Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the third quarter of fiscal 2018. All comparisons are to the third quarter of fiscal 2017 unless otherwise noted.
EXECUTIVE SUMMARY
- Record diluted earnings per share of $0.39, up 15% from 2017 EPS of $0.34
- Fiscal 2018 earnings guidance reaffirmed at $1.81 to $1.95 per share
- Record net sales of $2.4 billion, up 7%; organic net sales1 flat
- Volume of 1.2 billion lbs., up 5%; organic volume1 up 1%
- Operating margin of 11.1% compared to 12.7% last year
- Effective tax rate of 18.4% compared to 34.3% last year
- Year-to-date cash flow from operations of $743 million, up 40% compared to last year
COMMENTARY
“We reported record sales and earnings for the quarter and remain on track to deliver our full year earnings guidance range amid volatility due to tariffs and broader industry dynamics,” said Jim Snee, chairman of the board, president, and chief executive officer. “We continue to execute on our strategic initiatives while investing in growth for the future.”
“Grocery Products and International delivered solid results this quarter,” Snee said. “Refrigerated Foods’ branded value-added strategy was able to offset a dramatic decline in commodity profits. We also saw a strong increase in value-added sales at Jennie-O Turkey Store.”
“We increased our advertising investment this quarter and those investments are paying off with growth from brands such as Skippy®, Natural Choice®, Jennie-O®, Applegate®, Wholly Guacamole® and Herdez®,” Snee said. “I’m also pleased to report our recent strategic acquisitions of Columbus Craft Meats, Fontanini, and Ceratti are on track with expectations.”
FREMONT PLANT DIVESTITURE
“Last week we announced the sale of our Fremont processing facility to WholeStone Farms, LLC,” Snee said. “This strategic decision reflects changes in the long-term dynamics of the pork industry and is aligned with our vision as a global branded food company. The Fremont facility has been an important part of our Company for decades, and it was critical we partnered with a buyer that would commit to investments in the facility and team members.”
The purchase price is $30 million in cash, subject to adjustments at closing, and the transaction includes a processing facility and a multi-year agreement to supply pork raw materials to Hormel Foods. The Fremont plant harvests 10,500 hogs per day and currently represents one-third of the Company’s hog harvest volume and less than one-third of commodity pork earnings. The fiscal 2019 expenses associated with the transaction are anticipated to be $15-$20 million dollars, primarily related to expenses to relocate value-added manufacturing lines to other Hormel Foods facilities and pension-related expenses. Further guidance on the full earnings impact will be provided on the fourth quarter conference call in November. The transaction is expected to close in December 2018.
SEGMENT HIGHLIGHTS – THIRD QUARTER
Refrigerated Foods
- Volume up 5%; organic volume1 down 2%
- Net sales up 10%; organic net sales1 down 3%
- Segment profit flat
Volume and sales increases benefited from the inclusion of the Columbus and Fontanini acquisitions in addition to strong foodservice sales of Austin Blues® smoked barbeque products and retail sales of Hormel® Natural Choice® and Applegate® products. Organic volume and sales decreased due to lower hog harvest volumes.
Refrigerated Foods offset an 88% decline in commodity profits, a double-digit increase in per-unit freight expenses, and higher advertising investments to deliver results in line with last year.
Grocery Products
- Volume down 1%
- Net sales flat
- Segment profit up 4%
Mid-single-digit sales growth in our core Grocery Products portfolio, led by Wholly Guacamole® dips, Herdez® salsas and sauces, and Skippy® peanut butter, was offset by sales declines across the CytoSport portfolio and our contract manufacturing business. Total Grocery Products segment profit increased as core Grocery Products earnings more than offset declines in contract manufacturing. Grocery Products increased advertising for the quarter to support brands such as Skippy® and SPAM®. CytoSport earnings increased for the quarter due to lower selling, general and administrative expenses.
Jennie-O Turkey Store
- Volume up 14%
- Net sales up 8%
- Segment profit down 23%
Volume and sales for the quarter were driven by increases in whole bird and commodity sales in addition to strong value-added sales growth. Value-added sales gains were led by Jennie-O® premium deli products and Jennie-O® lean ground turkey. Segment profit decreased as a result of lower profits from whole bird sales, double-digit increases in per-unit freight costs, and increased advertising investment.
International & Other
- Volume up 9%; organic volume1 down 7%
- Net sales up 11%; organic net sales1 down 3%
- Segment profit up 9%
International sales increases were related to the inclusion of the Ceratti business, higher export sales for SPAM® luncheon meat and Skippy® peanut butter, and stronger sales for the China multinational business. Fresh pork export volume, sales, and profitability declined sharply in the quarter due to the impact of increased tariffs in key markets. Overall earnings increased as improved profitability in China more than offset lower fresh pork export profits and increased advertising investments.
SELECTED FINANCIAL DETAILS
Income Statement
- Selling, general and administrative expenses increased due to acquisitions and higher advertising investments.
- Advertising investments were $40 million compared to $24 million last year. Advertising investments for the full year are expected to increase by approximately 20% over last year.
- Operating margin was 11.1% compared to 12.7% last year.
- The effective tax rate was 18.4% compared to 34.3% last year. The decline was due to The Tax Cuts and Jobs Act passed in December 2017 and deferred tax remeasurements. The full year effective tax rate for fiscal 2018 is expected to be between 15% and 16% compared to 17.5% and 19.5% previously.
Cash Flow Statement
- Capital expenditures in the third quarter were $103 million compared to $42 million last year. Capital expenditures for the full year are expected to total approximately $400 million. Key projects include: bacon capacity increases in our Wichita, Kans., facility, a new whole bird facility in Melrose, Minn., improvements to the Austin, Minn., plant and multiple projects designed to increase value-added capacity.
- Depreciation and amortization expense in the third quarter was $41 million compared to $33 million last year. Expenses for the full year are expected to be approximately $160 million.
- Share repurchases to date total $45 million, representing 1.3 million shares purchased.
- The Company repaid $90 million in short-term debt in the quarter.
- The third quarter dividend marked the 90th year of uninterrupted dividends paid to our shareholders. The Company paid its 360th consecutive quarterly dividend at the annual rate of $0.75 per share, a 10% increase over the prior year.
Balance Sheet
- Working capital decreased to $757 million from $968 million at the beginning of the year, primarily related to debt retirement and lower accounts receivable.
- Cash on hand decreased to $269 million from $444 million at the beginning of the year as the Company continued to pay down short-term debt related to the Columbus Craft Meats acquisition.
- Total debt is $720 million. The debt is split between short-term borrowings of $95 million and long-term borrowings of $625 million.
- The Company remains in a strong financial position to fund other capital needs.
OUTLOOK
“We are reaffirming our earnings outlook for fiscal 2018. Our strong branded portfolio, focus on innovation, strategic acquisitions, and balanced model will continue to help us mitigate the impacts from foreign trade uncertainty, increased freight costs, and commodity market volatility,” Snee said.
