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Hormel Foods Announces Third Quarter Results and Continued Progress Towards Key Strategic Initiatives

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August 24, 2017

Austin, Minn.

Full year guidance lowered due to high commodity price volatility

Hormel Foods Corporation (NYSE: HRL) today reported results for the third quarter of fiscal year 2017. All comparisons are to the third quarter of fiscal year 2016. Results reflect the divestiture of the Diamond Crystal Brands business, the divestiture of the Farmer John business, and the acquisition of Justin’s, LLC. The impact of these transactions is excluded in the presentation of the non-GAAP adjusted measures below.

SUMMARY – THIRD QUARTER

  • Record earnings before income tax of $278 million, up 1 percent compared to 2016 earnings before income tax of $274 million
  • Diluted earnings per share of $0.34, down 6 percent from 2016 EPS of $0.36
  • Income taxes up $17 million compared to 2016; tax rate of 34.3 percent compared to 28.6 percent in 2016
  • Sales of $2.2 billion, down 4 percent; Non-GAAP1 adjusted sales2 up 1 percent
  • Volume down 9 percent; Non-GAAP1 adjusted volume2 down 1 percent
  • Refrigerated Foods operating profit up 15 percent; volume down 16 percent; Non-GAAP1 adjusted volume2 down 1 percent; sales down 6 percent; Non-GAAP1 adjusted sales2 up 5 percent
  • Grocery Products operating profit up 10 percent; volume up 4 percent; Non-GAAP1 adjusted volume2 up 3 percent; sales up 6 percent; Non-GAAP1 adjusted sales2 up 3 percent
  • International & Other operating profit down 16 percent; volume up 1 percent; sales up 1 percent
  • Specialty Foods operating profit down 14 percent; volume down 8 percent; Non-GAAP1 adjusted volume2 up 2 percent; sales down 7 percent; Non-GAAP1 adjusted sales2 down 1 percent
  • Jennie-O Turkey Store operating profit down 20 percent; volume down 7 percent; sales down 9 percent

STRATEGIC INVESTMENTS

“We continue to make excellent progress towards our strategic growth initiatives outlined in our 2017 Investor Day,” said Jim Snee, president and chief executive officer. “We separately announced three strategic investments which perfectly align with our path forward.”

“The acquisition of Fontanini Italian Meats and Sausages complements our branded foodservice business and provides additional avenues for growth in the foodservice channel as well as much-needed production capacity for our pizza toppings business,” Snee said. “This morning we also announced the acquisition of the Ceratti® brand, a premium value-added meats company in Brazil. This acquisition expands our global presence and is a platform for future acquisitions in South America. We are excited to welcome the Fontanini and Ceratti employees into the Hormel Foods family and look forward to their contributions going forward.”

“Earlier this month we committed over $130 million to expand production capacity for precooked bacon at our Dold Foods facility in Wichita, Kansas,” Snee said. “The demand for bacon, especially HORMEL® BACON 1TM fully cooked bacon, has been incredible. This strategic investment significantly increases our capacity and gives us runway for future growth in foodservice.”

COMMENTARY – THIRD QUARTER

“We generated record pre-tax earnings this quarter even as we faced record-high input costs for two of our primary raw materials, pork bellies and beef trim,” Snee said. “Nevertheless the results did not meet our expectations. Our team is working to mitigate the effects of volatile commodity markets through increased pricing, strategic promotional activity, and our on-going innovation efforts.”

“Strong earnings growth in Grocery Products and Refrigerated Foods was able to offset lower earnings in our other three segments,” Snee said. “Specialty Foods results are disappointing, primarily caused by a soft quarter for MUSCLE MILK® ready-to-drink protein products. As we anticipated, Jennie-O Turkey Store continues to navigate through unfavorable market conditions in the turkey industry.”

SEGMENT OPERATING HIGHLIGHTS – THIRD QUARTER

Grocery Products (19% of Net Sales, 21% of Total Segment Operating Profit)

Grocery Products sales increased 6 percent aided by strong sales of WHOLLY GUACAMOLE® dips, an additional period of JUSTIN’S® specialty nut butters, and higher sales of SKIPPY® peanut butter products. Segment profit increased 10 percent as higher input costs for beef trim, pork trim, and avocadoes were offset by advertising reductions and incremental earnings from an additional period of JUSTIN’S® specialty nut butters.

Refrigerated Foods (49% of Net Sales, 49% of Total Segment Operating Profit)

Refrigerated Foods sales declined 6 percent, primarily related to the divestiture of the Farmer John business. Foodservice products such as HORMEL® BACON 1TM fully cooked bacon and HORMEL® pepperoni and retail products such as HORMEL® BLACK LABEL® bacon, HORMEL® pepperoni, and HORMEL GATHERINGS® party trays posted strong sales growth. Segment profit increased 15 percent as strong demand for pork and operational improvements offset higher input costs related to bellies, pork trim, and beef trim, along with the divestiture of Farmer John.

Jennie-O Turkey Store (17% of Net Sales, 16% of Total Segment Operating Profit)

Jennie-O Turkey Store sales declined 9 percent and segment profit declined 20 percent. These decreases are primarily due to lower turkey commodity prices, pricing pressure from competing proteins, and increased operating expenses. A reduction in harvest volume was the primary factor to the decline in sales and volume.

Specialty Foods (9% of Net Sales, 8% of Total Segment Operating Profit)

Specialty Foods sales declined 7 percent primarily related to one extra period of Diamond Crystal Brands in fiscal 2016 and lower sales of MUSCLE MILK® protein products. Segment profit declined 14 percent as pricing of contract packaging sales did not keep pace with input cost increases. Lower sales for MUSCLE MILK® ready-to-drink protein products also contributed to the decline in segment profit.

International & Other (6% of Net Sales, 6% of Total Segment Operating Profit)

International sales increased 1 percent and segment profit decreased 16 percent driven by lower results in China, reflecting startup costs for our Jiaxing production facility and the closing of our Shanghai facility.

OUTLOOK

“We expect continued earnings pressure from higher input costs for key raw materials such as bellies, pork trim, and beef trim,” Snee said. “While we have communicated price increases in many categories, the increases will not be fully effective until late in the fourth quarter. Jennie-O Turkey Store continues to be adversely affected by unfavorable market conditions, as the industry has not returned to normalized turkey production levels. For these reasons, we are lowering our full year guidance to $1.54 – $1.58 per share from the low end of $1.65 to $1.71 per share. In the face of a challenging year, we are focused on our strategic initiatives and are committed to maintaining a long-term perspective on our decisions.”

DIVIDENDS

Effective August 15, 2017, the company paid its 356th consecutive quarterly dividend at the annual rate of $0.68.

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

The non-GAAP adjusted financial measurements are presented to provide investors additional information to facilitate the comparison of past and present operations. The company believes these non-GAAP adjusted 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.

2 ADJUSTED FINANCIAL MEASURES

Adjusted net sales and volume excludes the impact from the Justin’s, LLC acquisition in May 2016, and the divestitures of the Diamond Crystal Brands business in May 2016, and the Farmer John business in January 2017. Results below reflect only the incremental sales and tonnage through period 7 of fiscal 2017 for the Justin’s, LLC acquisition and only through the date of divestiture, or period 7 of fiscal 2016, for the Diamond Crystal Brands divestiture. The tables below show the calculations to reconcile from the non-GAAP adjusted measures to the GAAP measures in the third quarter and third quarter year-to-date of fiscal 2016 and fiscal 2017.

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CONFERENCE CALL

A conference call will be webcast at 8:30 a.m. CT on Thursday, August 24, 2017. Access is available at www.hormelfoods.com. The call will also be available via telephone by dialing 800-263-0877 and providing the access code 9221656. 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, August 24, 2017, and will remain on the website for one year.

About Hormel Foods Corporation – 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®, 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 ninth 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 32 – 38 in the company’s Form 10-Q for the quarter ended April 30, 2017, which can be accessed at www.hormelfoods.com under “Investors-SEC Filings.”