Hormel Foods Reports Third Quarter Results
Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the third quarter of fiscal 2020. All comparisons are to the third quarter of fiscal 2019 unless otherwise noted.
The impact of the Sadler’s Smokehouse acquisition (March 2020) is excluded in the presentation of the third quarter of fiscal 2020 non-GAAP measures of organic volume and organic net sales. Operating free cash flow is also presented as a non-GAAP metric.
EXECUTIVE SUMMARY – THIRD QUARTER
- Volume of 1.2 billion lbs., up 4%; organic volume1 up 3%
- Record net sales of $2.4 billion, up 4%; organic net sales1 up 2%
- Pretax earnings of $259 million, down 1%
- Operating margin of 10.5%, compared to 11.2% last year
- Effective tax rate of 21.6%, compared to 23.6% last year
- Net earnings of $203 million, up 2%
- Diluted earnings per share of $0.37, flat to last year
- Cash flow from operations of $330 million, up 59%
- Operating free cash flow1 of $242 million, up 72%
“We had an excellent third quarter with strength across our retail and deli businesses, along with a rebound in our foodservice business,” said Jim Snee, chairman of the board, president and chief executive officer. “The intentional balance we have built across our portfolio has once again enabled us to generate stable cash flows in a very dynamic time period, even as we absorbed significant incremental costs in our supply chain due to the COVID-19 pandemic.”
“The tireless dedication of our entire global team during these extraordinary times embodies our company’s purpose of Inspired People. Inspired Food.™,” Snee said. “I’m proud of our team’s unwavering commitment to employee safety and our ability to maintain high levels of performance to deliver record sales this quarter.”
“We expect the fourth quarter to mirror many of the dynamics we saw in the third quarter, including strength from our retail businesses and the ongoing recovery in our foodservice business,” Snee said. “However, the magnitude of additional recovery in the foodservice industry, the performance of the entire food supply chain and the state of the broader economy remain highly uncertain.”
“As we begin the fourth quarter, we are actively addressing two areas of our business,” Snee said. “First, while we saw an improvement in the third quarter, our foodservice business was still behind last year, which is a trend we expect to continue into the fourth quarter. I’m proud of the work our foodservice teams are doing to find unique solutions to support our distributors and operators. It is also encouraging to see growth from other channels and businesses offset declines in the foodservice channel.”
“Second, our plant professionals have done heroic work to meet the high level of demand we are seeing across our business,” Snee said. “In most businesses we are producing more product than we ever have, which is quite an accomplishment. However, in some key categories, the ongoing increased demand and impact of COVID-19 in our manufacturing facilities has forced our supply chain to find alternate solutions to increase production, including relying on our network of trusted co-manufacturing partners. In the fourth quarter, we expect factors such as limited labor availability, production inefficiencies due to COVID-19 safety measures and unseasonably low levels of inventory to challenge our ability to meet the increased demand for certain products.”
“We continue to ensure employee safety is our top priority,” Snee said. “We are seeing success from our awareness initiative, KEEP COVID OUT!, which reinforces the importance of taking preventive measures at our production facilities and in our communities where we work and live.”
The company’s safety procedures continue to meet or exceed CDC and OSHA guidelines, ensuring its operations reflect best practices in the food industry. In addition to numerous safety procedures enacted once the pandemic started, the company has expanded automated temperature screenings, added more staggered production shifts and increased training on COVID-19 best practices.
In the third quarter, the company absorbed approximately $40 million in incremental supply chain costs primarily related to lower production volumes, employee bonuses and enhanced safety measures in its production facilities. On a year-to-date basis, total incremental costs were $60 million, and the range of incremental costs in the fourth quarter is $20-$40 million. The total incremental supply chain costs are anticipated to be $80-$100 million in fiscal 2020.
“Being a good corporate citizen is about more than just writing a check to worthwhile causes. It’s about making a difference and doing our part every day to lift up our communities and use our size and position as a global branded food company to make a difference through our philanthropic pillars of food security, community support and education,” Snee said. “Since the start of the pandemic, we have continued to support our communities by contributing to hunger relief efforts, including donating cash and products to global, national and local hunger-relief organizations.”
“Hormel Foods remains committed to supporting equality and education,” Snee said. “Through the great work of our Inclusion and Diversity Guiding Coalition, in July we announced employee and corporate donations to three organizations: Minorities in Agriculture, Natural Resources and Related Sciences (MANRRS); the NAACP Legal Defense and Education Fund; and United Negro College Fund (UNCF). In addition, today we separately announced a college assurance program, Inspired Pathways, which will provide full tuition for any child of a Hormel Foods employee to attend community college. I’m very excited to see the difference these programs will make in our communities.”
SEGMENT HIGHLIGHTS – THIRD QUARTER
- Volume up 8%; organic volume1 up 7%
- Net sales up 5%; organic net sales1 up 2%
- Segment profit down 11%
Volume and sales increased as strong demand for branded retail and deli products, higher fresh pork commodity sales, and the impact from the Sadler’s Smokehouse acquisition more than offset a significant decline in foodservice sales. Improved sales results were driven by value-added brands such as Applegate®, Hormel® Black Label® and Columbus®. Segment profit declined as a result of lower foodservice sales, incremental COVID-19 related costs and losses on strategic hog hedge positions.
- Volume up 6%
- Net sales up 7%
- Segment profit up 36%
Volume and sales increased due to strong consumer demand across center store brands, including SPAM®, SKIPPY®, Herdez®, Hormel® Compleats®and Dinty Moore®. Improved sales and favorable product mix drove the significant increase in segment profit.
Jennie-O Turkey Store
- Volume down 9%
- Net sales down 4%
- Segment profit down 67%
Higher retail sales, led by Jennie-O®lean ground products, did not offset declines in foodservice, commodity and whole-bird sales. The sharp decline in segment profit was primarily due to higher manufacturing and live production costs attributed to the ongoing impact of three plant pauses on the vertically integrated supply chain. Additionally, the business absorbed incremental COVID-19 related costs.
International & Other
- Volume down 5%
- Net sales up 2%
- Segment profit up 26%
Sales increases in China and branded exports offset lower fresh pork export results. Worldwide demand for SKIPPY® peanut butter and SPAM® luncheon meat was exceptionally strong. Segment profit increased due to improved results in China and our partners in the Philippines, South Korea and Europe.
CHANNEL HIGHLIGHTS – THIRD 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 upcoming Form 10-Q. The ongoing COVID-19 pandemic and subsequent changes in consumer behavior drove higher and sustained retail sales in each of the company’s segments. The company delivered market share gains in many of its retail categories as consumers purchased branded food products at an accelerated rate through various retail outlets, including traditional, mass, club and discount retailers. The company’s investments into e-commerce have led to tremendous demand from both e-commerce retailers and through grocery pickup and delivery. Overall deli channel sales increased even as some categories declined. Foodservice net sales rebounded since the second quarter but still remained well below year-ago levels. International sales decreased primarily due to lower export sales of commodity pork and turkey products in the International & Other and Jennie-O Turkey Store segments, respectively.
- U.S. retail net sales up 19%
- U.S. deli net sales up 4%
- U.S. foodservice net sales down 19%
- International net sales down 2%
SELECTED FINANCIAL DETAILS
- Selling, general and administrative expenses increased slightly compared to the prior year, as higher employee-related expenses were mostly offset by lower advertising investments.
- Advertising investments were $24 million, down 23% to last year.
- Interest and investment income increased during the quarter. Higher investment income offset the additional interest expense from the recent bond issuance.
- Operating margin was 10.5%, compared to 11.2% in fiscal 2019. The decline for the quarter was due to the negative impacts from incremental costs related to the COVID-19 pandemic.
- The effective tax rate was 21.6%, compared to 23.6% last year.
Cash Flow Statement
- Cash flow from operations was $330 million, up 59%. Cash flow from operations was positively impacted by an increase in accounts payable and a reduction in inventory.
- Operating free cash flow1 was $242 million, up 72%.
- The company paid its 368th consecutive quarterly dividend on Aug. 17, 2020, at the annual rate of $0.93 per share, an 11% increase over the prior year.
- Capital expenditures in the third quarter were $88 million, compared to $67 million last year. The company’s target for capital expenditures in fiscal 2020 is $350 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.
- The company did not repurchase shares during the quarter.
- Depreciation and amortization expense in the third quarter was $50 million, compared to $41 million last year. The full-year expense is expected to be approximately $200 million.
- The company remains in a strong financial position with ample liquidity, a conservative level of debt and consistent cash flows.
- Cash on hand increased to $1.7 billion from $0.7 billion at the beginning of the year due to the cash proceeds from the $1.0 billion debt offering during the quarter.
- Total debt is $1.3 billion, up from $0.3 billion at the beginning of the year.
- Working capital increased to $2.0 billion from $1.3 billion at the beginning of the year, primarily related to a higher cash balance from the debt offering during the quarter. Additionally, inventory declined during the quarter due to record sales, and improvements in accounts payable more than offset an increase in accounts receivable.
A conference call will be webcast at 9 a.m. CDT on Aug. 25, 2020. Access is available at www.hormelfoods.com by clicking on “Investors.” The call will also be available via telephone by dialing 888-317-6003 and providing the access code 9237894. An audio replay is available by going to www.hormelfoods.com. The webcast replay will be available at noon CDT, Aug. 25, 2020, and will remain on the website for one year.