Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the third quarter of fiscal 2019. All comparisons are to the third quarter of fiscal 2018 unless otherwise noted. Results reflect the divestiture of the CytoSport business. The impact of this transaction is excluded in the presentation of the non-GAAP measures below.
EXECUTIVE SUMMARY
- Volume of 1.1 billion lbs., down 4%; organic volume1 down 1%
- Net sales of $2.3 billion, down 3%; organic net sales1 flat
- Pretax earnings of $261 million, up 1%
- Operating margin of 11.2% compared to 10.9% last year
- Effective tax rate of 23.6% compared to 18.4% last year
- Diluted earnings per share of $0.37, down 5% due to a higher effective tax rate
- Year-to-date cash flow from operations of $573 million, down 23% due to higher working capital
- Fiscal 2019 earnings guidance reaffirmed at $1.71 to $1.85 per share
COMMENTARY
“We delivered earnings in line with our expectations this quarter as our experienced management team reacted quickly and appropriately to rapidly changing market conditions,” said Jim Snee, chairman of the board, president and chief executive officer. “Disciplined pricing, strategic promotional activity, effective advertising and insight-led innovation all played a positive role in our performance. The fundamentals of our company are strong, and we remain focused on delivering our key results as we navigate near-term commodity market uncertainty.”
“Innovative branded product lines such as Hormel® Bacon 1™ cooked bacon, Hormel® Fire Braised™ products, SKIPPY® P.B. & Jelly Minis, and Herdez® salsas all delivered strong sales growth,” Snee said. “Our team also grew sales across many core brands such as SPAM®, Dinty Moore®, Mary Kitchen® and Old Smokehouse®.”
“Double-digit earnings growth in Refrigerated Foods offset weaker results in Grocery Products,” Snee said. “Refrigerated Foods effectively managed sales growth and profitability in the midst of volatile input costs caused by African swine fever. Many of our established brands in Grocery Products continue to outpace center store growth. However, the disappointing bottom-line performance for Grocery Products was driven by higher avocado costs in our MegaMex joint venture and lower results for our SKIPPY® peanut butter spreads business.”
“The Jennie-O Turkey Store team is working diligently to regain lean ground turkey distribution following the two voluntary product recalls,” Snee said. “Our International team made progress growing the SPAM® and SKIPPY® brands in China while U.S. exports continue to be impacted by global trade uncertainty.”
SEGMENT HIGHLIGHTS – THIRD QUARTER
Refrigerated Foods
- Volume down 1%
- Net sales up 1%
- Segment profit up 13%
Sales increased on strong demand for foodservice items such as Hormel® Bacon 1™ cooked bacon, Old Smokehouse® premium raw bacon and Hormel® Fire Braised™ products. Retail sales of Hormel® Black Label® convenience bacon and Columbus® branded deli items also contributed to overall growth. Volume declined slightly for the quarter, attributed to price increases on value-added items. Segment profit increased significantly primarily due to improved profitability for value-added products. Favorable operational expenses and higher commodity profits also contributed to the earnings growth.
Grocery Products
- Volume down 10%; organic volume1 up 1%
- Net sales down 11%; organic net sales1 up 1%
- Segment profit down 30%
Volume and sales decreases were related to the divestiture of CytoSport. On an organic basis, strong sales of the SPAM® family of products, Don Miguel® branded items, Dinty Moore® stew and Herdez® salsas and sauces more than offset lower sales of SKIPPY® peanut butter. The decline in segment profit was driven by the divestiture of CytoSport, the impact of significantly higher avocado costs and lower SKIPPY® peanut butter pricing.
Jennie-O Turkey Store
- Volume down 4%
- Net sales down 5%
- Segment profit down 9%
Volume and sales decreased for the quarter as lower retail and foodservice sales were not fully offset by improved results in the commodity and whole-bird businesses. The retail business continues to be impacted by lost distribution due to the impact of two voluntary product recalls. Segment profit declined as a result of lower sales from retail and foodservice value-added items.
International & Other
- Volume flat; organic volume1 up 2%
- Net sales flat; organic net sales1 up 2%
- Segment profit up 1%
Volume and sales for the quarter were flat as improved results in China offset the divestiture of CytoSport. Results in China were positively impacted by strong demand for foodservice and SKIPPY® peanut butter products as well as increased distribution of SPAM® luncheon meat. Segment profit for the quarter was slightly higher, driven by growth in China.
SELECTED FINANCIAL DETAILS
Income Statement
- Selling, general and administrative expenses decreased due to the impact of the divestiture of CytoSport and lower employee-related expenses.
- Advertising investments were $32 million compared to $40 million last year. Advertising investments for the full year are expected to be lower compared to the prior year, primarily attributed to the CytoSport divestiture.
- Operating margin was 11.2% compared to 10.9% last year.
- The effective tax rate was 23.6% compared to 18.4% last year. The increase was primarily due to the impact of deferred tax remeasurements last year. The full-year effective tax rate for fiscal 2019 is expected to be between 18.3% and 20.3% compared to 17.5% and 19.5% previously provided.
Cash Flow Statement
- Capital expenditures in the third quarter were $67 million compared to $103 million last year. The full-year outlook for capital expenditures decreased to approximately $250 million, primarily due to weather delays and changes to project timing and scope. 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 other projects designed to increase value-added capacity.
- Depreciation and amortization expense in the third 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 $107 million, representing 2.7 million shares purchased.
- The company paid its 364th consecutive quarterly dividend on Aug. 15, 2019, at the annual rate of $0.84 per share, a 12% increase over the prior year.
Balance Sheet
- Working capital increased to $1,173 million from $911 million at the beginning of the year, primarily related to higher inventory.
- Cash on hand increased to $560 million from $459 million at the beginning of the year.
- The company remains in a strong financial position to fund additional capital needs.
OUTLOOK
“We are reaffirming our fiscal 2019 earnings guidance range,” Snee said. “While we have yet to see sustained higher pork prices due to African swine fever, we have seen input cost volatility and are expecting further volatility. The Refrigerated Foods team has proven its ability to operate in various market conditions with a continued focus on value-added growth, disciplined pricing and innovation. Earnings pressure from higher avocado prices and peanut butter category dynamics will continue to impact results in Grocery Products in the fourth quarter.”
“Our experienced management team will continue to leverage our company’s long-term strategy of building brands, innovating, making strategic acquisitions and increasing balance in our business to deliver long-term growth,” Snee said.
