Hormel Foods Corp (HRL) Q2 2024 Earnings Call Transcript Highlights: Strong First Half Performance Amid Challenges

Hormel Foods Corp (HRL) reports robust earnings and significant cash flow improvements, despite headwinds in the Turkey business and production interruptions.

Summary
  • Volume: GBP2.2 billion for the first half, comparable to last year.
  • Net Sales: $2.9 billion for Q2 and $5.9 billion for the first half.
  • Gross Profit: Increased by 3% in Q2 and the first half; gross profit margin improved by 90 basis points to 17.4% in Q2.
  • SG&A Expenses: Increased by $54 million in Q2 and $73 million in the first half.
  • Advertising Investments: Up 27% in Q2 and 9% for the first half.
  • Earnings Before Income Taxes: $244 million for Q2 and $530 million for the first half.
  • Adjusted Earnings Before Income Taxes: $564 million for the first half, a 1% increase compared to last year.
  • Effective Tax Rate: 22.5% for Q2 and 23% for the first half.
  • Diluted Net Earnings Per Share: $0.34 for Q2 and $0.74 for the first half.
  • Adjusted Diluted Net Earnings Per Share: $0.79 for the first half, in line with last year.
  • Operating Cash Flow: $640 million year-to-date, an increase of 55%.
  • Capital Expenditures: $60 million in Q2; full-year outlook remains at $280 million.
  • Cash and Short-term Securities: $1.5 billion at the end of the quarter.
  • Debt: $3.8 billion at the end of the quarter.
  • Dividend: Paid at an annual rate of $1.13 per share; announced August dividend.
  • Full Year Net Sales Growth Expectation: 1% to 3%.
  • Full Year Diluted Net Earnings Per Share: $1.45 to $1.55.
  • Full Year Adjusted Diluted Net Earnings Per Share: $1.55 to $1.65.
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Release Date: May 30, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • Hormel Foods Corp (HRL, Financial) delivered a strong first half of the year with better-than-expected earnings and significant improvement in operating cash flows.
  • The foodservice segment showed consistent growth, achieving volume and segment profit growth for the fourth consecutive quarter.
  • International segment profitability improved significantly, with segment profit up almost 30% in the first half.
  • The company made progress on strategic initiatives, including the Planters Snack Nuts business, which responded positively to brand-building and innovation efforts.
  • Hormel Foods Corp (HRL) increased total points of distribution by 6% for flagship brands and 4% for rising brands, indicating strong retail performance.

Negative Points

  • The Turkey business faced significant headwinds, negatively impacting the overall performance and expected to remain challenged for the rest of the fiscal year.
  • The company experienced an unplanned production interruption at the Planters facility in Suffolk, Virginia, which is expected to impact third-quarter earnings.
  • SG&A expenses increased due to higher employee-related expenses and costs associated with the transform and modernize initiatives.
  • The retail segment faced a decline in volume, particularly impacted by lower sales across whole bird turkeys.
  • Certain categories within the convenient meals and proteins vertical experienced softer demand and increased competition, affecting overall performance.

Q & A Highlights

Q: Your first half EPS came in above consensus. Can you explain the prudence in your guidance for the back half of the year?
A: Jim Snee, Chairman, President, and CEO: We feel good about our business and have increased the lower end of our adjusted EPS range. However, the Suffolk issue and other factors like the incremental impact of Turkey and a higher tax rate have influenced our guidance. Despite these challenges, we expect strong performance from foodservice and international segments and continued improvements from our transform and modernize initiative.

Q: Can you elaborate on the key drivers for accelerating top-line growth in the back half of the year, especially in retail?
A: Jim Snee, Chairman, President, and CEO: Foodservice and international segments are expected to provide strong growth. In retail, while Turkey remains a challenge, we have strong syndicated data and expect growth in other verticals. The most likely scenario is achieving the low end of our net sales guidance range.

Q: Can you clarify the impact of Turkey on US retail volume and elaborate on the convenient meals and protein segment?
A: Jacinth Smiley, Independent Director: Two-thirds of the volume decline in retail for the first half was related to Turkey. Deanna Brady, Executive Vice President - Retail: For convenient meals and protein, we saw strong growth in SPAM and Skippy but softer demand in canned or center store areas. We are addressing this with promotions, displays, and advertising to drive consumer engagement.

Q: How are the returns on increased advertising spending playing out?
A: Deanna Brady, Executive Vice President - Retail: We are seeing strong performance in volume and market share gains for brands like SPAM, Black Label Bacon, and Jennie-O. The combination of advertising, innovation, and expanded distribution is driving positive returns.

Q: How would you describe the current promotional competitive backdrop in retail?
A: Deanna Brady, Executive Vice President - Retail: It varies by category. We are focusing on productive promotions and shifting dollars to support growth where needed. We work closely with retailers to ensure our pricing and promotions drive category growth and profitability.

Q: Can you explain the gap between retail scanner data and reported figures?
A: Jim Snee, Chairman, President, and CEO: Positive trends in scanner data are driven by strong performance in five of six verticals. The decline is mainly due to Turkey and non-tracked areas like contract manufacturing.

Q: What are the common threads in brands experiencing weakness in the center store?
A: Deanna Brady, Executive Vice President - Retail: Increased competition and price elasticities due to recent price increases are factors. We are addressing these with targeted promotions and advertising.

Q: How are you addressing the volume decline in retail?
A: Jim Snee, Chairman, President, and CEO: We are focusing on short-term actions like promotions and long-term strategies like price pack architecture, innovation, and advertising. Deanna Brady, Executive Vice President - Retail: We are also working on gaining distribution points and supporting our flagship brands with advertising and innovation.

Q: Can you provide more detail on the international segment's performance and outlook?
A: Jim Snee, Chairman, President, and CEO: We expect volume to be down high single digits but sales up high single digits due to a better mix. Strong performance in China, Indonesia, and the Philippines is driving growth. We expect continued improvement and acceleration in the second half.

Q: How are you managing the impact of lower whole Turkey volumes in retail?
A: Jim Snee, Chairman, President, and CEO: We have strong internal supply and capacity. We are gaining share in lean ground turkey and foodservice. There is no change in our outlook, and we believe we have derisked the Turkey business for the rest of the year.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.