Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the fourth quarter of fiscal 2018. All comparisons are to the fourth quarter of fiscal 2017 unless otherwise noted.
EXECUTIVE SUMMARY – FISCAL 2018
- Record diluted earnings per share of $1.86, up 18% from 2017 EPS of $1.57
- Excluding a non-cash impairment, adjusted diluted earnings per share1 of $1.89, up 20%
- Record cash flow from operations of $1.24 billion, up 20%
- Volume of 4.80 billion lbs., up 1%; organic volume1 down 1%
- Record net sales of $9.55 billion, up 4%; organic net sales1 down 1%
- Operating margin of 12.6% compared to 14.0% last year
- Effective tax rate of 14.3% compared to 33.7% last year
EXECUTIVE SUMMARY – FOURTH QUARTER
- Record diluted earnings per share of $0.48, up 17% from 2017 EPS of $0.41
- Adjusted diluted earnings per share1 of $0.51, up 24%
- Volume of 1.27 billion lbs., down 1%; organic volume1 down 3%
- Net sales of $2.52 billion, up 1%; organic net sales1 down 3%
- Operating margin of 12.8% compared to 13.2% last year
- Effective tax rate of 18.7% compared to 33.8% last year
FISCAL 2019 OUTLOOK
“Fiscal 2019 is a continuation of our long-term evolution as a global branded food company,” said Jim Snee, chairman of the board, president, and chief executive officer. “Our focus on building brands, delivering meaningful innovation to the marketplace, making strategic acquisitions, and creating intentional balance will ensure we are able to meet our growth goals. We are confident in our plan to deliver growth in each business segment in 2019.”
“We anticipate another year of strong cash flows. We plan to reinvest to expand capacity for branded value-added products while returning cash back to shareholders through a 12 percent dividend increase,” Snee said. “This coming year will require strong execution from every business unit in order to manage through commodity market volatility and global trade uncertainty. I know our team is up to the challenge.”
“Growth from leading brands such as Wholly Guacamole®, Applegate®, Jennie-O®, and SPAM® will be important to our success in 2019,” Snee said. “We expect continued growth from our many new innovative items such as Herdez® guacamole salsa, Hormel® Bacon 1™ fully cooked bacon, Hormel® Natural Choice® products, and Hormel® Fire Braised™ meats.”
|Fiscal 2019 Outlook|
|Net Sales Guidance (in billions)||$9.70 – $10.20|
|Earnings per Share Guidance||$1.77 – $1.91|
The following items are included in the company’s guidance range. The company plans to deliver $75 million in cost reductions in 2019 which excludes any planned synergies from recent acquisitions. The company will use the savings to help offset inflation, reinvest into key brands, and contribute to earnings growth. The company also expects to complete the Fremont divestiture in December 2018, incurring approximately $12 million in expenses. This transaction reduces earnings volatility and decreases the company’s reliance on commodity profits.
“This morning we announced a 12 percent increase to our annual dividend, making the new dividend $0.84 per share,” Snee said. “This is the 53rd consecutive year in which we’ve increased our dividend and the 10th consecutive year of double-digit increases. This demonstrates the confidence we have in our business going forward.”
Effective November 15, 2018, the company paid its 361st consecutive quarterly dividend at the annual rate of $0.75 per share.
COMMENTARY – FOURTH QUARTER
“Our team delivered a record quarter of earnings,” Snee said. “Refrigerated Foods had a particularly solid quarter led by value-added growth in retail, deli, and foodservice channels which offset a continued decline in commodity profits.”
“We reached many milestones this quarter including the startup of two new lines to support growth of Hormel® Fire Braised™ products and Hormel® Bacon 1™ fully cooked bacon,” Snee said. “We also announced expansions at our Burke manufacturing facility in Nevada, Iowa, and our Fontanini plant in McCook, Ill. These expansions will allow us to continue growing our pizza toppings business as well as our line of authentic premium Italian meats and sausages. These strategic investments reinforce the strength we are seeing in our value-added businesses.”
SEGMENT HIGHLIGHTS – FOURTH QUARTER
- Volume up 2%; organic volume1 down 2%
- Net sales up 6%; organic net sales1 down 3%
- Segment profit up 25%
Sales increases were driven by branded products such as Hormel® pepperoni, Hormel® Natural Choice® products, Applegate® natural and organic products, and Austin Blues® authentic barbeque products in addition to the benefit from the Columbus and Fontanini acquisitions. Organic volume and sales decreased due to lower hog harvest levels. Segment profit increased 25% in spite of a 31% decline in commodity profits and a double-digit increase in freight expenses.
- Volume down 4%
- Net sales down 4%
- Segment profit down 22%; adjusted segment profit1 down 6%
Volume and sales growth of Herdez® salsa and Wholly Guacamole® dips did not offset declines in our contract manufacturing business. Adjusted segment profit1 decreased due to a decline in sales and higher freight expenses. Additionally, a non-cash impairment of $17 million was incurred in the fourth quarter associated with the CytoSport business.
Jennie-O Turkey Store
- Volume down 4%
- Net sales down 4%
- Segment profit down 31%
Volume and sales decreases were due to lower whole bird volume and sales as shipments were shifted into the prior quarter to minimize cold storage expenses. Jennie-O® premium deli products and Jennie-O® foodservice products delivered sales gains. Segment profit decreased as a result of lower whole bird sales, higher feed costs, and increased freight expenses.
International & Other
- Volume up 5%; organic volume1 down 6%
- Net sales up 7%; organic net sales1 down 2%
- Segment profit up 7%
Volume and sales increased as higher exports of SPAM® luncheon meat and Skippy® peanut butter and the addition of the Ceratti business were partially offset by lower fresh pork exports. Global trade uncertainty continued to negatively impact fresh pork export volume, sales, and profitability. Segment profit increases were driven by the addition of the Ceratti business and lower selling, general, and administrative expenses.
SELECTED FINANCIAL DETAILS
- Selling, general and administrative expenses for the full year increased due to acquisitions and higher advertising investments.
- Advertising investments for the full year were $152 million compared to $136 million last year.
- Operating margin for the full year was 12.6% compared to 14.0%. The decline was primarily related to lower whole bird profitability.
- The full year effective tax rate was 14.3% compared to 33.7% last year. The decline was due to The Tax Cuts and Jobs Act passed in December 2017. The effective tax rate for fiscal 2019 is expected to be between 20.5% and 23.0%.
Cash Flow Statement
- Cash flow from operations for the full year was $1.24 billion, up 20% compared to last year. The increase was primarily due to by a lower tax rate and improvements in working capital.
- Share repurchases for the full year total $47 million, representing 1.4 million shares purchased.
- The company repaid $375 million in short-term debt in the full year.
- The company paid its 361st consecutive quarterly dividend at the annual rate of $0.75 per share, a 10% increase over the prior year.
- Capital expenditures for the full year were $390 million. Capital expenditures for fiscal 2019 are expected to be approximately $350 million. Large projects in 2019 include the Burke pizza toppings plant expansion, a Fontanini manufacturing line, and many other projects to support growth of branded value-added products.
- Depreciation and amortization expense for the full year was $162 million. Depreciation and amortization expense for fiscal 2019 is expected to be approximately $175 million.
- After the acquisition of Columbus Craft Meats, the largest in the company’s history at $857 million, the company remains in a strong financial position with its low level of debt and consistent cash flows.
- Cash on hand increased to $459 million from $444 million at the beginning of the year.
- Total long-term debt is $625 million compared to $250 million at the beginning of the year.
- Working capital decreased to $911 million from $968 million at the beginning of the year, primarily related higher accounts payable and lower accounts receivable.
A conference call will be webcast at 8:00 a.m. CT on Tuesday, November 20, 2018. Access is available at www.hormelfoods.com and clicking on “Investors.” The call will also be available via telephone by dialing 888-254-3590 and providing the access code 9962477. An audio replay is available by going to www.hormelfoods.com. The webcast replay will be available at 11:00 a.m. CT, Tuesday, November 20, 2018, and will remain on the website for one year.