November 16, 2017 / 12:22 PM / a year ago

Smucker brews up strong earnings, sees lower coffee costs in 2018

(Reuters) - Coffee maker J.M. Smucker Co (SJM.N) delivered strong quarterly earnings on Thursday and said inflated costs to buy coffee beans, which have dented profits this year, may fall in 2018.

Containers of Smuckers's Jam are displayed in a supermarket in New York City, U.S. February 15, 2017. REUTERS/Brendan McDermid

Shares of Smucker, the largest U.S. coffee roaster which also sells pet food and a variety of consumer food products, jumped almost 10 percent on Thursday morning.

The Orrville, Ohio company had a strong showing in the second quarter ended Oct. 31, benefiting from selling more pet food - its largest business - and price hikes for Jif peanut butter and its namesake brand of jams and ice cream toppings.

The results led Smucker to bump up its yearly sales forecast.

The price increases made up for higher commodity costs, particularly for buying coffee beans, Smucker Chief Financial Officer Mark Belgya said on a call with analysts.

The higher cost of buying coffee beans reduced profits in the Smucker’s coffee business that houses Folgers and Dunkin’ Donuts coffee by 18 percent.

But Smucker, which uses Arabica coffee beans, said it expected prices of the commodity will be lower in the fourth quarter ending April 2018.

“Our opinion is there’s going to be a lot of Arabica coffee in the world next year,” said Steve Oakland, the head of the company’s U.S. food and beverage business.

Smucker’s strategy of raising prices of its coffee brands to make up for higher coffee bean prices has not worked. A price hike earlier this year had to be rolled back after it drove many customers away.

Despite coffee challenges, pet foods were a bright spot for Smucker, with sales in that business rising 4 percent driven by Nature’s Recipe and Meow Mix.

Smucker has gone up against bigger rivals including Mars, which sells Pedigree and Whiskas, and Nestle (NESN.S), whose main pet brand is Purina. Both Mars and Nestle have been spending heavily to build out their pet food divisions.

Smucker’s net income rose 10 percent to $194.6 million in the second quarter. Excluding one-time items, the company earned $2.02 per share, beating analysts’ average estimate of $1.90, according to Thomson Reuters I/B/E/S.

Net sales rose slightly to $1.92 billion and topped analysts’ expectations of $1.89 billion.

Smucker said it now expects yearly net sales to be flat or down slightly, compared with an earlier forecast for sales to fall.

Reporting by Sruthi Ramakrishnan in Bengaluru; editing by Sai Sachin Ravikumar

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