Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the first quarter of fiscal 2019. All comparisons are to the first quarter of fiscal 2018 unless otherwise noted.
EXECUTIVE SUMMARY
- Fiscal 2019 earnings guidance reaffirmed at $1.77 to $1.91 per share
- Volume of 1.2 billion lbs., up 1%
- Net sales of $2.4 billion, up 1%
- Pre-tax earnings of $307 million, up 1%
- Diluted earnings per share of $0.44, down $0.12 per share due to the impact of tax reform in 2018
- Effective tax rate of 21.3% compared to 0.6% last year
- Operating margin of 13.0% compared to 13.0% last year
- Cash flow from operations of $187 million, down 38%
COMMENTARY
“We had a solid quarter with sales growth from Refrigerated Foods, Grocery Products and International,” said Jim Snee, chairman of the board, president and chief executive officer. “Three of our four segments generated earnings growth, which keeps us on track to deliver our full-year guidance.”
“Our new Hormel Deli Solutions division is off to a great start as the next growth engine for our company,” Snee said. “In addition, many branded value-added businesses performed well this quarter, including our business in China and both Hormel and Jennie-O foodservice divisions. We also saw impressive growth from many retail brands, including SPAM®, Dinty Moore®, Herdez®, Wholly Guacamole®, Applegate®, Natural Choice® and Hormel® pepperoni.”
“Again this quarter, our well-developed strategy of shifting our mix toward branded, value-added products in our domestic and international businesses more than offset significant declines in the commodity businesses,” Snee said. “We continue to intentionally transition our portfolio away from commodity products and the associated earnings volatility.”
CYTOSPORT DIVESTITURE
“Earlier this week we announced a definitive agreement to sell the CytoSport business to PepsiCo,” Snee said. “We made strong progress with innovation and sales growth in the food, drug and mass channel. However, it became clear to us over time that PepsiCo is the right long-term owner of this business as they have deep expertise in this space. PepsiCo has been a long-standing distribution partner for CytoSport and the Muscle Milk® brand, which puts them in a strong position to grow this dynamic business.”
The purchase price is $465 million in cash, subject to adjustments at closing. Total net sales in fiscal 2018 were approximately $300 million with operating margins slightly below total company operating margins.
SEGMENT HIGHLIGHTS – FIRST QUARTER
Refrigerated Foods
- Volume down 1%
- Net sales up 2%
- Segment profit up 3%
Sales growth was led by the new Hormel Deli Solutions division, with strong gains coming from Columbus® branded items and Jennie-O® premium deli meats. Foodservice sales of Old Smokehouse® bacon and Hormel® Fire Braised™ products and retail sales of Hormel® pepperoni, Hormel® Natural Choice® and Applegate® products also showed excellent growth. Segment profit increased as value-added profits more than offset a 70% decline in commodity profits, higher freight costs and higher operational expenses.
Grocery Products
- Volume up 3%
- Net sales up 1%
- Segment profit down 2%
Sales increases were led by Herdez® salsas and sauces, Wholly Guacamole® dips, the SPAM® family of products, Muscle Milk® protein beverages and Hormel® bacon toppings. These sales increases were partially offset by declines in contract manufacturing. Segment profit declined due to the effect of a non-operating tax benefit in our MegaMex joint venture in fiscal 2018, which was partially offset by a legal settlement in fiscal 2019.
Jennie-O Turkey Store
- Volume flat
- Net sales flat
- Segment profit flat
Volume and sales for the quarter were flat as improved results in foodservice and commodity sales were offset by declines in retail. Volume and sales increases in foodservice were driven by many categories, including Jennie-O® raw boneless breasts and Jennie-O® cooked breasts. Segment profit was flat as lower selling, general and administrative expenses were offset by lower retail sales of lean ground turkey.
International & Other
- Volume up 1%
- Net sales up 2%
- Segment profit up 1%
International volume, sales and profit increases were led by double-digit growth in exports of SPAM® luncheon meat and strong results from our China business. China results were positively impacted by strong sales of SPAM® and SKIPPY® branded products and lower pork input costs. Fresh pork export volume, sales and profitability declined in the quarter due to the continued impact of tariffs in key markets.
SELECTED FINANCIAL DETAILS
Income Statement
- Results were negatively impacted by two cents EPS related to the sale of the Fremont facility. Expenses included the cost to move value-added equipment out of the facility and various pension-related items.
- Selling, general and administrative expenses decreased, primarily due to a one-time benefit of two cents EPS resulting from a legal settlement. This settlement includes compensation for lost profits and was primarily reflected in net unallocated expense and the Grocery Products segment.
- Advertising investments were $39 million compared to $40 million last year. Advertising investments for the full year are expected to be flat compared to the prior year.
- Operating margin was 13.0% compared to 13.0% last year.
- The effective tax rate was 21.3% compared to 0.6% last year. The increase was primarily due to deferred tax remeasurements in fiscal 2018 as a result of The Tax Cuts and Jobs Act. The full-year effective tax rate for fiscal 2019 is expected to be between 20.5% and 23.0%.
Cash Flow Statement
- Capital expenditures in the first quarter were $39 million compared to $54 million last year. Capital expenditures for the full year are expected to total approximately $350 million. Key projects for the full year include an expansion of our Burke pizza toppings facility in Nevada, Iowa, an expansion at our Fontanini facility in McCook, Ill., and multiple other projects designed to increase value-added capacity.
- Depreciation and amortization expense in the first quarter was $40 million compared to $39 million last year. Expenses for the full year are expected to be approximately $160 million.
- Share repurchases for the quarter totaled $45 million, representing 1.1 million shares purchased.
- The Company paid its 362nd consecutive quarterly dividend at the annual rate of $0.84 per share, a 12% increase over the prior year.
Balance Sheet
- Working capital decreased to $665 million from $911 million at the beginning of the year, primarily related to higher levels of current debt.
- Cash on hand increased to $513 million from $459 million at the beginning of the year.
- Total debt is $625 million. The debt is split between current maturities of long-term borrowings of $375 million and long-term borrowings of $250 million.
- The company remains in a strong financial position to fund other capital needs.
OUTLOOK
“We are reaffirming our sales and earnings guidance for fiscal 2019,” Snee said. “We remain encouraged by the growth prospects in Refrigerated Foods, Grocery Products and International. The results we are seeing in our deli, foodservice and China businesses are exceeding expectations. While the fundamentals in the turkey industry are improving, Jennie-O Turkey Store will likely fall below our full-year expectations due to a lower retail sales outlook. While global trade uncertainty remains, we continue to execute on our well-defined strategy that focuses on building world-class brands, leading with innovation and insights, making smart investment decisions and building intentional balance into our business.”
