Smucker Company: announces Q4 fiscal 2020 results

Executive Summary

Chief Executive Officer Remarks

Fourth Quarter Consolidated Results

Full-Year Outlook

Net Sales

Operating Income

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

Cash Flow and Debt

Covid-19

Orrville / OH. (sc) The J. M. Smucker Company announced results for the fourth quarter of its 2020 fiscal year ending April 30, 2020. All comparisons are to the fourth quarter of the prior fiscal year, unless otherwise noted.

Net sales increased USD 189.9 million, or 10 percent, driven by increased consumer demand resulting from the Covid-19 pandemic.
For the full year, net sales were USD 7.8 billion, a 1 percent increase of comparable sales excluding acquisition, divestiture, and foreign currency exchange.
Net income per diluted share was USD 1.98. Adjusted earnings per share was USD 2.57, an increase of 24 percent.
For the full year, net income per diluted share was USD 6.84. Adjusted earnings per share was USD 8.76, an increase of 6 percent.
Cash from operations was USD 287.7 million compared to USD 274.2 million in the prior year.
Free cash flow was USD 211.3 million in the quarter and USD 985.5 million for the full year.
The Company provided its fiscal 2021 outlook, with an expected net sales decline of 1 to 2 percent, adjusted earnings per share to range from USD 7.90 to USD 8.30, and free cash flow to range from USD 900 to USD 950 million.

«I am extremely proud and thankful for how our employees have responded during the Covid-19 pandemic. We ensured our employee safety and well-being, supported the communities where we do business, maintained our product quality standards, and partnered with our suppliers and retailers to provide a steady supply of food for consumers and their pets,» said Mark Smucker, President and Chief Executive Officer.

«Our strong response is reflected in our exceptional fourth quarter results, with record-setting net sales and adjusted earnings per share. This exceptional growth is a testament to the strength of our brands and consumer-centric strategy, as consumers turned to trusted products to stock their kitchens as stay-at-home orders were implemented across North America.»

«Looking ahead, we anticipate increased at-home consumption to continue during the beginning of our fiscal year 2021 – though at a more moderate rate as stock-up purchasing in the fourth quarter is not anticipated to reoccur, and significant declines for the Away From Home business are expected to persist throughout the year. We remain focused on meeting the demand needs created by the current environment, while continuing to execute against our strategic priorities to position the business for long-term growth.»

(USD and shares in millions, except per share data)	Q3-2020	Q3-2019	Change
.
Net sales	USD 2,092.0	USD 1,902.1	10	%
.
Operating income	USD 346.7	USD 153.6	126	%
Adjusted operating income	431.2	353.3	22	%
.
Net income per common share – assuming dilution	USD 1.98	USD 0.63	n/m
Adjusted earnings per share – assuming dilution	2.57	2.08	24	%
.
Weighted-average shares outstanding – assuming dilution	114.0	113.8	–

Net sales increased 10 percent, driven by an 11 percentage point contribution from higher volume/mix across the majority of categories and brands in the U.S. Retail Consumer Foods, U.S. Retail Coffee, and U.S. Retail Pet Foods segments. Lower net price realization, primarily for coffee, reduced net sales by 1 percentage point.

Gross profit increased USD 96.0 million, or 14 percent, driven by the increased contribution from volume/mix and reduced input costs, partially offset by lower net pricing. Operating income increased USD 193.1 million, or 126 percent, primarily attributable to a USD 97.9 million goodwill impairment charge in the prior year and the increase in gross profit. Selling, distribution, and administrative expenses (SD+A) increased USD 3.6 million, including incremental expenses related to Covid-19, primarily for employee compensation and benefits as well as community support initiatives.

Adjusted gross profit increased USD 84.8 million, or 12 percent, with the difference from generally accepted accounting principles (GAAP) results being the exclusion of unallocated derivative gains and losses. Adjusted operating income increased USD 77.9 million, or 22 percent, further reflecting the exclusion of a goodwill impairment charge in the prior year, other special project costs, and amortization.

Net interest expense decreased USD 3.5 million, primarily as a result of reduced debt due to net repayments of USD 287.6 million during the fiscal year.

The effective income tax rate was 24.2 percent compared to 29.8 percent in the prior year. The effective tax rate in the prior year was unfavorably impacted by the goodwill impairment charge, partially offset by the favorable impact of the integration of Ainsworth Pet Nutrition, LLC during the fourth quarter. On a non-GAAP basis, the adjusted effective income tax rate was 23.4 percent compared to 21.4 percent in the prior year, with the primary difference from the effective income tax rate being the exclusion of the impact from the goodwill impairment charge in the prior year.

Cash provided by operating activities was USD 287.7 million, compared to USD 274.2 million in the prior year, reflecting an increase in net income adjusted for noncash items and a decrease in cash required to fund working capital, mostly offset by settlement of interest rate contracts. The decrease in working capital requirements was primarily driven by an increase in accounts payable due to extended payment terms, along with lower inventory levels at the end of the fiscal year resulting from increased demand during the fourth quarter, partially offset by an increase in trade receivables.

Free cash flow was USD 211.3 million, compared to USD 181.6 million in the prior year, reflecting the increase in cash provided by operating activities and a USD 16.2 million reduction in capital expenditures.

Net debt proceeds in the quarter totaled USD 235.0 million, reflecting an USD 800.0 million debt issuance, partially offset by a USD 500.0 million repayment of long-term debt and a reduction of short-term borrowings.

Prior to the Covid-19 pandemic, fourth quarter performance was trending in-line with the Company’s previous guidance expectations. Stay-at-home orders implemented during the quarter resulted in a significant increase in consumer demand across each of the Company’s U.S. and international retail businesses and a significant decline for its Away From Home business.

In March, the Company announced its priorities to support its employees and communities, while ensuring people and pets had access to a steady supply of food. The Company implemented measures including additional sanitation and safety procedures, hardship awards for its front-line employees, preserving compensation for those temporarily unable to perform their job, and incremental monetary and product donations to severely impacted communities. Incremental expenses related to these initiatives totaled approximately USD 13.0 million.

Fourth quarter results included approximately USD 185.0 million of incremental net sales versus prior expectations. The estimated benefit to earnings per share was approximately USD 0.50 versus the mid-point of the Company’s prior guidance, most of which is attributed to the gross profit from increased sales, less the incremental costs of Covid-related initiatives.

Net sales change vs prior year

(2) – (1) percent

Adjusted earnings per share

USD 7.90 – USD 8.30

Free cash flow (in millions)

USD 900 – USD 950

Capital expenditures (in millions)

Effective tax rate

24.0 percent

The Company provided its full-year fiscal 2021 guidance as summarized below:

.
The outbreak of Covid-19 had a material benefit to fiscal year 2020 results and has caused significant uncertainty for fiscal year 2021 projections. This guidance reflects performance expectations based on the Company’s current understanding of the environment.

Net sales are expected to decrease 1 to 2 percent compared to the prior year. The decline reflects lapping the USD 185 million of incremental net sales in the fourth quarter of fiscal year 2020 and an estimated USD 120 million Covid-related reduction to fiscal year 2021 net sales primarily resulting from a significant and extended decline in the Company’s Away From Home business, partially offset by increased at-home consumption benefiting the U.S. Retail Coffee and U.S. Retail Consumer Foods segments.

Adjusted earnings per share is expected to range from USD 7.90 to USD 8.30, based on 114.0 million shares outstanding. Earnings guidance reflects the decrease in net sales and estimates for adjusted gross profit margin of approximately 37.5 percent, SD+A expenses flat to slightly down compared to the prior year, and an adjusted effective tax rate of approximately 24.0 percent. Free cash flow is expected to range from approximately USD 900 to USD 950 million.