Edited Transcript of HRL earnings conference call or presentation 22-Aug-19 1:00pm GMT

 

Thomson Reuters StreetEvents

via Yahoo Finance - September 9, 2019

 

Q3 2019 Hormel Foods Corp Earnings Call

 

AUSTIN Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Hormel Foods Corp earnings conference call or presentation Thursday, August 22, 2019 at 1:00:00pm GMT

 

TEXT version of Transcript

 

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Corporate Participants

 

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* James N. Sheehan

 

Hormel Foods Corporation - Executive VP & CFO

 

* James P. Snee

 

Hormel Foods Corporation - Chairman, President & CEO

 

* Nathan Annis

 

Hormel Foods Corporation - Director of IR

 

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Conference Call Participants

 

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* Adam L. Samuelson

 

Goldman Sachs Group Inc., Research Division - Equity Analyst

 

* Benjamin Shelton Bienvenu

 

Stephens Inc., Research Division - MD

 

* Eric Jon Larson

 

The Buckingham Research Group Incorporated - Analyst

 

* Erica A Eiler

 

Oppenheimer & Co. Inc., Research Division - Equity Research Associate

 

* Heather Lynn Jones

 

Heather Jones Research LLC - Founder

 

* Rebecca Scheuneman

 

Morningstar Inc., Research Division - Equity Analyst

 

* Robert Bain Moskow

 

Crédit Suisse AG, Research Division - Research Analyst

 

* Thomas Hinsdale Palmer

 

JP Morgan Chase & Co, Research Division - Analyst

 

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Presentation

 

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Operator [1]

 

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods Third Quarter 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, August 22, 2019.

 

I'd now like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead, Mr. Annis.

 

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Nathan Annis, Hormel Foods Corporation - Director of IR [2]

 

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Good morning. Welcome to the Hormel Foods conference call for the third quarter of fiscal 2019. We released our results this morning before the market opened, around 6:30 a.m. Eastern. If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investors section.

 

On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; and Jim Sheehan, Executive Vice President and Chief Financial Officer. Jim Snee will provide a review of each segment performance for the quarter and our outlook for the remainder of 2019. Jim Sheehan will provide detailed financial results and further assumptions relating to our outlook. The line will be opened for questions following Jim Sheehan's remarks. (Operator Instructions)

 

An audio replay of this call will be available beginning at 11:00 a.m. today, Central Standard Time. The dial-in number is (888) 204-4368, and the access code is 8156000. It will also be posted to our website and archived for one year.

 

Before we get started, I need to reference the safe harbor statement. Some of the comments made today will be forward-looking, and actual results may differ materially from those expressed in or implied by the statement we will be making. Please refer to pages 35 to 41 in the company's Form 10-Q for the quarter ended April 28, 2019, for more details. It can be accessed on our website.

 

Additionally, please note, the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance by excluding the volume and sales impact of the CytoSport divestiture. Discussion on non-GAAP information is detailed in our press release located on our corporate website. Please note that during our call, we will refer to these non-GAAP results as organic volume and organic sales.

 

I will now turn the call over to Jim Snee.

 

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James P. Snee, Hormel Foods Corporation - Chairman, President & CEO [3]

 

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Thank you, Nathan. Good morning, everyone.

 

Hormel Foods is an uncommon company, unique in our industry. We have a tenured management team who is able to quickly adjust to dynamic and volatile market condition; a balanced portfolio of branded products sold through the retail foodservice, deli and international channels; a direct sales force that is able to build and maintain relationships to help our customers grow their businesses; a reputation for bringing industry-leading innovations to the marketplace; and an increasingly agile and efficient supply chain.

 

Our financial position and business fundamentals remain strong. This enables us to deliver growth organically and through strategic acquisition. Our leadership position as a global branded food company allows us to take a long-term perspective as we navigate near-term uncertainty related to various market conditions.

 

Our third quarter results demonstrate many of the qualities that make us uncommon. This morning, we announced earnings per share of $0.37, a 5% increase compared to last year, but in line with our expectation. The decline in earnings per share was driven by a higher tax rate.

 

Pretax profits grew 1% as excellent results from Refrigerated Foods offset declines from Grocery Products.

 

Net sales declined 3% due to the divestiture of CytoSport. On an organic basis, sales were flat on a volume decline of 1%.

 

Looking at the segments. Refrigerated Foods sales increased 1% on a volume decline of 1%. Segment profit increased 13% driven by higher value-added profitability. Lower operational costs and higher commodity profits played a smaller role in the profit improvement. Refrigerated Foods achieved record third quarter net sales, value-added sales, segment profit and value-added profit. This was quite an accomplishment by the Refrigerated Foods team.

 

Our Hormel foodservice division had another solid quarter. The team continues to leverage their direct sales organization to grow brands, such as HORMEL BACON 1, Hormel Fire Braised, Natural Choice, Fontanini and Old Smokehouse. I remain impressed with the innovation this team continuously delivers to the foodservice industry. They are also making excellent progress, filling the new capacity for precooked bacon and Fontanini products. We remain very confident in our ability to grow the Applegate brand. Our foodservice team is making great progress growing Applegate with health care providers, colleges and universities. These operators appreciate the point of difference the Applegate brand provides for the needs of their patrons. For example, the Applegate Blend Burger is filling a need in the college and university segment as students look for more ways to enjoy natural and organic alternative protein products.

 

The new Hormel Deli Solutions division continues to pursue its vision of helping retailers create the deli of the future. While the Columbus brand and our prepared foods portfolio of products are showing solid growth, the lower-margin, behind-the-glass category continues to decline. Consumer preferences are changing as shoppers are looking for more convenient options, such as grab-and-go products, like our HORMEL GATHERINGS party trays and our authentic line of Columbus charcuterie. While this shift away from the behind-the-glass category presents a near-term challenge to sales volumes, I'm confident the ongoing shift benefits the consumer, the retailer and our company over the long term.

 

As category leaders, we took price increases across many of our branded value-added products when we started to see sharp increases in input costs. During the third quarter, we were priced high relative to others in many retail categories, which created higher elasticities than we would typically expect. When higher input costs did not materialize as forecasted, we realigned our pricing to more closely match the commodity market.

 

Once again, Refrigerated Foods has demonstrated an ability to generate growth in volatile market condition. The long-term growth of this segment continues to be driven by value-added products, disciplined pricing and a clear focus on innovation. While we have seen how rapid changes in input costs can create noise in its quarterly results, the clarity, focus and alignment Refrigerated Foods demonstrate will continue to deliver sustainable growth.

 

Grocery Products volume declined 10%, while sales declined 11%. Organic volume and sales increased by 1%. Segment profit declined 30% year-over-year due to the divestiture of CytoSport, higher avocado cost for our Wholly Guacamole business and lower earnings from our Skippy peanut butter spreads business. Similar to what we experienced in 2017, avocado cost increased by over 100% during the quarter. A smaller California crop and strong global demand are driving the avocado market prices. In response, the MegaMex team is actively managing promotional tactics and will be evaluating pricing as the new crop is harvested during September. As always, we continue to focus on growing the Wholly Guacamole brand through effective brand building, advertising and innovation.

 

Our Skippy spreads business was negatively impacted by the price decline we took last quarter in response to a competitor's deflationary pricing. While we are disappointed in the category dynamic, we remain focused on building the Skippy brand through revenue growth management, effective advertising and continued innovation.

 

A key reason for acquiring the Skippy brand was to deliver out-of-the-jar innovation to the category. The recent launch of SKIPPY P.B. & Jelly Minis has been met with great retailer and consumer acceptance. This innovative item sold in the frozen section is versatile, affordable and perfect for today's busy families. We have now reached national distribution, and trial and repeat rates continue to improve. I'm very optimistic about the success of this product line.

 

While Skippy spreads and Wholly Guacamole had a difficult quarter, the balance of the Grocery Products portfolio performed well. Many of our center store brands, such as SPAM, Dinty Moore, Herdez, BLACK LABEL Bacon Bits and HORMEL COMPLEATS, all had a great quarter. I fully expect all of these brands will show growth for the full year.

 

Jennie-O Turkey Store volume decreased 4%, while sales decreased 5%. Segment profit declined 9% due to lower value-added sales. As we discussed last quarter, we are reactivating promotional activity to gain back lost retail distribution. While we continue to lap distribution losses, we have had a few small wins. We expect the process of regaining distribution will go well into 2020. Over the last few months, we have made changes to the Jennie-O organization to bring in several experienced leaders from other parts of the company who are charged with restoring growth through new and bold ideas for this business.

 

From an industry perspective, we continue to see lower poult placements, but cold storage remains at elevated levels. Turkey market prices have not materially changed since last quarter. International volume and sales were flat. Organic volume and sales increased 2%, while segment profit was up 1%.

 

Our team in China delivered strong results driven by our foodservice business, in addition to growth from the SKIPPY and SPAM brands. Exports continue to be affected by global trade uncertainty related to African swine fever and tariffs. Similar to the prior quarter, the uncertainty in the protein industry is related to the outbreak of African swine fever. On our second quarter call, we discussed our view that commodity markets would start to increase on higher demand for pork from China. While we have not seen consistently higher prices, we have seen higher volatility and expect that trend to continue. As we evaluate the global impact of African swine fever, we are still confident that pork markets will eventually increase. At the appropriate time, we will take the necessary price increases to manage our profitability, which may create short-term margin compression as pricing generally lags input cost increases.

 

Taking all factors into account, we are reaffirming our full year guidance of $1.71 to $1.85 per share. We are also reaffirming our sales guidance of $9.5 billion to $10 billion, but expect to be on the lower end of the range given market prices have not increased as we previously expected. I have confidence in our team's ability to adjust to the changing market conditions and deliver our full year outlook.

 

At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter and our earnings guidance, in addition to key assumptions for the remainder of fiscal 2019.

 

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James N. Sheehan, Hormel Foods Corporation - Executive VP & CFO [4]

 

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Thanks, Jim. Good morning.

 

Net sales for the third quarter were $2.3 billion. Organic sales growth in 3 of the 4 business segments was offset by declines at Jennie-O Turkey Store.

 

Pretax earnings...

 

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