Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the fourth quarter of fiscal 2020. All comparisons are to the fourth quarter of fiscal 2019 unless otherwise noted.
The impact of the Sadler’s Smokehouse acquisition (March 2020) is excluded in the presentation of the fourth quarter of fiscal 2020 non-GAAP measures of organic volume and organic net sales. The impact of the CytoSport divestiture last year is excluded from prior year adjusted diluted earnings per share. Operating free cash flow is also presented as a non-GAAP metric.
EXECUTIVE SUMMARY – FISCAL 2020
- Volume of 4.8 billion lbs., up 1%; organic volume1 up 2%
- Net sales of $9.6 billion, up 1%; organic net sales1 up 2%
- Operating income of $1.1 billion, down 8%
- Operating margin of 11.5% compared to 12.6% last year
- Diluted earnings per share of $1.66, down 8%; down 2% to adjusted diluted earnings per share1 last year
- Cash flow from operations of $1.1 billion, up 22%
- Operating free cash flow1 of $0.8 billion, up 21%
EXECUTIVE SUMMARY – FOURTH QUARTER
- Volume of 1.2 billion lbs., down 2%; organic volume1 down 3%
- Net sales of $2.4 billion, down 3%; organic net sales1 down 4%
- Operating margin of 11.4% compared to 12.8% last year
- Effective tax rate of 15.9% compared to 21.0% last year
- Diluted earnings per share of $0.43, down 9% from $0.47
EXECUTIVE COMMENTARY
“I’m proud of how our team overcame multiple challenges to deliver record sales this year,” said Jim Snee, chairman of the board, president and chief executive officer. “We grew sales in all four segments, which speaks to the strategic balance we have built into our company. In several of our domestic businesses, strong demand for our products exceeded the available supply. From a bottom-line perspective, our experienced leadership team managed through the incremental supply chain costs we incurred related to the pandemic, which was the largest driver of our earnings decline,” Snee said.
“For the quarter, growth in our International segment was incredibly strong, particularly in China, where we drove balanced growth between the retail and foodservice channels. International sales of SPAM® luncheon meat and SKIPPY® peanut butter remained robust,” Snee said. “We continued to see a high level of growth for many retail and deli brands, including Applegate®, Columbus®, Jennie-O®, Hormel® Black Label®, Herdez® and SKIPPY®. Consistent with industry trends, our foodservice business showed declines this past quarter. As a leader in the industry, we will continue to support the distributor and operator community during this difficult time.”
“I am optimistic about generating sales and earnings growth in fiscal 2021. Our One Supply Chain team delivered steady production improvements throughout the quarter, and our production capacity for key product lines is structurally higher as we move into next year. The balance we have across the retail, deli, foodservice and international channels gives us confidence in our ability to perform well in many different economic scenarios,” Snee said. “This most recent surge of COVID-19 cases in communities does create a level of uncertainty in a number of areas, notably labor availability, customer demand and raw material markets. Our company has adjusted to these conditions and will continue to invest to meet the needs of our team members, customers, consumers and operators.”
STRATEGIC INVESTMENTS
“We opened our new Burke pizza toppings plant expansion this quarter, which will provide much-needed capacity for our pizza toppings business,” Snee said. “We are also on track to open our new state-of-the-art dry sausage production facility for Columbus® charcuterie products during the first half of the year.”
“Finally, we are investing in a major capacity expansion for our pepperoni business,” Snee said. “Even before the pandemic, we needed more capacity to support our retail and foodservice businesses. This expansion will give us a long runway to continue growing in this important category.”
COVID-19 RESPONSE
“As we enter fiscal 2021, we are witnessing another dramatic increase in COVID-19 cases across the nation,” Snee said. “Employee safety remains our top priority, and we are doubling down on our awareness initiative, KEEP COVID OUT!, which reinforces the importance of taking preventive measures at our production facilities and in our communities where we work and live.”
For the full year, the company absorbed over $80 million in incremental supply chain costs primarily related to lower production volumes, employee bonuses and enhanced safety measures in its production facilities. The company estimates most of the incremental supply chain costs are temporary and can be minimized after the pandemic subsides.
DIVIDENDS
“We announced a five percent increase to our annual dividend, making the new dividend $0.98 per share,” Snee said. “This is the 55th consecutive year in which we’ve increased our dividend, which is a testament to the strong and consistent performance our company continues to deliver.”
Effective Nov. 16, 2020, the company paid its 369th consecutive quarterly dividend at the annual rate of $0.93 per share.
SEGMENT HIGHLIGHTS – FOURTH QUARTER
Refrigerated Foods
- Volume down 4%; organic volume1 down 5%
- Net sales down 5%; organic net sales1 down 7%
- Segment profit down 17%
Retail and deli sales growth from brands such as Applegate®, Hormel® Black Label® and Columbus®, in addition to the impact from the Sadler’s Smokehouse acquisition did not offset a significant decline in foodservice sales. Sales were impacted by production limitations due to the COVID-19 pandemic and lower inventory levels. The decline in segment profit was due to lower foodservice sales, incremental supply chain costs related to the COVID-19 pandemic and a decrease in commodity profits.
Grocery Products
- Volume up 1%
- Net sales down 1%
- Segment profit up 1%
Demand for center store brands remained strong, led by growth from brands such as SKIPPY®, Herdez® and Hormel® Compleats®. Sales were impacted by lower inventory levels and production limitations related to the COVID-19 pandemic on certain center store products and lower sales for MegaMex foodservice items. Segment profit increased as improved results across the nut butters portfolio more than offset increased freight expense and lower earnings from our MegaMex foodservice business.
Jennie-O Turkey Store
- Volume down 2%
- Net sales down 6%
- Segment profit down 21%
Volume and sales growth of Jennie-O® lean ground products and whole birds were exceptionally strong. Reduced demand for foodservice and commodity products led to the overall decline in sales. Lower foodservice earnings and increased supply chain costs related to the COVID-19 pandemic drove the significant decline in segment profit.
International & Other
- Volume down 1%
- Net sales up 8%
- Segment profit up 55%
Sales increased due to strong worldwide demand for SPAM® luncheon meat and growth in China. Results in China were positively impacted by strong demand for branded retail items, such as SKIPPY® peanut butter, and an accelerating recovery in the foodservice channel. The significant increase in segment profit was due to improved results in China, higher income from our partners in the Philippines, South Korea and Europe, and branded export growth.
CHANNEL HIGHLIGHTS – FOURTH QUARTER
In an effort to add an increased level of disclosure and clarity to the nature, timing and uncertainty of our revenue, net sales have been disaggregated into sales channels, which can also be found in the upcoming Form 10-K. The ongoing COVID-19 pandemic and subsequent changes in consumer behavior drove higher retail sales in each of the company’s segments. Overall deli channel sales increased even as some categories declined. Foodservice net sales continued to show declines, similar to prior quarters. International sales increased primarily due to sales increases in China.
- U.S. retail net sales up 7%
- U.S. deli net sales up 1%
- U.S. foodservice net sales down 23%
- International net sales up 2%
SELECTED FINANCIAL DETAILS – FISCAL 2020
Income Statement
- Operating margin for the full year was 11.5% compared to 12.6%. The company was negatively impacted by higher operating costs in 2020 due to the impact of the COVID-19 pandemic.
- Selling, general and administrative expenses increased by 5%. The increase was primarily related to one-time adjustments in 2019 related to the CytoSport sale.
- Advertising investments were $124 million compared to $131 million last year.
- The effective tax rate was 18.5% compared to 19.1% last year.
- The fourth quarter and full year of fiscal 2021 contain an extra week as compared to fiscal 2020.
Cash Flow Statement
- Cash flow from operations was $1,128 million, up 22% compared to last year. The increase was primarily due to effective management of working capital.
- The company acquired the Sadler’s Smokehouse business for $271 million during the year.
- Dividends paid to shareholders were $487 million. The company paid its 369th consecutive quarterly dividend on Nov. 16 at the annual rate of $0.93 per share, an 11% increase over the prior year.
- Capital expenditures were $368 million. The company’s target for capital expenditures in fiscal 2021 is $350 million. Large projects include a new dry sausage facility in Nebraska, a pepperoni capacity expansion project, Project Orion and many other projects to support growth of branded products.
- Share repurchases totaled $12 million, representing 0.3 million shares purchased.
- Depreciation and amortization expense for the full year was $206 million. Depreciation and amortization expense for fiscal 2021 is expected to be approximately $210 million.
Balance Sheet
- The company is in a strong financial position with ample liquidity, a conservative level of debt and consistent cash flows.
- Cash on hand increased to $1,714 million from $673 million at the beginning of the year primarily due to the cash proceeds from the $1.0 billion debt offering during the year.
- Total long-term debt is $1,304 million compared to $250 million at the beginning of the year.
- Working capital increased to $2,075 million from $1,256 million at the beginning of the year, primarily related to a higher cash balance from the debt offering during the year.
PRESENTATION
A conference call will be webcast at 9 a.m. CST on Nov. 24, 2020. Access is available at www.hormelfoods.com by clicking on “Investors.” The call will also be available via telephone by dialing 888-317-6003 and providing the access code 5831860. An audio replay is available by going to www.hormelfoods.com. The webcast replay will be available at noon CST, Nov. 24, 2020, and will remain on the website for one year.
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