CAG ConAgra Brands Inc

The J.M. Smucker Company (SJM) delivered first quarter 2012 adjusted earnings of $1.12 per share, outperforming the Zacks Consensus Estimate of $1.08 and prior-year quarter of $1.04 per share.

Adjusted earnings exclude restructuring and merger and integration costs of 14 cents and 18 cents per share, in the first quarter of 2012 and 2011, respectively. However, the results in the quarter include the operations of Rowland Coffee Roasters, Inc. since the completion of the acquisition on May 16, 2011.

Net sales in the quarter increased 14% year over year to $1.19 billion, due to net price realization across many of the company's brands. The Zacks Consensus Revenue Estimate was $1.25 billion. The acquisition of Rowland Coffee contributed approximately 2% to net sales.

Volumes, however, declined 3% in Folgers coffee, Jif peanut butter, and Crisco shortening and oils, which had offset the volume gains realized in Pillsbury baking mixes and natural foods beverages. The overall impact of sales mix and foreign exchange rates was favorable.

Expenses and Margin Performance

Gross profit, excluding merger and restructuring costs, increased 6.0% year over year to $23.6 million. Price increases taken in the coffee category to offset higher commodity costs contributed to incremental gross profit, but did not, however, generate margin expansion. Gross margin contracted 280 basis points (bps) to 37.1% in the first quarter of 2012.

Selling, distribution and administrative expenses climbed 7% year over year, however, it declined 120 bps to 18.2% as percentage of net sales. Marketing expenses decreased 1%, while selling and general and administrative expenses both increased 13% and distribution expenses increased 4% in the quarter.

Excluding the impact of merger and restructuring costs, operating income increased 5.0% while operating margin contracted 140 basis points to 17.3%.

Interest expense decreased 7% to $15.4 million as the benefit of the interest rate swap more than offset the costs of higher debt outstanding. During the first quarter of 2012, the company borrowed $306.7 million under its revolving credit agreement for general corporate purposes, including the Rowland Coffee acquisition.

Segment Performance

The company’s biggest segment, U.S. Retail Coffee Market, reported a robust 27% increase in sales to $500.1 million aided by four price increases since May 2010. Volume decreased 8% in the first quarter of 2012, excluding Rowland Coffee. The acquisition of Rowland Coffee contributed approximately $20.1 million to segment net sales.

The U.S. Retail Consumer Market segment’s sales soared 2% while volumes plummeted 3%. Although the segment experienced higher raw material costs in flour, oils, and milk, price increases were taken in most of these categories. However, they did not fully offset the higher recognized costs, most notably in milk.

Net sales in the International, Foodservice, and Natural Foods segment, excluding the impact of the Rowland Coffee acquisition and foreign exchange, increased 7% over the same period.  Price increases and favorable mix more than offset a 1% decline in volume.

Other Financial Updates

At the end of July 31, 2011, Smucker had cash and cash equivalents of $102.5 million compared with $522.8 million at the end of July 31, 2010. Cash used from operating activities was $58.2 million, compared with $27.2 million in the same period in 2010.

The company expects a significant use of cash during the first half of each fiscal year, primarily due to seasonal fruit and vegetable procurement, the buildup of inventories to support the Fall Bake and Holiday period, and the additional increase of coffee inventory in advance of the Atlantic hurricane season.

At the end of July 31, 2011, inventory levels also include an additional buildup in preparation for the coffee production consolidation that is scheduled for later in fiscal 2012 under the company's restructuring plan.  Further, the impact of commodity cost increases on overall higher inventory levels caused a significant increase in working capital requirements during the first quarter of 2012.

Outlook

Concurrent with the earnings release, the company provided guidance for fiscal 2012. For fiscal 2012, the company continues to expect net price realization to result in a significant 2012 net sales increase, compared with 2011.

However, the impact of the recent 6% price decrease on the majority of its coffee products sold in the U.S. is expected to lower 2012 sales growth, from its previous 20% growth estimate.

Further, excluding merger and restructuring costs of 55 cents to 60 cents per share, Smucker expects its earnings to range from $5.00 to $5.15 for fiscal 2012.

Currently, Smucker -- which faces stiff competition from ConAgra Foods, Inc. (CAG) and Kraft Foods, Inc (KFT), has a Zacks #3 Rank, implying a short-term Hold recommendation.

 
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