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Hormel Foods Announces Record Second Quarter Results and Reaffirms Full Year Guidance

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May 24, 2018

Austin, Minn.

Company maintains full year sales and earnings guidance while effectively managing commodity and freight headwinds

Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the second quarter of fiscal 2018. All comparisons are to the second quarter of fiscal 2017 unless otherwise noted.

EXECUTIVE SUMMARY

  • Record diluted earnings per share of $0.44, up 13% from 2017 EPS of $0.39
  • Fiscal 2018 earnings guidance reaffirmed at $1.81 to $1.95 per share
  • Record net sales of $2.3 billion, up 7%; Organic net sales1 flat
  • Volume of 1.2 billion lbs., up 3%; Organic volume1 down 1%
  • Operating margin of 13.1% compared to 14.4% last year
  • Effective tax rate of 20.0% compared to 33.2% last year
  • Year-to-date cash flow from operations of $443 million, up 58% compared to last year

COMMENTARY

“Our team delivered record earnings per share of $0.44 which was in line with our expectation and keeps us on track to maintain our full year earnings guidance,” said Jim Snee, chairman of the board, president, and chief executive officer. “We were particularly pleased with the bottom-line performance from Refrigerated Foods as our experienced team grew our value-added profits while navigating through volatile markets. Our balanced business model helped mitigate higher freight costs and a difficult commodity environment.”

“We delivered record sales led by our Refrigerated Foods and International segments. Strong top-line growth from brands such as Hormel® Natural Choice® and Hormel® Bacon 1™ and international sales of products such as Skippy® peanut butter was complemented by the strategic acquisitions of Fontanini, Columbus Craft Meats, and Ceratti,” Snee said. “Our core center store portfolio of brands such as SPAM®, Dinty Moore®, and Herdez® also showed strong growth this quarter.”

SEGMENT HIGHLIGHTS – SECOND QUARTER

Refrigerated Foods

  • Volume up 6%; Organic volume1 down 1%
  • Net sales up 14%; Organic net sales1 flat to last year
  • Segment profit up 18%

Volume and sales increases benefited from the inclusion of the Columbus and Fontanini acquisitions in addition to strong retail sales of Hormel® Natural Choice® products and foodservice sales of Hormel® pepperoni and Hormel® Bacon 1™ fully cooked bacon. Organic volume decreased due to lower hog harvest volumes.

Refrigerated Foods delivered segment profit growth of 18% despite a 25% decline in commodity profits, a double-digit increase in per-unit freight expenses, and higher advertising expenses. Strong results were delivered by our branded retail and foodservice businesses in addition to the inclusion of the Fontanini and Columbus acquisitions.

Grocery Products

  • Volume down 2%
  • Net sales down 1%
  • Segment profit down 12%

Low-single-digit sales growth in our core Grocery Products portfolio, led by Wholly Guacamole® dips, the SPAM® family of products, Herdez® salsas, Dinty Moore® stew, and Hormel® chili, was more than offset by significant sales declines across the CytoSport portfolio and our contract manufacturing business. Total Grocery Products segment profit was down due to increased promotional activity and lower volumes at CytoSport and lower earnings from our contract manufacturing business.

Jennie-O Turkey Store

  • Volume down 3%
  • Net sales down 4%
  • Segment profit down 34%

Sales declines were primarily due to lower whole bird pricing and volume as a result of continued oversupply of turkeys in the industry and excess meat in cold storage. Sales declines of whole birds were partially offset by increased retail sales, led by Jennie-O® lean ground turkey and Jennie-O® Oven Ready™ products. Segment profit decreased as a result of lower profits from whole bird and commodity sales, double-digit increases in per-unit freight costs, and increased advertising.

International & Other

  • Volume up 14%; Organic volume1 up 1%
  • Net sales up 22%; Organic net sales1 up 8%
  • Segment profit up 6%

International volume and sales increases were related to strong results in China, increased export sales, and the inclusion of the Ceratti business. Earnings increased on improved profitability in China due to lower raw material costs but were partially offset by higher advertising expenses and lower branded export margins.

SELECTED FINANCIAL DETAILS

Income Statement

  • Selling, general and administrative expenses increased due to the impact from acquisitions and higher advertising expense.
  • Advertising expenses were $37 million compared to $30 million last year. Full year advertising expenses are expected to increase by approximately 20% over last year.
  • Operating margin was 13.1% compared to 14.4% last year.
  • The effective tax rate was 20.0% compared to 33.2% last year due to the passage of The Tax Cuts and Jobs Act in December 2017. The full year effective tax rate is expected to be between 17.5% and 19.5%.

Cash Flow Statement

  • Capital expenditures in the second quarter were $87 million compared to $39 million last year. Full year capital expenditures are expected to total $425 million. Key projects include bacon capacity increases in our Wichita, Kans., facility, a new whole bird facility in Melrose, Minn., modernization of the Austin, Minn., plant, and projects designed to increase value-added capacity.
  • Depreciation and amortization expense in the second quarter was $41 million compared to $32 million last year. Full year expenses are expected to be approximately $160 million.
  • Share repurchases to date total $45 million, representing 1.3 million shares purchased.
  • The Company repaid $70 million in short-term debt in the quarter.
  • The Company paid its 359th consecutive quarterly dividend at the annual rate of $0.75 per share, a 10% increase over the prior year.

Balance Sheet

  • Working capital increased to $702 million from $625 million in the first quarter, primarily related to a higher inventories from acquisitions and lower accounts payable.
  • Cash on hand decreased to $262 million from $386 million for the first quarter as the Company continues to pay down short-term debt related to the Columbus Craft Meats acquisition.
  • Total debt is $810 million. The debt is split between short-term borrowings of $185 million and long-term borrowings of $625 million.
  • The Company remains in a strong financial position to fund other capital needs.

OUTLOOK

“We are reaffirming our sales and earnings outlook for fiscal 2018,” Snee said. “Our balanced business model allows us to manage through volatility and deliver consistent earnings growth. We continue to execute our value-added growth strategy in Refrigerated Foods and expect our retail and foodservice branded businesses to offset higher freight costs and lower pork commodity profits. Our expectation is for strong year-over-year earnings growth for International and for Grocery Products to return to its growth trajectory. While we are starting to see early signs of a recovery in the turkey industry, we expect Jennie-O Turkey Store to continue showing earnings declines for the remainder of this year.”

“We are making excellent progress on the integrations of our recent acquisitions. These efforts, in combination with continued execution of our strategic imperatives, will ensure we remain in a position to deliver strong growth in the future.”

Fiscal 2018 Outlook​

Net Sales Guidance (in billions) $9.70 – $10.10
Earnings per Share Guidance $1.81 – $1.95
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PRESENTATION

A conference call will be webcast at 8:00 a.m. CT on Thursday, May 24, 2018. Access is available at www.hormelfoods.com. The call will also be available via telephone by dialing 800-239-9838 and providing the access code 9118102. An audio replay is available by going to www.hormelfoods.com and clicking on Investors. The webcast replay will be available at 11:00 a.m. CT, Thursday, May 24, 2018, and will remain on the website for one year.

Click here for the full release.

About Hormel Foods – Inspired People. Inspired Food.

Hormel Foods Corporation, based in Austin, Minn., is a global branded food company with over $9 billion in annual revenues across 75 countries worldwide. Its brands include SKIPPY®, SPAM®, Hormel® Natural Choice®, Applegate®, Justin’s®, Columbus®, Wholly Guacamole®, Hormel® Black Label® and more than 30 other beloved brands. The company is a member of the S&P 500 Index and the S&P 500 Dividend Aristocrats, was named one of “The 100 Best Corporate Citizens” by Corporate Responsibility Magazine for the tenth year in a row, and has received numerous other awards and accolades for its corporate responsibility and community service efforts. In 2016, the company celebrated its 125th anniversary and announced its new vision for the future – Inspired People. Inspired Food.™ – focusing on its legacy of innovation. For more information, visit www.hormelfoods.com and https://csr.hormelfoods.com/.

FORWARD-LOOKING STATEMENTS

This news release contains forward-looking information based on management’s current views and assumptions. Actual events may differ materially. Please refer to the cautionary statement regarding Forward-Looking Statements and Risk Factors which appear on pages 31 – 38 in the company’s Form 10-Q for the quarter ended January 28, 2018, which can be accessed at www.hormelfoods.com under “Investors – Filings & Reports – SEC Filings.”

1 COMPARISON OF U.S. GAAP TO NON-GAAP FINANCIAL MEASUREMENTS

The non-GAAP adjusted financial measurements of organic net sales and organic volume are presented to provide investors additional information to facilitate the comparison of past and present operations. The company believes these non-GAAP financial measurements provide useful information to investors because they are the measurements used to evaluate performance on a comparable year-over-year basis. Non-GAAP measurements are not intended to be a substitute for U.S. GAAP measurements in analyzing financial performance. These non-GAAP measurements are not in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

Organic net sales and organic volume are defined as net sales and volume excluding the impact of acquisitions and divestitures. Organic net sales and organic volume exclude the impacts of the acquisition of Columbus Craft Meats (November 2017), the acquisition of Fontanini Italian Meats and Sausages (August 2017), and the divestiture of Farmer John (January 2017) in Refrigerated Foods and the acquisition of Ceratti (August 2017) in International. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the second quarter and second quarter year-to-date of fiscal 2018 and fiscal 2017.