荷美爾 (HRL) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Hormel Foods Corporation first-quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time.

(Operator Instructions).

I would like to remind everyone that this conference is being recorded today, February 20, 2014 and I will now turn the conference over to Jana Haynes, Director, Investor Relations.

Please go ahead.

Thank you.

Good morning.

Welcome to the Hormel Foods conference call for the first quarter of fiscal 2014.

We released our results this morning before the market opened, around 6:30 AM Eastern time.

If you did not receive a copy of the release, you can find it on our website at www.hormelfoods.com under the Investors section.

On our call today is Jeff Ettinger, Chairman of the Board, President and Chief Executive Officer and Jody Feragen, Executive Vice President and Chief Financial Officer.

Jeff will provide a review of the operating results for the quarter, then Jody will provide detailed financial results for the quarter.

The line will be open for questions following Jody's remarks.

As a courtesy to the other analysts, please limit yourself to one question with one follow-up.

If you have additional queries, you are welcome to get back in the queue.

An audio replay of this call will be available beginning at 10:30 AM Central time today, February 20, 2014.

The dial-in number is 1-800-406-7325 and the access code is 4664913.

It will also be posted to our website and archived for one year.

Before we get started with the results of the quarter, I need to reference the Safe Harbor.

Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those expressed in or implied by the statements we will be making.

Among the factors that may affect the operating results of the Company are fluctuations in the cost and availability of raw materials and market conditions for finished products.

Please refer to pages 26 through 30 in the Company's annual report for the fiscal year ended October 27, 2013 for more details.

It can be accessed on our website.

Now I'll turn the call over to Jeff.

Thank you and good morning, everyone.

We announced record first-quarter earnings this morning of $0.57 per share, up 19% over last year.

Operating profit increased by 20% with four of our five segments registering gains this quarter.

In terms of the top line, we generated record sales of $2.2 billion, an increase of 6% over last year, on volume growth of 2%.

I will now take you through each segment.

Our Grocery Products segment profit increased 13% and sales grew by 20%.

Sales for Grocery Products in the quarter were down 2%, excluding Skippy products.

Sales gains in Grocery Products were led by Skippy peanut butter, Hormel chili, Hormel bacon toppings and the HERDEZ line of salsas and sauces.

We are particularly pleased with our team's success in securing increased distribution and feature activity for our Skippy peanut butter products.

While our Grocery Products segment profit increased during the quarter, there were some challenges.

Higher beef and pork input costs pressured the market margins of some of our core products and sales of our SPAM family of products and Hormel Compleats microwave meals were soft during Q1.

Segment operating profit for Refrigerated Food was up 59% driven by positive pork operating margins and growth in both our food service and retail value-added franchises.

Sales for Refrigerated Foods increased 6% led by retail sales of our Hormel Black Label bacon, Lloyd's ribs and Hormel REV snack wraps.

We also enjoyed sales growth in our food service business, including such items as our Hormel Fire Braised meats and Old Smokehouse Pecanwood Smoked Bacon.

Segment volume for Refrigerated Foods declined 1% due to increased internal utilization of raw materials and the impact of our exit from the animal feed business in the second quarter of 2013.

Segment profit at Jennie-O Turkey Store increased 1%.

While we benefited from more favorable feed costs this quarter, the savings were offset by weaker live production performance due to the sustained extremely cold temperatures we have experienced this winter.

The unusually cold weather has also caused national propane and natural gas shortages driving up the cost of these fuels significantly, which will negatively impact our raw material costs in the second and third quarters.

Sales of our Jennie-O Turkey Store lean ground turkey chubs and tray packs were strong in the first quarter as we kicked off a new Make the Switch media campaign in January featuring lean ground turkey as an ingredient in tacos.

Overall, the Jennie-O Turkey Store segment reported sales growth of 2% on flat volume.

Timing differences of whole bird shipments for the holiday season year over year masked some of the value-added sales increases we enjoyed during the quarter.

We are pleased with the sustained growth of our value-added turkey products in retail, foodservice and deli as consumers continue to find better-for-you food solutions in our portfolio of turkey products.

Our Specialty Foods segment reported an operating profit decrease of 11% and a sales decrease of 16% driven by the expiration of the agreement last summer allowing Diamond Crystal Brands to sell certain sugar substitutes in the foodservice trade channel.

The decline from the contract expiration more than offset gains in our sugar and Hormel Health Labs businesses.

Our Specialty Foods team is focused on rebuilding its product portfolio and providing sales and operating profit growth as soon as possible.

Our International and Other segment profit increased 32% and sales grew 24%.

Strong export sales of the SPAM family of products and Skippy peanut butter drove the positive results.

Our China operations also continued to augment segment sales growth.

As we move into the second quarter, we will kick off national media campaigns and promotional activity to support our SPAM family of products and Compleats microwave meals.

We also expect continued positive momentum when it comes to our Skippy brand.

Pork operating margins continue to be favorable.

Bacon demand remains strong and we are very pleased with the performance of our Hormel REV snack wraps, which are exceeding our expectations with excellent repeat purchase rates.

The PED virus has impacted our internal farm operations and several of our independent hog suppliers.

Our Refrigerated Foods team is closely monitoring the effects on our pork raw material supplies.

Based on the timing of the virus breaks in our supply chain so far, we anticipate tighter pork raw materials in the summer months.

We are taking steps now to ensure we will be able to meet the needs of our customers during this time period.

We continue to expect year-over-year sales and profit growth from Jennie-O Turkey Store, but profit growth will be at more modest levels than initially anticipated due to fuel costs.

Finally, we are enjoying significant growth in our International and Other business segment and look for this to continue going forward.

Taking all of these significant factors into account, we are maintaining our fiscal 2014 earnings guidance of $2.17 to $2.27 per share.

At this time, I will turn the call over to Jody Feragen to discuss the financial information relating to the first quarter.

Thank you, Jeff.

Good morning, everyone.

Earnings for the first quarter of fiscal 2014 totaled $153.3 million, or $0.57 per share, compared to $129.7 million, or $0.48 per share a year ago.

Dollar sales for the first quarter totaled $2.24 billion compared to $2.12 billion last year, a 6% increase.

Volume for the first quarter was 1.27 billion pounds, up 2% from the same period last year.

Selling, general and administrative expenses in the first quarter work 7.4% of sales, unchanged from last year.

Selling, general and administrative expenses are expected to be between 7.3% and 7.6% of sales for the full year.

Equity and earnings of affiliates was $4.7 million in the first quarter versus $9.8 million last year.

The decrease is the result of unfavorable exchange rates and lower earnings at our MegaMex Foods joint venture, which experienced higher input costs.

Advertising expense for the quarter was $36.1 million compared to $24.7 million last year.

The increase was the result of the new Make the Switch ad campaign for Jennie-O Turkey Store and the national advertising campaign for Hormel REV wraps.

Additionally, advertising campaigns are planned for our Skippy peanut butter, our SPAM family of products and Hormel Compleats microwave meals.

Interest in investment income was $1.2 million for the first quarter compared to $1.8 million last year.

Interest expense for the quarter was $3.1 million, unchanged from last year.

We expect interest expense to be about $12 million to $14 million for fiscal 2014.

Our effective tax rate in the first quarter was 34.3% versus 33.5% in fiscal 2013.

For fiscal 2014, we expect the effective tax rate to be between 34% and 35%.

The basic weighted average number of shares outstanding for the first quarter was 263.8 million shares.

The diluted weighted average number of shares outstanding for the first quarter was 270.2 million shares.

Depreciation and amortization for the quarter was $31.8 million, up from $29.8 million last year.

We expect depreciation and amortization to be approximately $125 million to $128 million in fiscal 2014.

Total long-term debt at the end of the quarter was $250 million, unchanged from last year.

Capital expenditures for the quarter totaled $37 million compared to $22.1 million last year.

For fiscal 2014, we expect capital expenditures to be approximately $130 million to $140 million.

At the beginning of the first quarter, we completed the acquisition of the Skippy peanut butter business in China, spending $41.4 million and using our available cash balances for the transaction.

The integration of this business into our current sales and distribution operation has been completed by our international team.

At this time, I will turn the call over to the operator for the question-and-answer portion of the call.

Luke?

(Operator Instructions).

Jeremy Scott, CLSA.

Hi, good morning.

Can you give us an update on the REV productline, how are consumers responding and how is it performing versus your expectations?

And then maybe an update on the Compleats breakfast line as well.

Very good.

We are very pleased with how REV is performing in the marketplace.

As we exited the holiday season and got into the back-to-school timeframe for the winter semester at schools, we are seeing good sales response.

We are ahead of schedule in terms of our repeat measures on this productline.

We continue to have excellent distribution in the marketplace and would expect that our relaunched consumer advertising campaign will also add to the sales within the REV line.

When it comes to breakfast Compleats, we have had reasonably good success getting the product landed in a number of retailers.

It is becoming one of the better selling items of the Compleats line, a few of the varieties and so we are pleased in that regard.

Overall, I have to concede that Compleats didn't fully live up to our expectations for the quarter, but we do -- between the advertising that is kicking in for Compleats and some better feature activities that we know we have on the books for the upcoming two quarters, we expect some improvements on the Compleats line and breakfast Compleats will be part of that.

Great.

And I appreciate it's pretty difficult to track, but, on PED, can you talk about your exposure relative to the industry?

It seems like a lot of the barns affected are from your primary sourcing areas and then maybe get into how -- what is the volume impact for the summer months and how the margin volatility is going to play into your guidance.

Wow, that's a lot of questions in one question.

Certainly, the industry conditions leave supplies uncertain for I think a lot of folks in the industry and we would expect higher hog prices to result from that and that is pretty much reflected in what we see in the futures market.

Our team has worked hard to identify gaps that we see in our supply chain, along with our internal supply, as well as our producers and we will look to make sure that we try to secure enough production to make sure that we can meet our customers' needs and the needs of our value-added businesses.

Did that answer all your questions?

I am trying to remember what the rest of them were.

Just what your expectations for volume impact may be in the summer months when the shortages really come into play.

I don't really have a specific decline number for us because, as I have indicated, we have been working to fill some of those gaps.

So it might be even a little early to tell.

The benefit is that it is moving across the country, if you will, in waves so that it is not all going to absolutely hit in one particular period.

Okay, thank you.

Akshay Jagdale, KeyBanc.

Good morning.

First question is on Jennie-O Turkey.

You mentioned the fuel costs and just the tough -- the cold weather and the impact it is having on the operating profit.

Can you help us quantify that in any way?

I guess the best I can tell would be that our original expectations for the Jennie-O Turkey Store were reasonably solid gains year over year in segment profit for most of the quarters.

As you saw in Q1, it was a much more modest gain.

That is probably more of the mode we would expect now for the next couple of quarters and then by the fourth quarter, we do expect the division to be in a position to be more solidly up.

So the fuel cost and live production were somewhat unexpected and hit with some significance.

We do recognize though obviously there are some benefits in terms of total feed costs.

In a relatively healthy position when it comes to the commodity meat markets within the turkey complex and we are really quite happy with their value-added growth, even though the aggregate growth for all of Jennie-O in sales was 2%.

As I mentioned, some of it was related to some whole bird timing and so notwithstanding the whole bird, our value-add businesses were up more in the 4% to 5% range.

So we are very happy with that.

So the underlying profitability of the business continues to move in the right direction.

Is it fair to say that this issue should be transitory and it seems like a couple more quarters is sort of what you are expecting?

Yes.

Okay.

And then on Refrigerated, I thought it was a very good quarter if you look at margins on a per pound basis.

Probably the best when you have had in a couple of years.

So was it really that good and then how do I parse out or reconcile the commentary on the REV wraps and the volumes being down?

I know there's a lot of moving parts, but clearly the REV business is doing well, but will it start to show up in the revenue numbers and if so, where?

Thanks.

On Refrigerated Foods, I mean it was a good quarter.

I kind of look at three things going well within the Refrigerated group.

Clearly, the basic cutout margins were a lot more favorable this year than what we had experienced a year ago.

Secondly, some of the more kind of market-based supply chain type items -- if you recall, we talked about those last year at the Investor Day as bacon, for example, is being in a challenging circumstance for part of last year.

That complex is in much better shape right now.

And then our higher value-added items are really doing quite well and again, in terms of the masking effect of the change in feed sales and then some of the internal transfers, I mean if you just kind of look at the retail value-added franchises, they were up solidly above 5% growth in the aggregate with several items doing well.

REV is part of that.

As we mentioned earlier, we are happy with where REV is showing up and we do expect to see a time where you will see that top line reflected as part of the total Refrigerated Foods results.

Okay, great.

I will pass it on.

Thank you.

Eric Larson, CL King.

Yes, good morning, everyone.

Just a quick follow-up on the cutout margins, Jeff, for kind of the upcoming quarters.

I think all of us pretty much anticipate you are going to have a tighter hog supply.

Is there enough room at retail for the cut-out margin -- for the prices to at least be able to offset your higher costs?

In other words, can you at least maintain your cutout margin for let's say the next two or three quarters?

The cutout margins were quite favorable in Q1.

In our very current environment, they remain favorable, but we have known from the last few years that that can be mercurial and when you add in the effect of PED and what kind of a variable that might be, I guess we are not counting on cutout margins staying at today's level, but that is where they are today.

Okay.

I just didn't -- I'm just trying to get a feel for whether there is enough room in the whole meat complex.

Obviously, you have got very high beef prices and chicken prices have moved up too because your supplies have been constrained there as well.

So it seems like there is the ability at retail to get to pricing that you need to offset that lower supply, but that is just my observation.

And then number two, could you talk a little bit more about MegaMex?

Obviously, your equity earnings in the quarter were about half of what they were a year ago and is it just the margin issue with input costs and are they going to price to try to pick some of that back up in the back half -- or the final nine months of your year or how should we look at that equity line?

Well, MegaMex -- we talked last year about an earnout composition related to the fresh rice food piece and really for the remaining quarters of this year, that will still, on a percentage basis, hold down what ultimately MegaMex will contribute to the Company.

Otherwise, I mean you have -- there are quite a few factors.

I mean there is Peso exchange factors; there is some supply factors.

We have had some unevenness in terms of business performance.

The Don Miguel piece was a little bit softer in this quarter both in sales and in terms of some margin squeeze.

On the other hand, the HERDEZ line was really quite strong and we are happy with the sales of the [fresh rice], the Wholly Guacamole item.

So overall, we are still very high on what MegaMex is going to be able to do for the Company.

But we are kind of swimming through some choppy seas in terms of that equity and earnings line for probably the next couple quarters.

Okay, thanks.

I'll get back in the queue.

Rachel Nabatian, Credit Suisse.

Good morning.

First question is a follow-up to Akshay's.

On Jennie-O, are you running the business as well as you thought you would internally?

Cold weather and fuel costs are things that we have heard about from the commodity chicken operators, but the depth and the expected duration of the negative impact hasn't been to the same extent as what you have discussed today.

Thank you.

Yes, I mean we think the team up there really does a very good job in terms of trying to anticipate potential challenges.

I mean the whole situation related to propane and we got into a mode here during January where we were a little bit concerned as to whether we would even get any propane and when you have live turkeys in a barn, that is a very significant problem.

We did survive through that timeframe, but with much more significant cost than what our initial plans had been built around.

We do believe that there will be somewhat of a transitory effect of those costs as we finally get out of the cold weather and hopefully the markets return to some normalcy.

We are seeing some improvement on the national gas front already in terms of the market coming back to a little bit more normal situation and would expect propane to follow.

But, overall, I mean I would agree that we would have had even a stronger quarter at Jennie-O but for those conditions, but I think the team is doing what they can to weather those.

Okay, that's fair.

And then just one follow-up question on REV wraps and protein snacking terms.

So I just got back from CAGNY and almost every presenter had a focus on protein and then Kraft and Hillshire brands were introducing meat plates, plates of meat, melted cheese or chicken with dipping sauce and so I guess I just wanted to know your thoughts on this and if you think it's a positive since it will grow the category?

I believe these products are generally next to REV wraps in the store.

Well, I mean it is early to tell.

Some of those products are just going to get in market this spring.

They have been shown to the retails, but in terms of actual shelf impact.

We obviously believed in the concept that meat or meat and cheese combinations could be a positive element for consumers when it comes to snacking opportunities and so it is certainly not (inaudible) to us that others have looked at the marketplace the same way and have come up with different offerings.

I mean I think the offerings that I've seen are really all quite different from each other, so there certainly is a possibility that they could well be complementary and hit consumers at slightly different occasions or maybe a slightly different age audience.

But in terms of what we were looking to accomplish with REV, we are happy with what we have seen and we continue to gain shelf placements even in the environment of others introducing new items.

Great, thank you.

Ken Zaslow, Bank of Montreal.

Yes, good morning, everyone.

Sorry to beat a dead horse here, but if I think about the turkey business, is it fair to say about $20 million over a three-quarter period is kind of the estimated cost associated with this?

Is that a fair number?

You are talking about fuel alone?

))Ken Zaslow Yes, just for the three-quarter impact, first, second and third quarter.

If you are looking at just fuel cost by itself, that number is low.

But we obviously have other things offsetting some of the fuel, unexpectedly high fuel.

We use a significant amount of fuel in the operation.

So it was north of $10 million on a one-quarter basis.

Okay, so, actually the more interesting question I hope is, all right, so now that you had greater pressure from that, which was unexpected, what was better than expected to offset this throughout the whole organization because if you are saying $20 million or $30 million is low, obviously you have had other successes that may not -- were not in your forecast as well.

So what actually is exceeding your expectation across your portfolio?

Refrigerated Foods ended up doing up a little bit better than we thought.

We knew they were going to have a positive year, but the overall total in terms of their gain year over year was more significant than we had originally planned and we are attaining kind of better than pro forma benefits from Skippy peanut butter in both the Grocery and International segment.

Great.

My final question is on Compleats, what is the -- and even SPAM.

What do you think the progress will be throughout the year in terms of the build because it seems like this was again one of the pieces of your portfolio that has not been as good as we would've expected, but it sounds like you guys are addressing it again?

Ken, I don't have a real clean answer for you on that.

I mean it has been a little bit of a puzzle even internally.

We thought maybe we had turned the corner a little bit last year.

We had a couple of really pretty strong quarters with Compleats heading into Q4 and kind of later in the year, it was a little softer and then Q1 clearly did not meet our expectations.

So we are hopeful that the new marketing effort and the new -- and some of the promotions we have with the customers will get that back on the right trajectory.

We think we have introduced some items that consumers like in terms of the breakfast Compleats item, but time will tell here.

I would agree with you that that has been one of our franchises that has been a little bit more of a struggle for us.

Great.

Thank you.

(Operator Instructions).

Farha Aslam, Stephens Inc.

Hi, good morning.

A question around the very strong margins in fresh pork and kind of how you think about pricing in your value-added products because it looks like hog costs will go up going into that spring/summer timeframe.

Are you thinking that you are going to focus on passing along those prices in your packaged meats items or are you thinking of more taking a balanced approach and saying, okay, I am making a lot in fresh pork, maybe I don't need to take as much on my packaged meats?

Sure, this is Jody.

We always evaluate where we are at with our cost structure and the prices that we go to the retailers with and in some instances, like the supply chain items, it is probably a more rapid change.

Certainly in some foodservice areas, we have contracts that have levers that move along with cost of goods.

I would expect that we will continue to evaluate and look at where we need to take pricing and if it is appropriate at the time, we won't be the only ones with those higher input costs in the industry.

Okay.

So how much timing is required for you -- if we see -- because we see that summer hogs are going to be really expensive.

Do you need to start talking about pricing with retailers now or is it automatically or formulaic?

We're just trying to understand how you are planning on managing that summer hog bit?

Sure, from the retail perspective, I would say the team is probably looking at it right now.

It will be dependent on evaluating those gaps in our supply chain and what we think it is going to do to us internally.

So I would believe the team is working on it now.

And on the Grocery side, we actually have gone to our customers and notified them of pricing on (inaudible) the beef-based items such as Hormel chili, Mary Kitchen Hash and also on SPAM luncheon meat.

That's helpful.

And sort of the degree of pricing to be taken on those roughly?

Low to mid-single digits; it varies by item.

Okay.

And then (inaudible) you have had China, that Skippy business for a about a quarter now.

Kind of now that you have had it, how do you feel about it?

Have you been able to kind of marry SPAM and Skippy in China and how is that working out?

It's working out well.

I mean it is interesting.

In terms of our quarter-one results, our international team actually didn't get their hands on the business as quickly to be able to benefit fully from it in the quarter.

They kind of, by January, kind of had the full control.

So they got one month worth of the full benefit of integration of China.

But they are quite happy with what they have been able to do with some of the distributors not only in China, but in some of the other Asian-based markets where we have seen an ability to kind of lever at least the attention level if somebody can carry both a SPAM and a Skippy as items into the marketplace.

And then it is really -- it's way too early in terms of any sort of operating synergies.

I mean we literally have had our team helping the local group there for a very short period of time.

Great, thanks for the added color.

Akshay Jagdale.

Hi, can you hear me?

Thanks for taking the follow-up.

I wanted to ask about Skippy.

I think last quarter you said you wouldn't talk about that line item financially separately, but it seems like it is going better.

So can you give us some more color on what is going better?

Is it a cost issue or is it just distribution and maybe a little bit more color on what is driving that.

Obviously the sales execution seems to be better, but anything to help us understand the performance of Skippy within the context of the category because the other big brand has had some issues in recent months.

The costs have remained benign, so that has been positive overall for the net margin for the business.

But probably the bigger factor that has been the consumer reception to our positioning with the item, as we took the item over, we found there were some retailers that had either no Skippy items or a pretty scant section, even though we could identify there were long-standing consumers within their marketplace and so they were quite receptive to the notion of us getting back in and becoming supportive behind it.

We coupled that with promotional support.

Clearly, it would -- especially on a year-over-year basis.

If you think about it, this was the quarter that last year the business was for sale.

So I don't blame the sellers.

They probably weren't spending a lot of time promoting the product that quarter.

So on a year-over-year basis, especially, we certainly drove some added feature activity.

But our feature spending on this item is now at a level that is kind of commensurate with being the number two player in the category.

It allows us to generate good solid growth in terms of the top line, but also is living up to our performance expectations in terms of margin.

And now you are going to put some marketing behind it and then the innovation piece will come after that.

Is that how we should --?

Exactly.

So the timing -- I mean we are looking at back-to-school time for the advertising.

I mean we are still settling on kind of the final new campaign themes and what the media elements will be, but I would -- you should look for it in the later part of our fiscal year as the kids go back to school in the fall.

And then the new product innovation -- we have some closer-in things that will hit the market here soon, but in terms of kind of the more major what we talked about sort of the out-of-the-jar type newer opportunities, those are definitely more 2015, probably not even right out of the gate 2015, but will follow on soon after when the marketing kicks off.

And just one last one on Grocery.

Just can you talk a little bit about the environment?

Obviously, the center of the store is quite pressured and we have heard that a lot at CAGNY, but I don't think it is clear to anybody really why the consumer is so strapped, especially on their food purchases.

So what is your read on that situation?

Well, for us, the center of the store was somewhat choppy.

I mean we had items such as SPAM and Compleats that ended up having declines year over year and so certainly you can look at those and say, gee, we are experiencing some kind of at least short-term contraction of those franchises in this current environment.

On the other hand, we had several items that did well like bacon bits and chili and Herdez and Wholly and so we are I guess blessed, if you will, with a lot of niche relatively young items in some cases that are still finding more and more consumers and so we are maybe a little less than the mode of having a lot of high household penetrations, extremely mature franchises and so we seem to be able to expand our consumer base even in this current economic environment.

Thank you.

Thanks for taking all the follow-ups.

And there are no further questions at this time.

I will now turn the call back to management for any closing.

Thank you all for joining us today.

We appreciate your interest in Hormel Foods.

Have a great day.

And thank you.

Ladies and gentlemen, this will conclude the conference call for today.

Again, we thank you for your participation and you may now disconnect your line.