Hormel Foods FY 3Q15 Earnings Call Notes

Supply shortages in Turkey and deflation in pork

“Sales were lower due to turkey supply shortages in our Jennie-O Turkey Store segment and price deflation in the pork markets, primarily impacting sales within our Refrigerated Foods and International segments.

Pork prices down 40% y/y

“To illustrate the dramatic change in pork markets, the average USDA pork cutoff price in July of 2014 was $133 compared to $83 in July of 2015, almost a 40% decrease. While across the company our team is generally focused on our goal of 5% top line growth, in this particular market scenario, volume growth may be the more appropriate metric by which to gauge results.”

Profit at Jennie O down 45% impacted by avian flu

“Jennie-O Turkey Store segment profit decreased 45% and sales decreased 12%. Results were impacted by high pathogen avian influenza, as flocks lost earlier this year created large volume shortfalls in operations and sales. We have now repopulated approximately two-thirds of the farms’ previously impacted and we expect to complete the repopulation process during the fourth quarter.”

Cytostport (Muscle Milk) operating profit +79%

“Our Specialty Foods segment reported a robust operating profit increase of 79%. Improvements to the cost structure in the CytoSport and Century Foods operations, along with stronger performance in our Specialty Products business benefited results this quarter. Specialty Foods segment sales increased 31%, largely driven by the recently acquired CytoSport business. The CytoSport team has achieved additional distribution of MUSCLE MILK protein nutrition products with big gains coming from one of our more recent product introductions, MUSCLE MILK PRO SERIES.”

Acquired Applegate

“Yeah. I’ll take the first part. We’re still very excited about Applegate. As you point out, I mean, it’s been a month, counting today, and if you really look at the quarterly results, I mean, you’re talking barely even a couple of weeks of results. However, if you just look at the general business trends, they’re still rocking along at double-digit growth rates and we’re very excited about the ability of that franchise to connect with consumers.”

Comments on Avian Influenza

“We are filling up the barns but there clearly is at least a little bit of risk associated with that. We’ve heard a similar theory as to perhaps birds go south faster than they come north and they may not linger as long in the areas, and so that might be a positive factor. But I mean, at this point, it’s just such a wild card. I mean, this was an unprecedented incident already. We’re trying to learn from it, the government’s trying to learn from it. It could hit other parts of the country, it could hit another time of the year, it could go away, it could come back in a smaller manner.

And so, we’re trying to be ready for any contingency. And the best I can tell you right now is we haven’t had a system outbreak since early June and that frankly even if something did hit this fall, it won’t affect 2015 results. Because I mean, you just wouldn’t see the loss of bird flow that quickly. But by the time we’re talking again in November, we should have a much better sense of whether something seems to be occurring on a fall basis this year or not and what potential impact that might have. Even if nothing occurs, however, and as we indicated the last call, I mean with the 22-week lifespan and with egg shortages and so forth, I mean, we’re expecting volume struggles even in the first half of next year until we cycle through this”

Bird loss was 20%

“The bird loss, if you will, ended the system near 20%. And then when you netted it out and there’s some price differential here, I mean, it was a 12% sales drop. So, we were able to buy in some meat, mostly on the dark meat side during the quarter in order to try to mitigate that effect”

Lower volume hits margins when you have fixed costs

“When you’re that short in volume in your plants, that creates all sorts of overhead issues. When you literally don’t have products to sell, I mean, you’re losing that margin and that volume.”

We want to control our own destiny when it comes to pork supply

“our philosophy when it comes to pork is we do want to control our own destiny and we have for years, so even years ago when Oscar Mayer and Sara Lee chose to get out of being vertical in hog processing and rely on others for their meat supply, we made the decision to stick with it. And frankly, as the industry consolidates, to me that decision is even more firm that we need to be able to control our own destiny. That being said, we’ve never tried to be one of the big players when it comes to pork slaughter.”