Raw Material Costs Signal Warning to Hormel Despite Good Earnings

US - Raw material costs in pork, beef, turkey and avocado could push Hormel’s earning down, despite reporting a rise in second quarter earnings.
calendar icon 22 May 2014
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The company reported fiscal 2014 second quarter net earnings of $140.1 million, up 12 per cent from net earnings of $125.5 million a year earlier.

Diluted earnings per share for the quarter were $0.52, up 13 per cent compared to $0.46 last year. Sales for the quarter were $2.2 billion, up 4 per cent from the same period in fiscal 2013.

Jeffrey M. Ettinger, chairman of the board, president and chief executive officer said: “Elevated pork, beef, turkey, and avocado costs, driven by tighter raw material supplies, are presently compressing margins on many of our value-added products. We are maintaining our fiscal 2014 guidance range of $2.17 to $2.27 per share, but expect these cost pressures to push our full year earnings toward the lower end of this range.”

Grocery Products which represent 17 per cent of Net Sales and 25 per cent of Total Segment Operating Profit saw operating profit increase by 16 per cent, aided in part by a favourable comparison to fiscal 2013 which included SKIPPY peanut butter acquisition costs.

Total segment sales were flat.

SKIPPY peanut butter products, HORMEL bacon toppings, and the HERDEZ line of products within our MegaMex Foods joint venture delivered sales growth. Sales of our SPAM family of products and HORMEL COMPLEATS microwave meals declined in the second quarter.

Refrigerated Foods, which represents 50 per cent of Net Sales and 34 per cent of Total Segment Operating Profit saw profit increase by 38 per cent.

Higher pork operating margins offset raised raw material costs in the value-added businesses.

Sales for the quarter were up 10 per cent.

Jennie-O Turkey Store, which is 17 per cent of Net Sales 4 per cent of Total Segment Operating Profit had a two per cent increase in profits in the quarter.

Strong commodity turkey prices and lower feed costs were offset by lower live production performance and higher fuel expenses from the extended harsh winter.

Sales were down one per cent with lower bird weights driving lower volumes. Sales of value-added products increased this quarter, including JENNIE-O fresh lean ground turkey tray packs, turkey breakfast sausage, and turkey bacon.

The Specialty Foods segment posted operating profits 26 per cent lower than last year with a 12 per cent decrease in sales. Lower segment results were largely due to the July 2013 expiration of the agreement allowing Diamond Crystal Brands to sell certain sugar substitutes into foodservice trade channels.

International & Other segments continued to generate strong growth with segment profits up 34 per cent and a sales increase of 23 per cent.

The China business delivered excellent results with growth in pork and the addition of SKIPPY peanut butter. Segment results were also driven by robust export sales.

“Our team continues to generate growth through innovative new value-added products, such as our HORMEL® BACON 1TM fully cooked bacon launched in foodservice channels this quarter by the Refrigerated Foods segment and SKIPPY® Singles Creamy peanut butter items recently introduced by the Grocery Products segment,” said Mr Ettinger.

“Our team achieved a record second quarter both in terms of dollar sales and earnings per share.

“We improved operating profit margins on a total company basis and in four of our five segments.”

“Beneficial pork operating margins and growth in our value-added foodservice business drove our Refrigerated Foods segment results. Our Grocery Products and International segments continued to deliver distribution gains with SKIPPY® peanut butter this quarter,” Mr Ettinger added.

“Favourable turkey commodity markets and growth in value-added product sales helped to mitigate lower live production results in our Jennie-O Turkey Store segment.”

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