A.I. overshadows Hormel Foods' record quarter

by Keith Nunes
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The incidence of highly pathogenic avian influenza in the United States will significantly affect Hormel's Jennie-O Turkey business unit.

AUSTIN, MINN. — Charles Dickens comes to mind when reviewing Hormel Foods’ second-quarter earnings, because it may be described as the best of times and the worst of times. While the company generated record earnings during the quarter, the incidence of highly pathogenic avian influenza in the United States will significantly affect the company’s Jennie-O Turkey business unit going forward.

For the quarter ended April 26, Hormel’s net income rose 29% to $180,201,000, equal to 68c per share on the common stock. Sales for the quarter were $2,279,345,000, essentially flat compared with the same quarter of the previous year when sales totaled $2,244,866,000.

“We achieved record second-quarter earnings and sales, driving double-digit earnings growth with all five segments delivering increases” said Jeffrey M. Ettinger, chairman of the board, president and chief executive officer. “Although declining pork markets drove lower pricing and net sales this quarter, Refrigerated Foods increased operating profit by 52% with strong sales growth of food service and retail value-added products.

“Jennie-O Turkey Store entered the quarter with excellent momentum and drove robust sales and earnings gains, but exited the quarter with substantial supply chain challenges brought on by avian influenza.  Grocery Products benefited from input cost relief and growth of our Spam family of products, while the export business in our International segment continued to be challenged by port issues and the strong U.S. dollar. Specialty Foods delivered earnings growth as the team continues to achieve synergies with the recently acquired CytoSport business.”

Jeffrey M. Ettinger, chairman of the board, president and c.e.o. of Hormel Foods.

Mr. Ettinger added that while he expects the Refrigerated Foods and Grocery Products divisions to benefit from value-added product growth and lower pork input costs, the Jennie-O business will be significantly challenged.

“Taking these factors into consideration, we are maintaining our 2015 non-GAAP earnings guidance at the lower end of our previously stated $2.50 to $2.60 per share range,” he said.

Calling the avian influenza situation “unprecedented,” Mr. Ettinger said the outbreaks effects are going to extend into 2016.

“The Midwest began experiencing significant outbreaks of highly pathogenic avian influenza in late March,” he said in a conference call with financial analysts on May 20. “To date approximately 55 farms have been impacted that were to supply Jennie-O Turkey Store with turkeys. While we experienced modest financial impact from the outbreak in the second quarter, Jennie-O Turkey Store is estimating a loss of approximately 15% of second-half sales.

“This sizable estimated loss of volume is not only due to bird losses over the past month, but also takes into account the fact that many of our barns remain empty under quarantine. Due to lack of internal turkey supply we will be purchasing some additional meat from external sources but at a higher cost. We are also planning for lower sales as we are forced to rationalize some business.”

As a result, Mr. Ettinger anticipates Hormel Foods will reduce its Jennie-O operating margins approximately 10% to 12% during the second half of the fiscal year.

Looking ahead to 2016, Mr. Ettinger said this fall is “a wildcard,” and that the outlook for the first half of fiscal 2016 for the Jennie-O business will be subdued. He added that while the U.S. Department of Agriculture has yet to adjust its turkey production numbers for the year he doubts the industry will hit the 3% to 4% forecasted increase.

“I mean, given our experience and given that we’re sort of tied for one of the lead players in terms of volume in the industry I guess I have a hard time seeing how those numbers happen if we are going to be short 20% in terms of at least turkeys coming into our system and about 15% net of the meat we are going to buy,” he said. “So, I don’t have an adjusted total industry number for you, but I guess I am skeptical as to the industry’s ability to hit that 3% to 4% gain number.”

Pork, another key commodity for Hormel Foods, will be positive for the company.

While the news on the turkey front may be dismal, pork, another key commodity for Hormel Foods, will be positive for the company.

“ … We expect (hog) supply to be up 5% to 6% for the year,” said Jody Feragen, chief financial officer. “So I would assume, particularly given the extremely high comps that we had last year due to the disease issues in the industry, that we will see some reasonable hog prices. So that is a good thing.

“Domestic demand seems to be pretty robust at this point in time. We do see that exports have fallen a bit so we will keep an eye on that. But it is really our value-added businesses that are driving the results for Refrigerated Foods.”
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