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Smucker shares soar, as it foresees weaker coffee costs ahead

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Shares in JM Smucker saw their best gain in nine years as the owner of brands including Folgers and Dunkin’ Donuts coffee forecast weaker bean costs, amid expectations of bumper arabica supplies.

 

Shares in the Ohio-based group - which is the largest US coffee roaster, besides running food and pet nutrition operations – soared 9.9% at one point, their biggest one-day gain since November 2008, before easing back to $116.30 in lunchtime deals in New York, up 9.2%.

 

The jump followed the release of earnings for the August-to-October period which beat expectations, and reassurance that full-year performance will beat forecasts, helped by the boost to margins from a sharp decline in the price paid for coffee.

 

Indeed, for the February-to-April period, the last quarter of JM Smucker’s financial year, the group is forecasting “record fourth quarter segment profit for coffee, primarily resulting from lower green coffee cost and cost-savings initiatives”, said Mark Smucker, the group’s chief executive.

 

‘Profit trends will improve sharply’

 

For the August-to-October period, JM Smucker reported a further hit from the high coffee costs which dented results earlier in the financial year, sending the group’s shares tumbling.

 

In the latest quarter, while coffee division sales held steady at $522.7m, profits dropped 18% to $152.6m, “primarily due to higher green coffee costs”, the group said.

 

However, “coffee profitability will improve significantly in the back half of the year”, Mr Smucker said, helped by “lower green coffee cost expected later in the fiscal year”.

 

“Profit trends will improve sharply during the second half of the fiscal year, reflecting improved performance related to K-Cups and lower green coffee cost,” said Mark Belgya, the group’s finance director.

 

‘A lot of arabica coffee’

 

While the group does not comment on its hedging strategy, the comments would appear to imply that it has been unable to exploit fully the drop in arabica coffee prices from a high of 175.65 cents a pound in New York in November last year to 126.60 cents a pound on Thursday, on a spot contract basis.

 

Mr Smucker also, when asked over the threat to coffee output posed by wetness in Vietnam and dryness in South America, signalled he was relaxed over weather threats to coffee supplies.

 

“In our opinion is there’s going to be a lot of arabica coffee in the world next year,” he told investors, advising against taking too much notice of individual weather forecasts.

 

“It will drive you crazy… if you chase on a day-to-day basis” changes in weather outlooks.

 

Results and forecasts

 

For the August-to-October period, the group unveiled a 9.8% rise to $194.6m in earnings.

 

Excluding one-time items, the earning came in at $2.02 per share, ahead of the $1.90-per-share result that Wall Street had expected.

For the year to April, the group improved its sales forecast, which it said it expects to come in “flat to down slightly” year on year,

 

However, it trimmed its forecast for underlying full-year earnings per share to $7.75-7.90, from $7.75-7.95.

 

Nonetheless, this is ahead of the $7.72 per share expected by analysts.

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