AUSTIN, MINN. — Hormel Foods Corp. remains focused on its “formula for success,” which includes brand building, product innovation and strategic acquisitions, said James P. Snee, chairman, president and chief executive officer.
“This time-tested strategy continued to serve us well this quarter as improvements in our branded value-added businesses once again offset significant declines in our commodity businesses,” Mr. Snee said during a Feb. 21 earnings call. “We will continue to be intentional about shifting our portfolio away from commodity products and the associated earnings volatility.”
Net earnings attributable to Hormel Foods in the first quarter ended Jan. 27 totaled $241,425,000, equal to 45c per share on the common stock, which was down 20% from $313,107,000, or 57c per share, in the prior-year period. Results were negatively impacted by expenses related to the sale of a pork processing plant in Fremont, Neb., and a significantly higher effective tax rate when compared to the year-ago quarter, which included a one-time benefit from U.S. tax reform.
Net sales rose slightly to $2,360,355,000 from $2,331,293,000, as improvements in Grocery Products, Refrigerated Foods, and International and Other segments offset declines in the Jennie-O Turkey Store business.
“We grew pretax earnings by 1% as three of our four segments delivered earnings growth,” Mr. Snee said. “Three segments also delivered sales growth, resulting in increased sales of 1% on volume growth of 1%.”
Brands showing solid growth in the quarter included Spam, Dinty Moore, Wholly Guacamole, Herdez and Applegate, he added.
“Our food service business remains robust, both domestically and in China,” Mr. Snee said. “Growth this quarter was led by brands such as Old Smokehouse, Hormel Fire Braised, Jennie-O and Skippy. Our products continue to solve for the challenges faced by operators around the globe. With exciting innovation pipelines, retail brands such as Natural Choice, Skippy, Justin’s and Applegate will continue to deliver innovation to the marketplace at a faster cadence than ever before.”
Two voluntary recalls during the quarter of lean ground turkey due to the potential presence of Salmonella hurt results.
“Even though we experienced a rebound in sales after the recalls and have confidence in the long-term growth of lean ground turkey, we are being very conservative on our sales outlook,” Mr. Snee said. “Additionally, the extreme cold weather this winter will adversely impact raw material costs in the next two quarters. We will continue to focus on improving our turkey supply chain and investing in the Jennie-O brand. But because of these recent events, we expect Jennie-O Turkey Store to fall below the plan we had for them this year.”
Two days before, Hormel announced plans to sell its CytoSport business to Purchase, N.Y.-based PepsiCo, Inc., for a purchase price of $465 million. Products include protein shakes, powders and bars under the Muscle Milk and Evolve brands. Hormel acquired the business in 2014 for approximately $450 million.
“The CytoSport team should be pleased with the gains they made in the innovation space, with the creation of the Evolve product line, Muscle Milk bars and multiple new flavors and formats for the Muscle Milk product line,” Mr. Snee said during the earnings call. “The team also generated nice growth in the food, drug and mass channel. However, it became apparent that Pepsi was the right long-term owner of this business given their expertise and scale in the beverage space. Pepsi has been a long-standing distribution partner for CytoSport and the Muscle Milk brand, which puts them in a strong position to grow this dynamic business.”
The transaction is expected to close in the second quarter. The business generated sales of approximately $300 million in 2018 with operating margins slightly below that of the total company, said James N. Sheehan, executive vice-president and chief financial officer.
“We expect the sale to impact ongoing earnings by approximately 3c to 5c per share for fiscal 2019,” Mr. Sheehan said. “We expect to gain on the sale of 6c to 12c per share in the second quarter. Combined, the full-year estimate is expected to be a net 2c-to-9c gain.”
Hormel Foods continues to be “very, very active looking for impactful M.&A. … in a number of different places,” Mr. Snee said.
“The areas that we’ve talked a lot about, our desire to continue to add on to our very strong food service presence,” Mr. Snee said. “We have capacity in our international business to do more. And then I think even in our domestic Grocery Products segment, we believe that with some of the M.&A. activity that’s taken place, there will probably be some carve-outs.
“And we also want to be very intentional about our ability to expand our MegaMex business. That’s a business that’s done really well for us. It’s on-trend. And we’d love to get bigger, faster there.”
For the full year, the company expects to deliver earnings per share in the range of $1.77 to $1.91 and net sales of $9.7 billion to $10.2 billion, which does not include any impact from the pending CytoSport transaction.