Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the second quarter of fiscal 2019. All comparisons are to the second quarter of fiscal 2018 unless otherwise noted.
EXECUTIVE SUMMARY
- Volume of 1.2 billion lbs., up 1%
- Record net sales of $2.3 billion, up 1%
- Pretax earnings of $318 million, up 7%
- Diluted earnings per share of $0.52
- Excluding one-time gain on the divestiture of CytoSport, adjusted diluted EPS1 of $0.46 per share
- Effective tax rate of 11.1% compared to 20.0% last year
- Operating margin of 13.3% compared to 12.9% last year
- Year-to-date cash flow from operations of $366 million, down 18% due to higher working capital
- Fiscal 2019 earnings guidance decreased to $1.71 to $1.85 per share from $1.77 to $1.91 per share
COMMENTARY
“We achieved record sales this quarter as three of our four segments delivered volume and sales growth,” said Jim Snee, chairman of the board, president and chief executive officer. “Many of our innovative product lines such as Hormel® Bacon 1™ cooked bacon, Hormel® Fire Braised™ products, Hormel® Natural Choice® snacks and Herdez® salsa delivered double-digit sales growth. We also grew core product lines such as Hormel® pepperoni, Dinty Moore® stew and Austin Blues® authentic barbeque products.”
“In spite of record sales, second quarter earnings did not meet our expectations,” Snee said. “African swine fever in China started to impact global hog and pork markets this quarter, which led to rapidly increasing input costs. In response, we have announced pricing action across our branded value-added portfolio in the Grocery Products, Refrigerated Foods and International segments.”
“Jennie-O Turkey Store profits declined due to a combination of plant startup costs and lower retail sales,” Snee said. “We made a large investment to automate our whole-bird facility in Melrose, Minn., and the startup was more difficult than anticipated. We made excellent progress through the quarter and are now on track to deliver the production efficiencies we expected. Retail sales declined for the quarter, but we are reactivating promotional activity and advertising in order to regain distribution.”
“We finalized the sale of CytoSport this quarter and used the proceeds to pay down the remaining debt from the Columbus Craft Meats acquisition and build our cash position,” Snee said. “We will use our strong balance sheet to continue to grow our company through disciplined and strategic investments, including acquisitions and capacity expansion projects.”
SEGMENT HIGHLIGHTS – SECOND QUARTER
Refrigerated Foods
- Volume flat
- Net sales up 1%
- Segment profit down 5%
Volume and sales growth was led by foodservice products such as Hormel® Bacon 1™ cooked bacon, Hormel® Fire Braised™ products and Austin Blues® authentic barbeque products. Retail products such as Hormel® Black Label® bacon, Hormel® Natural Choice® products, Hormel® pepperoni and Hormel® prepared foods products for the deli also showed excellent growth. Branded value-added sales growth was offset by a double-digit decline in commodity sales.
Segment profit declined as growth in value-added profits did not fully offset a 65% decline in commodity profits. Higher operational expenses related to capacity expansion projects also impacted profitability.
Grocery Products
- Volume up 3%
- Net sales up 2%
- Segment profit up 12%
Sales increases were led by Herdez® salsas and sauces, Wholly® guacamole dips and Skippy® peanut butter, offset by lower sales of CytoSport products. Segment profit increased primarily due to higher volume and margins across many categories, such as the SPAM® family of products and Dinty Moore® stew, and lower expenses for CytoSport. The divestiture of CytoSport was completed on April 15, 2019.
Jennie-O Turkey Store
- Volume up 2%
- Net sales flat
- Segment profit down 45%
Sales for the quarter were flat as improved results in foodservice and whole-bird sales were offset by declines in retail sales due to the lingering impact of two voluntary product recalls. Foodservice sales growth was led by many categories, including Jennie-O® sliced products. Segment profit was impacted by higher-than-expected plant startup expenses, higher feed costs and lower retail sales.
International & Other
- Volume down 7%
- Net sales down 9%
- Segment profit down 31%
International volume, sales and segment profit decreased primarily due to the continued impact of tariffs on fresh pork exports along with higher freight costs. Growth in our China business was driven by increased sales of branded value-added products such as SPAM® luncheon meat and Skippy® peanut butter.
SELECTED FINANCIAL DETAILS
Income Statement
- Selling, general and administrative expenses decreased primarily due to a one-time gain resulting from the CytoSport divestiture and lower selling expenses.
- Advertising investments were $35 million compared to $37 million last year. Advertising investments for the full year are expected to be modestly lower compared to the prior year due to the CytoSport divestiture.
- Operating margin was 13.3% compared to 12.9% last year.
- The effective tax rate was 11.1% compared to 20.0% last year. The decrease was due to the impact of the tax gain from the CytoSport divestiture. The full-year effective tax rate for fiscal 2019 is expected to be between 17.5% and 19.5%.
Cash Flow Statement
- Capital expenditures in the second quarter were $48 million compared to $87 million last year. The full-year outlook for capital expenditures decreased to approximately $310 million, primarily due to weather delays and project timing. Key projects for the full year include an expansion of our Burke Corporation 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 second quarter was $41 million, flat to last year. The full-year expense is expected to be approximately $160 million.
- Share repurchases for the quarter totaled $23 million, representing 0.6 million shares purchased.
- The company repaid the remaining $375 million in debt related to the Columbus Craft Meats acquisition.
- The company paid its 363rd consecutive quarterly dividend on May 15, 2019, at the annual rate of $0.84 per share, a 12% increase over the prior year.
Balance Sheet
- Working capital increased to $1,199 million from $911 million at the beginning of the year, primarily related to the proceeds received from the CytoSport divestiture.
- Cash on hand increased to $639 million from $459 million at the beginning of the year.
- The company remains in a strong financial position to fund additional capital needs.
OUTLOOK
“Over the past three years, the intentional actions we have taken as part of Our Path Forward, which include evolving to a broader global branded food company, accelerating our foodservice business, modernizing our supply chain and divesting nonstrategic assets, has made our company stronger,” Snee said. “Our experienced management team, leading brands, focus on innovation, strong balance sheet and diversified businesses allow us to manage through times of uncertainty and volatility, as we are currently experiencing with African swine fever.”
The company’s revised fiscal 2019 earnings guidance range is based on the input cost increases experienced in the second quarter and a forecast for volatile domestic pork prices in the second half of fiscal 2019. The company has a proven ability to operate in elevated market conditions but expects short-term margin compression as branded value-added pricing actions lag input cost increases. Additionally, expectations for Jennie-O Turkey Store have been lowered as the company reinvests in the Jennie-O® brand in order to regain retail distribution.
