22 Aug 2018 --- American made food manufacturer J.M. Smucker saw strength in its US retail coffee business in its Q1 2019 results, with sales up 2 percent to US$490m and profit up 20 percent to US$148m to offset softness in the US retail consumer foods business. Sales in the US retail pet foods business rose 29 percent to US$671m and profit edged up 3 percent to US$100m. Total adjusted operating income was up 5 percent during the quarter to US$317m.
The company updated its full-year fiscal 2019 outlook reflecting the anticipated impact from the pending divestiture of its US baking business.
“Our first quarter performance reflects significant progress in realigning our portfolio to growth areas and on-trend categories. Smucker’s Uncrustables, Dunkin' Donuts, Café Bustelo, Nature's Recipe, and Sahale Snacks , all achieved double-digit sales growth in the quarter and in the aggregate, accounted for three percentage points of top-line growth,” Mark Smucker, Chief Executive Officer told a conference call.
“The Rachael Ray Nutrish brand also achieved double-digit sales growth versus the comparable period in the prior year. Achieving increases in nearly every key area of the portfolio of where we have made investments validates that we can continue to win in today’s marketplace. Some of our established brands underperformed in their traditional categories in the quarter. These included Folgers, Jif and Natural Balance. While some of this was timing-related, our teams are hard at work executing specific plans to improve performance for these brands through the remainder of the year,” he added.
US Retail Coffee segment net sales increased US$10.1 million. Favorable volume/mix contributed 2 percentage points, driven by the Dunkin' Donuts, 1850, and Café Bustelo brands, partially offset by declines in Folgers roast and ground coffee. The favorable volume/mix was slightly offset by lower net price realization, driven by the Folgers brand. Segment profit increased US$24.6 million primarily due to lower input costs, which more than offset an increase in marketing expense.
“Growth in both our Premium and One-Cup segments continues to be led by the Dunkin' Donuts brand. Sales for the brand were up 13 percent in the quarter which builds on 10 percent growth in the first quarter of last year. The current year also included contributions from our recently introduced canister format which is generating incremental sales for both the Dunkin' Donuts brand and our overall coffee business,” CEO, Smucker noted.
“1850 Premium Coffee was another contributor to growth in both the Premium and One-Cup segments. Launched in April, the brand has already hit our target ACV of 70 percent and is currently generating nearly $1 million in weekly retail sales and growing. To further build consumer awareness, our comprehensive $30 million marketing program is now underway,” he said.
“Although it is still early in the launch, we are excited by the initial pipelines build and expect 1850 to be a growth platform for years to come. Stabilizing the Folgers Roast and Ground business also remains a key priority. In the near-term, this includes capitalizing on greater than anticipated green coffee favorability by investing in elevated trade support. We also have key merchandizing activities planned for the upcoming months. Longer-term initiatives to reinvigorate coffee rituals for this iconic brand are also in progress and we look forward to sharing more in the future,” he added in the conference call.
Overall in Q1, gross profit increased US$16.1 million, or 2 percent, primarily driven by the addition of Ainsworth. This was partially offset by an unfavorable net impact of lower pricing and higher costs, attributable to an unfavorable change in derivative gains and losses. Reflected in gross profit was a US$10.9 million fair value purchase accounting adjustment attributable to acquired Ainsworth inventory, which resulted in higher cost of products sold when the related inventory was sold in the quarter. Selling, distribution, and administrative (“SD&A”) expenses increased US$34.5 million, primarily reflecting the addition of Ainsworth. Operating income decreased US$8.3 million, due to the higher SD&A expenses and a US$9.0 million increase in amortization expense, which was primarily attributable to Ainsworth. A reduction in other special project costs of US$19.4 million partially offset these factors.
On a non-GAAP basis, adjusted gross profit increased US$50.0 million, or 8 percent, with the primary difference from GAAP results being the exclusion of the US$34.6 million unfavorable change in unallocated derivative gains and losses. After factoring in the increase in SD&A expenses, adjusted operating income increased US$15.2 million, or 5 percent.
On July 9, 2018, the company announced the signing of a definitive agreement to divest its US baking business. Full-year projections for this business were included in the company's previous fiscal 2019 guidance. The company has now updated its full-year outlook to reflect the anticipated impact of the divestiture, based on an expected transaction close date of August 31, 2018. In addition, the net sales guidance also reflects lower than anticipated net sales in the first quarter.
In terms of other segments, US Retail Consumer Foods segment net sales decreased US$4.6 million. Excluding the baking business, which is pending divestiture, net sales were comparable to the prior year as volume/mix gains for Smucker's Uncrustables were partially offset by declines for the Jif brand. Net price realization was neutral. Segment profit decreased US$12.8 million due to higher input and freight costs, unfavorable volume/mix, and increased marketing expense.
US Retail Pet Foods Segment net sales increased US$150.5 million reflecting the US$162.8 million contribution from Ainsworth. Excluding Ainsworth, net sales declined US$12.3 million, or 2 percent. Lower net price realization reduced net sales by 1 percentage point. Lower volume/mix also decreased net sales by 1 percentage point, reflecting declines for the Natural Balance brand and the discontinuation of certain Gravy Train products, partially offset by gains for the Nature's Recipe, Milk Bone, and Meow Mix brands. Segment profit increased US$2.6 million, reflecting the addition of Ainsworth. However, profit contributions from the Ainsworth acquisition reflected the unfavorable impact of the US$10.9 million fair value purchase accounting adjustment. Excluding Ainsworth, segment profit declined as the net impact of lower pricing and higher input and freight costs was only partially offset by reduced marketing expense.
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