Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the second quarter of fiscal 2020. All comparisons are to the second quarter of fiscal 2019 unless otherwise noted.
The impact of the Sadler’s Smokehouse acquisition (March 2020) and the CytoSport divestiture (April 2019) are excluded in the presentation of the non-GAAP measures of organic volume and organic net sales. The impact of the one-time gain associated with the CytoSport divestiture last year is excluded from prior year adjusted pretax earnings and adjusted diluted earnings per share. Operating free cash flow is also presented as a non-GAAP metric.
EXECUTIVE SUMMARY
- Volume of 1.2 billion lbs., up 4%; organic volume1 up 7%
- Record net sales of $2.4 billion, up 3%; organic net sales1 up 6%
- Pretax earnings of $286 million, down 10%; down 5% to adjusted pretax earnings1 last year primarily due to lower investment income
- Operating margin of 12.1%, compared to 13.3% last year
- Effective tax rate of 20.6%, compared to 11.1% last year
- Diluted earnings per share of $0.42, down 19%; down 9% to adjusted diluted earnings per share1 last year
- Cash flow from operations of $360 million, up 102%
- Operating free cash flow1 of $280 million, up 115%
EXECUTIVE COMMENTARY AND OUTLOOK
“As a global branded food company, we play a critical role in providing safe, high-quality food during this challenging time,” said Jim Snee, chairman of the board, president and chief executive officer. “I am incredibly proud of the heroic efforts of our production professionals, who have risen to the challenge and continue to produce food with a sense of purpose and pride. Our commitment is to ensure every Hormel Foods employee is safe and healthy and can continue to meet the needs of our customers and consumers.”
“Our financial results this quarter demonstrate the value of our balanced business model and our team’s ability to react to a rapidly changing environment,” Snee said. “We continue to excel and gain market share in channels that are open and available to us, namely the retail channel. We know consumers are looking for trusted brands, and we will continue investing in our leading brands such as SPAM®, SKIPPY®, Jennie-O®, Hormel® Natural Choice® and Applegate®. Our strong balance sheet and stable cash flows give us the confidence to lean into our business and make the right long-term decisions for our team members, suppliers, customers and shareholders. Even though the COVID-19 pandemic has caused a dramatic shift in consumer behavior, operational disruptions and extreme volatility in raw material markets, we remain financially strong and well-positioned to weather the pandemic.”
In the second quarter, the company absorbed approximately $20 million in incremental supply chain costs primarily related to lower production volumes, employee bonuses and enhanced safety measures in its production facilities. The company expects to absorb another $60-$80 million in the second half of the year, weighted primarily to the third quarter. The majority of the increased costs are expected to be temporary.
“Our leadership team has extensive experience effectively managing through volatile input cost markets and changes in consumer behavior, but we have always done so with a fully functioning supply chain across the industry,” Snee said. “The COVID-19 pandemic has created industry uncertainty as to whether we will experience further interruptions. Additionally, the foodservice industry is in the very early stages of a recovery, and we are actively monitoring the pace and magnitude of this recovery. As a result of this uncertainty, we are withdrawing our full-year sales and earnings guidance.”
COVID-19 RESPONSE
“Employee safety has been and will continue to be our top priority, and this is why we are committed to making the necessary investments to keep our team members safe,” Snee said. “Our industry-leading effort to enhance safety protections for our team members is complemented by our new awareness initiative, called KEEP COVID OUT!, which reinforces the importance of taking preventive measures at our production facilities and in our communities where we work and live.”
Enhanced safety procedures have been implemented across the company’s facilities, including providing personal protective equipment for all production team members, frequent disinfecting of high-touch areas, reconfiguration of common areas and workstations, temperature and wellness screenings, revised shift scheduling, reducing production line speeds, new guidelines on carpooling, more extensive social distancing measures throughout each facility and where possible, providing remote work opportunities and facilitating access to rapid testing for employees. The company’s safety procedures meet or exceed CDC and OSHA guidelines, ensuring that its practices continue to reflect best practices in the food industry. The company has also announced over $11 million in bonuses to all full- and part-time plant production team members.
“I have the highest level of confidence that we have the right strategy, sound fundamentals, best-in-class management and the financial strength to thrive in this dynamic marketplace,” Snee said. “I appreciate the work happening across all areas of our company and know we will continue do what is best for our team members and customers.”
SEGMENT HIGHLIGHTS – SECOND QUARTER
Refrigerated Foods
- Volume flat; organic volume1 down 1%
- Net sales down 1%; organic net sales1 down 3%
Segment profit down 17%
- Strong retail and deli products sales and the Sadler’s Smokehouse acquisition did not fully offset a dramatic decline in foodservice sales. Improved results from products such as Hormel® Black Label® bacon, Applegate® natural and organic meats, Columbus® charcuterie, Hormel® pepperoni and Lloyd’s® barbeque meats were more than offset by the adverse profit impact from significantly lower foodservice sales and higher operational costs.
Grocery Products
- Volume up 7%; organic volume1 up 19%
- Net sales up 8%; organic net sales1 up 20%
- Segment profit up 22%
Volume and sales increased as a result of higher consumer demand for branded retail products. Double-digit growth from products such as the SPAM® family of products, SKIPPY® peanut butter, Hormel® chili and Hormel® Compleats® microwave meals more than offset the divestiture of the CytoSport business last year. The significant increase in profit was due to higher sales and an improved mix across the portfolio.
Jennie-O Turkey Store
- Volume up 19%
- Net sales up 12%
- Segment profit up 54%
Improved retail, commodity and whole-bird sales more than offset a decline in foodservice sales. Distribution gains prior to the COVID-19 outbreak and subsequent strong demand during the outbreak for Jennie-O® lean ground products drove double-digit retail sales increases. Segment profit increased due to higher sales and improved operational and live production performance.
International & Other
- Volume down 2%; organic volume1 down 1%
- Net sales up 2%; organic net sales1 up 3%
- Segment profit up 62%
Strong global demand for SPAM® luncheon meat and other branded exports overcame softer foodservice sales, especially in China. Segment profit increased as higher branded export margins and income from affiliates more than offset weaker results in China and lower fresh pork export margins.
CHANNEL HIGHLIGHTS – SECOND 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 Form 10-Q. The COVID-19 pandemic and subsequent shelter-in-place restrictions drove higher and sustained retail sales for each of the company’s segments. The company delivered market share gains in the majority of its retail categories as consumers purchased branded food products at an accelerated rate through various retail outlets, including traditional, mass, club, discount and e-commerce retailers. Deli channel sales increased even as some categories declined. The effect of the pandemic also caused sharp sales declines in the foodservice channel during the quarter for each of the company’s segments. International sales increased primarily due to exports of branded and commodity products in the International & Other and Jennie-O Turkey Store segments.
- U.S. retail net sales up 16%
- U.S. deli net sales up 5%
- U.S. foodservice net sales down 21%
- International net sales up 11%
SELECTED FINANCIAL DETAILS
Income Statement
- Selling, general and administrative expenses increased year over year. The inclusion of the one-time gain resulting from the CytoSport divestiture led to lower expenses in fiscal 2019.
- Advertising investments were $35 million, flat to last year.
- Interest and investment income declined during the quarter due to losses on investments of $12 million.
- Operating margin was 12.1%, compared to 13.3% in fiscal 2019. Operating margin last year benefited from the one-time gain resulting from the CytoSport divestiture.
- The effective tax rate was 20.6%, compared to 11.1% last year. The lower rate in fiscal 2019 was due to the benefit of the tax gain from the CytoSport divestiture.
Cash Flow Statement
- Cash flow from operations was $360 million, up 102%. Lower levels of inventory and accounts receivable drove the majority of the increase.
Operating free cash flow1 was $280 million, up 115%.
- The company paid its 367th consecutive quarterly dividend on May 15, 2020, at the annual rate of $0.93 per share, an 11% increase over the prior year.
- The company finalized the acquisition of Sadler’s Smokehouse for $269 million during the quarter.
- Capital expenditures in the second quarter were $80 million, compared to $48 million last year. The company’s target for capital expenditures in fiscal 2020 is $340 million. Large projects include the Burke pizza toppings plant expansion, a new dry sausage facility in Nebraska, Project Orion and other projects to support growth of branded products.
Share repurchases for the quarter totaled $12 million, representing 0.3 million shares purchased.
- Depreciation and amortization expense in the second quarter was $51 million, compared to $41 million last year. The full-year expense is expected to be approximately $200 million.
Balance Sheet
- The company remains in a strong financial position with limited debt and consistent cash flows.
- The company recently renewed its shelf registration statement and will be looking at near-term opportunities to access the debt capital markets to refinance existing debt maturing in April 2021 and to maintain ample liquidity at favorable interest rates.
- Cash on hand decreased to $606 million from $673 million at the beginning of the year.
- Total debt is $315 million, up from $250 million at the beginning of the year. The increase is attributable to the adoption of the new lease accounting standards.
- Working capital decreased to $924 million from $1,256 million at the beginning of the year, primarily related to the long-term debt becoming a current maturity during the quarter.
PRESENTATION
A conference call will be webcast at 8 a.m. CDT on Thursday, May 21, 2020. Access is available at www.hormelfoods.com by clicking on “Investors.” The call will also be available via telephone by dialing 888-254-3590 and providing the access code 7355932. An audio replay is available by going to www.hormelfoods.com. The webcast replay will be available at 11 a.m. CDT, Thursday, May 21, 2020, and will remain on the website for one year.
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