J.M. Smucker Co. Earnings Call Nuggets: Competition and Supply Constraints

On Friday, J.M. Smucker Co. (NYSE:SJM) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Competition

Ken Goldman – JPMorgan: I’m hearing some things you’re saying about pricing that are interesting. You mentioned having to take down pricing in fruit spreads because of competitive activity. You’ve moved some spending from sounds like advertising to promotional spending this quarter across consumer foods and you took down your coffee prices, it sounds like by a greater degree when your underlying costs went down and that’s unusual versus your history if I am hearing you right. You’ve highlighted U.S. consumer spending getting better, but it almost seems like the actions you are taking on price suggests a reaction to the opposite. So I’m just curious if you can reconcile this a bit for us and help us understand why we shouldn’t be a little bit concerned about the competitive environment may be forcing you to be a little bit more careful on pricing right now than you otherwise would be?

Vincent C. Byrd – President and COO: Let me start, then I’m going to turn it over to Paul and Mark to give a color from their respective business areas. But I think you may recall from the last two or three quarters we talked a lot about sharpening our price points and it really does vary by category and sort of by definition we say that entails everything from closing some pricing gaps to reflecting the absolute reduction of some of our commodity costs that, specifically in coffee have got us to some price points that we weren’t before. It talked about truly leveraging better some of our promotion and trade spend to make those more effective and efficient, so I guess I would just say from a macro perspective those are the things that we’re looking at, we did lean forward into some price reductions at the beginning of the year on coffee, but it really does vary category by category. So with that I’ll turn it over to Paul and Mark.

Paul Smucker Wagstaff – President, U.S. Retail Consumer Foods: Just on two key categories, first fruit spreads. We have seen some decline in the fruit spreads volume overall, which is a concern to us; there is a really a few things that are driving that. The first is we did take two price increases last fiscal year and we know that we have some pricing gaps on shelf and we cross some defiles that we know are impacting our overall volume, so we did take the opportunity to take some pricing down in some of our key areas like our better for use segments and on one key large size (indiscernible) around Strawberry, which actually goes into effect this month. So, we do not recognize that we have some trends that are down, but we think we have some good pricing in place to correct that. Also on mill, we’re able to take price decline on milk and we did see some nice volume increase in the past quarter, so we feel good where we stand with those two opportunities at this point. Fruit spreads clearly being the one that’s more concerning to us, but we feel we have some good plans in place to start turning that business around.

Mark T. Smucker – President, U.S. Retail Coffee: Just quickly I think Vince said it very well on coffee, we did take a decline in the first quarter ahead of cost moderating, but the point there was to really position ourselves well for the key fall period, which we’ve done and to make sure that the absolute price, as well as the gaps within the segments were right to help drive volume. So, we have increased spending on advertising, we’re focusing a lot of dollars on TV equity and as was in the script also, the promotions that we have done have been very targeted and very effective.

Supply Contstraints

Eric Katzman – Deutsche Bank: I guess couple of questions. First, Mark the $5.12 to $5.22. Can you just remind me does that assume some kind of mark to market hedge either gain or loss over the year?

Mark R. Belgya – SVP and CFO: No, that – we obviously have had somewhat significant gains and losses, unrealized over the last couple of quarters, but that would factor in over the course of the rest of the year to reflect the actual cost of the commodity received.

Eric Katzman – Deutsche Bank: Then I guess switching to the coffee supply constraint issue, I guess there were some rumors in the market and you came out with a press release saying that that was not going to be I guess material, but it sounds like it’s – I mean, the good news is, is you have the demand but the bad news is that you’re having some supply constraints and you’re calling out that it could actually impact volume for the total Company. So, I guess, what gives us confidence that the supply constraint is going to be resolved and is competition trying to take advantage of this situation, maybe you could just go into a little more detail.

Mark T. Smucker – President, U.S. Retail Coffee: This is Mark Smucker. Let me just start by clarifying is that Kansas supply constraint is not a quality or a shortage of resin. I mean, it’s just related to operational issues at the supplier and we are working on a daily basis with them. We have great visibility both backward into the supply chain as well as forward into our customers. And we are confident that the actions we’ve put in place are resolving the issue. We actually have some new capacity that has come online in the last couple of weeks, which is helping and we have seen sustainable operational improvements from that supplier. So, although it has – it impacted volume slightly, we do believe that we are managing it very effectively and from a competitive standpoint, we are not seeing any activity that would lead us to believe that it’s any different from what we’ve already put in place from a promotional standpoint.

Eric Katzman – Deutsche Bank: Then last, I guess, to either maybe Vince or Richard, just, I guess, industry-wide to a certain extent you are in a position where some of your costs are either going down over time or have moderated, so you don’t feel the need to put through pricing and maybe because of that your categories look little healthier than they did, but to the extent that you are making comments about the industry isn’t it fair to say that those companies that have a waiting towards the grain complex, corn et cetera that they are seeing inflation that they’re going to have to put through pricing and this dynamic of higher pricing and then weaker volume and demand elasticity is a challenge that kind of continues into calendar ’13. Just how do you react to that?

Richard K. Smucker – CEO: Quickly, I don’t know what the position is for other companies and our competitors, but our position on the commodities we’re in good shape and when we went into the summer months and the drought. We all read about the drought and saw that drought and saw the impact on the margins on the prices of the commodities. We were pretty well covered, and so I’m not sure what our competitors are doing, but we feel very confident that our positions are good for the remainder of the fiscal year and that our margins are going to be solid for the remainder of the fiscal year. So, the impact on us was relatively minor and again I think we’re in pretty good position. Going back just a second on the coffee, the supply issue was had — not a significant impact on our second quarter. Our teams did a wonderful job of getting us out of it and certainly by the end of this quarter, the third quarter, we don’t see any more disruptions by the suppliers. So, we should be in good shape without any major impact.