know what’s going to happen in this segment and how strong your confidence is in that profit forecast.

Mark Belgya

Steve, I’ll start and I’ll turn it over to you for some details. David your points are well taken and we still hold to what we said in my earlier comments about all three segments being up year-over-year. Candidly, last year was a tough quarter for this segment, we do expect growth. I think as Steve will elaborate certainly there were some things that happened that we are lapping and we’ll see a greater benefit of that in the back of the year, particularly around the trade spend and food service. Steve you want to comment further?

Steve Oakland

Yes, certainly. The impact of this quarter was the Canadian dollar, was the exits and the trade spend, and if you remember we made those trade spend adjustments primarily in the third and fourth quarters. So those are flowing through the income statements in the first quarter against the quarter that didn’t have those. So as that volume normalizes, that trade spend volume normalizes, I think we will see favorability in the back half.

We also feel very strongly that the merchandizing programs both in our Canadian business and in our Natural Foods business are very strong for the back half, and we’re seeing momentum in our Food Service business on our Folgers liquid coffee business. So, we think the businesses are actually individually performing well, all of the noise should flush its way out by the end of the year. We’ll have the exits behind us, and we think we can make up quite frankly the currency impact and still show modest growth for the full year.

David Driscoll - Citi

If I just kind of repeat something, you second quarter is going to look a lot more like the first quarter here, and then third quarter and fourth quarter is where you would expect to sizeable improvements in profitability within your segments, is that a fair characterization?

Steve Oakland

That is similar to how the see it. I would expect, the only difference in that I would expect a little contribution from truRoots and Enray business in the second quarter.

Operator

Moving on we’ll year from Mario Contreras from Deutsche Bank.

Mario Contreras - Deutsche Bank

So this was the highest margin we have seen from the US retail segment in at least the last three years. I’m just wondering how sustainable do you think this margin level is or you should maybe something of now a competitive activity over the course of the year eat into that a little bit.

Mark Belgya

Hey Mario this is Mark Belgya. Yes we clearly had strong margins, I think it reflected, probably most key was a turnaround in the peanut butter business. That has been the drag quite candidly for the last four or five quarters. Obviously even though Coffee profit dollars were down, they still maintain a strong segment percentage.

So, I don’t see dramatic changes, I think its normal course as we move through the next couple of quarters you do tend to see a little bit margin because as our baking business plays a larger part because of Fall Bake that as you know the lower margin business. So I think you will see some pull down from the first quarter.

And then I think as you look forward it’s is going to become a bit of a function of what pricing does because as you know we focus on profit dollar growth. So if we were to see any kind of significant price movement increasing that top line, that will moderate the margin accordingly.

Mario Contreras - Deutsche Bank

And then just one additional question with respect to the recently announced Sahale acquisition; just wondering if you could talk a little bit about the long-term opportunities for this business, for example it has a large [sea] stock presence, maybe some opportunity you got some Smucker products through that distribution and vice versa, get a bigger traditional retail distribution for Sahale, thanks.

Paul Smucker Wagstaff

Hi Mario this is Paul and again we are very excited about this Sahale opportunity. The snacking category as you all know is growing very significantly and they have a really unique portfolio of products that are very great obviously tasting products but also they are positioned well, little premium and that distribution is not full I would say, so there is opportunity for us to gain distribution in other channels.

And then also the learnings that we get from them we can also apply to some of other brands. So although it is very early in the process as we stand today, we do feel very comfortable that there is going to be opportunity not only just for Sahale but some offer other brands. So, we are excited with that.

Vince Byrd

Mario, this is Vince. I would only add that although much of a smaller scale, it’s not that too dissimilar to when we acquired the Folgers business that had a very strong presence in the dollar channel where we did not have much distribution. And if you look at Sahale, even where they are merchandised in the store and produce section et cetera will be new for us. But we really think we’ll be able to leverage our go-to-market strategy and maybe a more traditional channels to really help grow that business in the future.

Operator

We’ll now year from Farha Aslam from Stephens. Please state your question.

Farha Aslam - Stephens

Mark you mentioned briefly your cost savings program would kick in as the year progresses. Could you just reminders what the cost savings from your actions will be for this year, and when those contributions will flow-through?

Mark Belgya

As far as a combinations, we said [day-to-year] that we will have about $10 million of additional benefits from the full-year operations of our [Oregon] plan and given that is kind of running smoothly. So that we continue to see, and that was in our original guidance and that continued.

I think in the other as we are going to cover some of that top line for all that we spoke to, will really be a function of focusing on the spending side, and this will hold through across our manufacturing facilities as well as a corporate function.

So that will be the driver, I would say, of most of the production opportunities. Again it’s earlier in the year, it doesn’t allow the team some flexibility to look at where some spending that might not be as necessary as originally planned. That’s where we’ll focus for first.

Farha Aslam - Stephens

And the second question is a coffee; now that you have taken your prize increase your in the second quarter, how are you seeing the promotional cadence flow through versus competition, is it in line with your expectations greater or less?

Mark Smucker

Farha its Mark Smucker. It is in line with our expectation. As you know part of the reason, for obviously we take price to be transparent with our customers. Part of the reason we took in the first quarter was to make sure that we had our pricing strategy set for the key holiday period.

So, literally as we speak, we are seeing pricing move on shelf both in our own business as well as all of the key competitors. So we would expect that relative price gaps will continue to manage and do a good job doing that, and so overall I think the pricing across it, the category and the segments within it are in line with our expectations.

Operator

Matthew Grainger of Morgan Stanley has our next question.

Matthew Grainger - Morgan Stanley

Just first on coffee, could you talk a bit about the outcome or the impact of some of the shelf resets that have taken place in the category during the summer both on roast and grounds and your K-Cup business. And then separately just on K-Cup, could you update us just a bit on some of the efforts that you have in place to expand distribution in alternative channels where you feel you’re making progress currently.

Vince Byrd

When you look at the share trends, which are positive, you look at the 12 week share trends sequentially. We’ve actually had some nice results in all of a segments; so K-Cup has stabilized and maybe increased slightly, and then you look at premium in mainstream and those also have positive trends as well, and we attribute that success to obviously our promotional efforts, our brand support efforts.

And we have seen that shelf recess has occurred in the roast and ground space, we have one, and in fact we have maintained the number of items on shelf versus competition in the premium space some of the smaller or smaller brands would have lost, and so we clearly have been successful on that front.

On the K-Cup side, it’s a little bit more of a mixed bag clearly having Bustelo and some of our new items has helped us, and I think as we are still trying to study how that has impacted us, but I think while we would say it is positive, and it just really varies by customer.

And then, Matthew you had another question on K-Cup.

Matthew Grainger - Morgan Stanley

I think expanded channels which club etcetera (inaudible).

Vince Byrd

So in this expanded channels we did talk last time about dollar, online and club and we have had some nice successes in all of that which has contributed to our success in the quarter.

Matthew Grainger - Morgan Stanley

Could I ask a quick follow-up as well on Pillsbury? I can definitely appreciate placing the focus on higher margin products going into the fall, but your commentary didn’t seem particularly optimistic on competitive dynamics or category growth in the mixes sort of follow forward-looking basis. Do you expect to see improvement in the business performance here over the next few quarters, and can adjust it to your comfort level around the plans and sort of the promotional and merchandising efforts you have in place going into the fall.

Paul Smucker Wagstaff

Show Matthew this is Paul. So couple of things, I would say that we are optimistic on our business as far as the new items that we’re planning on launching. We’re trying to focus on some of the key trends that are occurring from a consumer perspective, things like simple ingredients, and we have some products that we are coming out launching on that front, gluten-free items and our seasonal items continue to do very well. We’ve clearly focused on our frosting category which is where we are the number one and also it’s profitable for us.

In the last year there was about 200 items that were launched in the baking category alone, and so that’s added to some of the complexity of the category and some of the additional competitiveness that’s taken place in that section, and so some of those new items have been more fib-related and more I would say not as relevant as some other ones. So we would hope some of that would get sort through and we would focus on more of the longer term trends that our items that we think are going after.

Additionally we think about our merchandising for Fall Bake, we are a very good position with the Pillsbury business, and when we think about oil, oil is looking fantastic. We had a very good quarter last year, a great quarter first quarter, and we look good for Fall Bake.

So when we think of our total baking business, I think we want to include the Crisco brand as well as a Pillsbury brand. So we feel very good about going forward.

Operator

Our next question comes from the line of Akshay Jagdale of KeyBanc Capital Market. Please state your question.

Akshay Jagdale - KeyBanc Capital Market

A couple of questions on the K-Cup business, can you give us an update on what your expectations are for K-Cup sales growth for those of 2015? It seems like the quarter at least from where I sense came in better than I thought on the K-Cup side comment has some pretty easy comps especially in the back half of that business.

You mentioned your share trends have re-stabilized and you’re getting some incremental pace, and from what I know the new Keurig on the 2.0 is also going to be positive for your new products. So can you just give us an overall update on sort of sales growth expectations and maybe talk a little bit about the 2.0 launch and so what impact that might have on your business.

Mark Smucker

Hi Akshay its Mark Smucker. So I think we haven’t really changed our outlook in terms of, we do expect mid-single digit volume growth on K-Cup, and as you look across the segment shares are starting to stabilize a little bit, and we have seen over the past 12 weeks saw the unlicensed growth has slowed somewhat and you’ve seen the license player shares also sort of settled.

We did fear as I mentioned earlier, a small uptick in our share and so we are encouraged by that, but of course we need to continue to support the business. And then on 2.0, clearly we’re confident that we are with the right partner. Our partnership with Green Mountain as we have said before has been fantastic and we continue to be optimistic about that.

We will in all of these formats that the 2.0 machine will brew, and just believe in the consumer benefits that that new technology brings to bear in terms of flexibility and so forth. Keurig has done a great job of building a strong brand portfolio, and I think as you’ve seen in the segment, with good support the strong brands, winning brands will continue to win.

Akshay Jagdale - KeyBanc Capital Market

That’s helpful and then any update on your relationship with Dunkin, obviously the trends in the premium coffee side continue to be strong. So can you give us an update as to where you stand as it relates to the K-Cup business potentially.

Vince Byrd

Akshay, this is Vince, as we’ve said before our Dunkin relationship is also equally very, very strong. We continue to work with them on a premium side than it is to a number of new products. We continue to look at opportunities between our two companies for growth that will benefit both them and us, and there is really nothing new to report as it relates to K-Cup, we’re exploring a number of opportunities between the two companies.

Akshay Jagdale - KeyBanc Capital Market

Just one last one on M&A, can you use an overall update on what you’re seeing in terms of activity in the M&A space that seems to me obviously there’s been a pickup in general in terms of M&A deals in the food space. You guys have obviously made some tuck-in acquisitions, so it seems to me that maybe valuations might be a lot of [rich]. Can adjust help us understand the dynamics on the M&A side as you see them, thank you.

Richard Smucker

Sure Akshay, this is Richard. Basically I agree with everything you said, the activity has increased, we’ve been able to get a couple of nice tuck-ins and enabling acquisitions which we continue to look for those opportunities along with Bolton and obviously occasionally some transformational. But you’re right there is more activity in, and we are in a good position to play in that space because we have a very strong balance sheet and a good currency in a stock if necessary.

So other than that, I think you’re right on the analysis of where the market today. Mark you might have a comment on that.

Mark Belgya

Obviously the only thing that I would add is, when you kind of look at the transaction in depth, what is different and what’s driving some of these multiples and valuations may be lost a few years ago, and I think the one thing you do hear quite a bit and I know several of our peers have announced transactions, there is this whole concept of buying down the multiples.

And so while you are seeing sort of this 11, 12, 13, 14 times being paid in the market, the ability of companies to take advantage of synergies and then also the step up invasive is really allowing companies to do transactions that at the end of the day if they execute adjusted properly, you get them down to more traditional valuation.

So I think, until the interested environment changes and there is evidence that maybe that strategy that will ][continue on synergies doesn’t play out, I think you will continue to see this heightened levels.

Operator

Next we’ll hear from John Baumgartner of Wells Fargo. Please state your question.

John Baumgartner - Wells Fargo

Just thinking about the retail consumer business, maybe you could speak a bit to what you are seeing in certainly the peanut butter category. It looks as though some of the price promotion in the Nielsen data has really increased over the past 4 or 8 weeks. So just in light of that, how are you thinking about the competitive environment there, are there any risk to your peanut butter profit plan as fiscal ‘15 unfolds thank you.

Paul Smucker Wagstaff

Hi John this is Paul. When we think about the peanut butter category, right now we feel our business is very good and we think about the back-to-school we have great merchandising in place. The early consumer takeaway seems to be very strong which we are pleased to see.

From a competitor perspective, we would say that all the players, we categorize it that all the key players are really playing responsibly. It’s competitive, there is no doubt about that, we are seeing some deals which you typically see around this time of year back-to-school, but overall we feel pretty good about the health of the category. There are a lot of new items that are coming into this segment, not only us but other competitors and we feel that’s going to overall increase the usage peanut butter.

And keep in mind it’s still one of the cheapest protein out in the market place, and with some of the higher costs that we’ve seen on the meat side of the business, meat side of the category protein, we feel very good about where peanut butter is going to play.

Operator

Next we’ll hear from Robert Moskow of Credit Suisse. Please state your question.

Robert Moskow - Credit Suisse

A question on Jif, I though in your opening comments Mark you said, pardon me it was Vince. You said that we now expect peanut butter to return to a more normalized margins. Has anything changed regarding your outlook for fiscal ’15 or was that always pretty much your expectation. I think some people including myself I thought you might be able to overshoot on margins this year..

And then secondly, in the mix anything you said that the mix, Mark you did say that the mix would be different this year in terms of the segment and how they deliver profit. Are you thinking that coffee will be a little bit less then you thought in terms of profit contribution policy and International Foodservice and Natural Food that’s going to be a little bit less than expected?

Mark Belgya

Rob this is Mark Belgya I’m trying to clarify here on both your questions. On first one, the peanut butter, because last year, probably actually the last six to seven quarters was just much lower than the average that what you are seeing is return. I mean mostly that profit gain in the [pulse] segment was due to peanut butter. And that was doing their expectation and I think the growth in the business as you just is to continue, so we’ll still see profitability.

But that was the big step up, and then in terms of the just the overall profitability, your take is correct, I mean we fell a little bit short on the coffee side, so the other two segments will continue to make up the difference to help land at the original guidance for the company.

Robert Moskow - Credit Suisse

Coffee had a very strong year Mark I remember you and I talking about this in fiscal ’14. Just broadly speaking, I think there is some concern that the big step up in profits over the last two years, you and I talked about like $100 million step up, can you still protect that step up, is that profit in the profit pool that you expect to be able to hold on to that, so there is no risk if that deteriorates.

Mark Belgya

Our expectation and you heard us say this a hundred times, our expectation is grow every business every year and I am not saying that blindly, but we would expect continue to maintain that portion of that overall profit pool and as we look to the year and would still see some profit growth just maybe not to the degree view originally had at the outset.

Robert Moskow - Credit Suisse

Got it, still growing.

Operator

Our next question comes from Jonathan Feeney of Athlos Research.

Jonathan Feeney - Athlos Research

In keeping with tradition a couple of questions. The first is how specifically are you thinking about the timing of the launch of Keurig 2.0 with respect to how your modeling profits in that coffee segment. I mean is that a significant factor in your thought process, and I would imagine there has been, you mention this in past before whether there should be some inventory build and perhaps maybe that’s affecting the timing of your profit expectations over the course of the fiscal year, that would be my first question.

Second question would be on the M&A front. In a lot of ways the history of Smucker has been written by big transformative deals getting into new categories as you talk about with investors. Have integrated those who successfully, when I look at Sahale Snacks, it’s certainly a kind of acquisition you’ve done successfully. It is somewhat of a new category for you though but rather small and sort of niche oriented.

So I guess my question around Sahale would be, does this tell us, does this mean that if you did a big transformative deal it would be in the direction of something like a Sahale Snacks or sort of all options on the table as they have historically as far as on the lookout for bigger deals, thanks very much.

Mark Smucker

Hi Jonathan this is Mark Smucker, I will start with your question 2.0. Really the contribution this year is minimal. If you take into consideration that Keurig will be also settling 1.0 Brewers alongside that. With that aside, even if that were not the case it would take some time before those 2.0 brewers would make their way into a significant portion of household that would be meaningful across a business. And so I would tell you that this year the contribution would be minimal.

Richard Smucker

And Jonathan if you’re satisfied with Mark’s answer, I will answer the one on M&A, this Richard, obviously our strategy is to own the number one brand, it’s only the centre of the story in North America. That allows us to play in a lot of categories that we are not in today.

So if you look at the transformational acquisitions, I think you could be confident that we’re looking in a number of different categories that are beyond the current categories that we are in today. We weren’t in coffee as you know, six years ago, and we are now in coffee in a place of significant role.

And we think that there are several other categories that could fit very nicely. Now the Sahale acquisition is a nice feat and gets us into snacking category in a small way to really learn that business.

But we think that has some real expert growth as we’ve mentioned already, but that’s one category we weren’t really, we were dabbling in with some of the products, but now that gets us in a bigger way. But there are other categories out there that we do think would settle down. We hope that at some point in time is something to be announced, but nothing today.

Operator

Next we’ll hear from Chuck Cerankosky of Northcoast Research. Please state your question.

Chuck Cerankosky - Northcoast Research

When you look at the sales growth pressures in the quarter and some of it continuing into the year, what attention might be needed on expense control?

Mark Belgya

Chuck this is Mark Belgya, we’ve been reiterating some of the points a little bit earlier is that, being one quarter in gives us a lot of flexibility in terms of looking in, and as you know any budget has some discretionary funds in that. So right now the challenge of across the organization is to look and we will implement changes.

We’re not enough posts situation here, I don’t want to come across as being that drastic it’s just being very prudent in cost management and using eight months of the remaining fiscal year to close a little bit of that and to maintain that guidance. But there are levels that we can pull in dollars that we can pull back on from budget perspective.

Richard Smucker

Chuck this is Richard, and just add to that, we also haven’t given on original top line growth goals. We go back to our sales team and say, hey we were a little bit short in the first quarter, how are you going to make up the difference? So it’s not just bottom-line, we have some leverage we can pull to make sure we’re heading both of those.

Chuck Cerankosky - Northcoast Research

Okay and looking at the Santa Cruz brand where it had some volume contractions in the quarter, anything going on there that’s different from the overall organic category trends that might explain that or is it distribution related? Just curious about that brand’s performance.

Steve Oakland

Sure. Hi Chuck, Steve Oakland. Chuck if you remember we made a conscious decision, large piece of volume of Santa Cruz organic was the lemonade, and that lemonade was promoted across traditional grocery at very aggressive price points, 10 per 10 per organic lemonade. Two years ago, we stepped away from that and we’ve positioned that brand more consistent with the way its positioned across other categories and other beverages, and we’ve taken those price points up.

So really other than that the Santa Cruz brand is very healthy today, as is ours. We had a great quarter in traditional and instant beverages. So if you strip the noise out from the lemonade change, actually we see growth in that business now and we see a lot of opportunities to extend it.

As you know it’s in pouched organic apple sauce, its in peanut butter, it’s in a lot of other categories.

Operator

Next we’ll hear from Jason English of Goldman Sachs. Please state your question.

Jason English - Goldman Sachs

Mark on the last quarter conference call you could have detailed the algorithm in terms of gross profit, growth expectation, SD&A growth expectations as well as sales, can you update us on your thinking on each of those line items.

Mark Belgya

I think that there are not going to be dramatic changes from the original. I’m in a little bit of the SD&A should improve just from the commentary that we’ve had as it relates to an administrative type expenses and marketing and that’s where that would fall out.

But gross [profit] comments earlier, there is a little bit of mix shift when moving from coffee that I can get, I don’t think it’s significant, original expectations and again keep coming back it was still our original guidance, so you’ll just a little bit of improvement on the SD&A side of the course of the remainder of three quarters and maybe just a little bit of erosion of gross profit but hopefully we can compensate that based upon what riches comments were enjoying some additional sales particularly in coffee.

Jason English - Goldman Sachs

When you say a little bit of erosion of gross profit are you comparing that to the first quarter or are you suggesting that gross margins could be down year-on-year?

Mark Belgya

No, from my original commentary for the fiscal year. I don’t have exactly my language, I know we didn’t just think of basis points increases out of the beginning of the year, but I think we said that gross profit would be sort of in line with our income before tax expectations, so its like 3% or 4%, I think that still kind of where we’re looking at.

Jason English - Goldman Sachs

Yeah, you would suggest that the gross profit would grow below sales modestly, suggesting the modesty of your gross margin compression year-on-year. It’s sound like maybe that’s still the case or it could be a little bit better is that fair?

Mark Belgya

That’s fair.

Jason English - Goldman Sachs

And then in terms of sales you are expecting volume growth for the full-year. It came in a little bit light despite the price investment this quarter and obviously the expectations for price to ramp. How are you thinking about volume for the full year now?

Mark Belgya

Yeah if you look across the business and again you always have to be a little bit careful because mix (inaudible) in to this because as you know in this quarter we had baking was down which was a large volume, you know sales dollar of the margin business.

But I would say that we expected a modest increase at the beginning of the year, and we probably see it tweaking down just a little bit to being flat. I mean we’re talking about a percentage point basically. So closer to flat but again mix will come in to play with the course of the year depending upon where volume shakes out.

Operator

Next we’ll take a follow-up question from David Driscoll of Citi. Please state your question.

David Driscoll - Citi

Thank you for taking the final question. Just wanted to ask a little bit about the Life is good brand and what happened there? So generally it’s my view that launching a new brand is an expensive proposition especially in a category that’s got many, many, many, many brands in there.

Just would love to understand kind of why did this brand fail, what did you guys learn from the whole experience of launching the Life is good product?

Mark Smucker

Sure David its Mark Smucker. I would start just by saying that the relationship with the Life is good folks is fantastic, and we really had a lot in common with those guys, they do a very nice job with their brand. But at the end of the day, we did some research we felt that coffee and their brand did well together.

What we learned although the products were very good products but we learned was it that the relevancy of that brand was very decent on the coast, so on the East and West Coast but elsewhere the brand awareness was very low. And so we just saw a good trial out of the gate but poor repeat purchase because I think that the consumer has a number of choices in that category and that brand unfortunately just did not survive.

David Driscoll - Citi

Okay final question from me unrelated, Mark can you just clarify for me what is your marketing spending plan for the year? How much do you think that marketing will be up?

Mark Smucker

Well obviously David we are still, the team is still working through it. I would suspect that it will be basically in line, maybe slightly above last year’s spend. And again just to reiterate I made this commentary on a couple of quarters when we’ve adjusted marketing is that, we are committed to market in a good portion but there is still some flexibility, and we underscore that were quite comfortable with what we have on air.

We did a lot of production last year so we got some great commercial that are still in the can to be run. So we are looking at those dollars that either we had more flexibility or will not have a dramatic impact. But I suspect it will be right about last year’s level or maybe just a tad bit above.

Operator

We’ll take our next follow-up question from Akshay Jagdale of KeyBanc Capital Market. Please state your question.

Akshay Jagdale - KeyBanc Capital Market

Thanks for taking this follow-up, this one is for Mark, you mention the mid-single digit growth expectation for volumes in K-Cup. I mean you are at 8% growth this quarter the category is still growing double-digit and your share is improving.

So why is that not - I mean I understand that you want to be conservative but is my characterization of it being conservative in light of the facts we’ve seen so far. Is that the right characterization or why should we expect 5% growth when your share is improving and the category is growing double-digit.

Mark Belgya

Akshay the short answer would be that we’re still in the process of filling the pipeline with both new products and some of the new channels that we recently got rights for offset by some of the recent declines in the Millstone items.

Akshay Jagdale - KeyBanc Capital Market

Okay, so still there’s a lot of moving parts and you need some time to get more visibility is that a good way to think about it?

Mark Belgya

You got it.

Akshay Jagdale - KeyBanc Capital Market

And then just overall on your guidance for the full year, so why did the coffee business margins or sales come in below your expectation, what were the drivers of that, was that the pricing to cost lag, take of business, can give us some color on that and maybe an order or magnitude.

Vince Byrd

Akshay this is Vince, I think we need to take a step back. I mean we grew the coffee business 2% in the quarter coming off a strong quarter last year, and we grew virtually every brand and yes we might have had higher expectations, we are very, very pleased with where we started the fiscal year on coffee.

Again roast and ground has grown for nine consecutive quarters, and I think we’re very very pleased with that result. So yes it might have been slightly below our expectations, but if you take a step back and look at those results, if you very good and I think we’re positioned for the balance of the year.

Operator

Will now take a follow-up question from Robert Moskow with Credit Suisse.

Robert Moskow - Credit Suisse

I think people listening to this call might want to go back to the beach, but I’m going to ask a broader question about merchandising environment at retail heading into back-to-school, and then also into the Fall Bake.

I’ve heard a lot of packaged food manufacturers lament the fact that merchandising has gotten overcrowded, and that there has been a big shift to value channels and these have been kind of real limiting factors stop

Are you seeing those same issues as you head into this fall, and have you taken any steps kind of compensate for it. How is this environment different from last year’s environment or merchandising perspective?

Vince Byrd

Robert, I think you’re correct if you read what’s going on in our industry and from what our peers are saying, there is a lot of merchandising activity and some degree we are all competing regardless of categories. But we feel very comfortable as Paul Wagstaff articulated earlier with both the back-to-school activity.

In fact one could argue that we have more merchandising issues than we’ve had in the last few years, and then secondly as we look in to the holiday period we feel very, very comfortable.

We feel comfortable with our price points across our portfolio, and so there is no doubt that it’s a challenge but can’t use it as an excuse. We have leading brands and we need to make sure that we get a fair share of those opportunities and programs.

Robert Moskow - Credit Suisse

And you said that you are very comfortable reduced price points. Are those price points below where they were a year or two ago, because commodities are favorable so that gives you that flexibility?

Vince Byrd

Is going to vary by each of those segments as primary Mark and Paul have articulated because when that particular community rests, and again Crisco Oil would be down, peanut butter may be up, et cetera et cetera, we won’t go back won’t rehash them all, but it’s going to vary.

Operator

And we have other questions at this time. I will now turn the conference call back to management to conclude.

Aaron Broholm

We would like to thank everybody for being on the call, and hopefully you can get back to your vacations and that’s where you are. I can get rest assured we are not going back to beach in Ohio. Thank you.

Operator

Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by dialing 888-203-1112 or 719-457-0820 with a passcode of 5735316. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The J. M. Smucker Company's (SJM) CEO Richard Smucker on Q1 2015 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts