AUSTIN, MINN. — Market volatility caused by an outbreak of African swine fever (A.S.F.) in China and the ripple effects it is causing in the global meat protein markets was the primary reason Hormel Foods Corp. lowered its guidance for the rest of the fiscal year.
“African swine fever in China started to impact global hog and pork markets this quarter, which led to rapidly increasing input costs,” said James P. Snee, president and chief executive officer. “In response, we have announced pricing action across our branded value-added portfolio in the Grocery Products, Refrigerated Foods and International segments.”
Adding to the pressure on the company were start-up issues at its turkey processing plant in Melrose, Minn.
“Jennie-O Turkey Store profits declined due to a combination of plant start-up costs and lower retail sales,” Mr. Snee said. “We made a large investment to automate our whole-bird facility in Melrose, Minn., and the start-up was more difficult than anticipated. We made excellent progress through the quarter and are now on track to deliver the production efficiencies we expected. Retail sales declined for the quarter, but we are reactivating promotional activity and advertising in order to regain distribution.”
Management initially forecast full-year sales to be in the range of $9.7 billion to $10.2 billion. Earnings per share were forecast to be between $1.77 and $1.91 per share. Following the second quarter, Hormel’s guidance was revised lower to sales coming in between $9.5 billion and $10 billion, and earnings being in the range of $1.71 to $1.85 per share.
“We started to see the market effects of A.S.F. in our second quarter,” Mr. Snee said. “We saw a rapid increase in key input cost for hogs, the U.S.D.A. composite cutout, bellies and trim during the quarter. We expect all these markets to increase in the coming months. In response to these input cost increases and the cost increases we expect to come, we announced pricing action on the majority of our pork-related products portfolio across Refrigerated Foods, Grocery Products and International.”
For the quarter ended April 28, Hormel Foods net income was $282,429,000, equal to 53c per share on the common stock, and an improvement over the same period of the previous year when the company earned $237,384,000, or 45c per share.
Sales for the quarter rose slightly to $2,344,744,000 from $2,330,568,000.
Sales in Refrigerated Foods, the company’s largest business unit, rose 1% during the quarter to $1,257,884,000. Segment profit fell 5% to $158,088,000. Segment profit declined as growth in value-added profits did not fully offset a 65% decline in commodity profits, according to the company.
The trade war with China impacted fresh pork exports and the performance of Hormel’s International business unit. Sales declined 9% to $146,285,000, and segment profit fell 31% to $14,325,000 during the quarter.
“The key driver to the decline continues to be lower fresh pork exports volume and pricing caused by global trade uncertainty related to tariffs,” Mr. Snee said May 23 during a conference call to discuss the quarterly results. “We also experienced higher freight costs, primarily relating to flooding near Fremont, Neb., which affected our ability to ship export products.”
Looking ahead, Mr. Snee said he expected A.S.F. to continue to impact the market.
“As we look forward, the biggest unknown in the protein industry is related to the outbreak of African swine fever in China,” he said. “The best industry information shows that China has lost between 150 million and 200 million hogs. This is equivalent to more than the entire pork production in the United States. In addition, China is the largest pork producer and consumer of pork in the world. Second, due to the losses of hogs in China, we have seen hog prices in China increase by approximately 20% during our second quarter. Prices will likely continue to move higher as cold storage stocks in China are drawn down.”