Hormel Foods: Reports Third 2020 Quarter Results

Austin / MN. (hrl) Hormel Foods Corporation, a leading global branded food company, reported results for the third quarter of fiscal 2020. All comparisons are to the third quarter of fiscal 2019 unless otherwise noted. The impact of the Sadler’s Smokehouse acquisition (March 2020) is excluded in the presentation of the third quarter of fiscal 2020 non-GAAP measures of organic volume and organic net sales. Operating free cash flow is also presented as a non-GAAP metric.

Executive summary – third quarter

• Volume of 1.2 billion lbs., up 4 percent; organic volume1 up 3 percent
• Record net sales of USD 2.4 billion, up 4 percent; organic net sales1 up 2 percent
• Pretax earnings of USD 259 million, down 1 percent
• Operating margin of 10.5 percent, compared to 11.2 percent last year
• Effective tax rate of 21.6 percent, compared to 23.6 percent last year
• Net earnings of USD 203 million, up 2 percent
• Diluted earnings per share of USD 0.37, flat to last year
• Cash flow from operations of USD 330 million, up 59 percent
• Operating free cash flow1 of USD 242 million, up 72 percent

Executive commentary

«We had an excellent third quarter with strength across our retail and deli businesses, along with a rebound in our foodservice business,» said Jim Snee, chairman of the board, president and chief executive officer. «The intentional balance we have built across our portfolio has once again enabled us to generate stable cash flows in a very dynamic time period, even as we absorbed significant incremental costs in our supply chain due to the Covid-19 pandemic.»

«The tireless dedication of our entire global team during these extraordinary times embodies our company’s purpose of Inspired People. Inspired Food.TM,» Snee said. «I’m proud of our team’s unwavering commitment to employee safety and our ability to maintain high levels of performance to deliver record sales this quarter.»

Outlook

«We expect the fourth quarter to mirror many of the dynamics we saw in the third quarter, including strength from our retail businesses and the ongoing recovery in our foodservice business,» Snee said. «However, the magnitude of additional recovery in the foodservice industry, the performance of the entire food supply chain and the state of the broader economy remain highly uncertain.»

«As we begin the fourth quarter, we are actively addressing two areas of our business,» Snee said. «First, while we saw an improvement in the third quarter, our foodservice business was still behind last year, which is a trend we expect to continue into the fourth quarter. I’m proud of the work our foodservice teams are doing to find unique solutions to support our distributors and operators. It is also encouraging to see growth from other channels and businesses offset declines in the foodservice channel.»

«Second, our plant professionals have done heroic work to meet the high level of demand we are seeing across our business,» Snee said. «In most businesses we are producing more product than we ever have, which is quite an accomplishment. However, in some key categories, the ongoing increased demand and impact of Covid-19 in our manufacturing facilities has forced our supply chain to find alternate solutions to increase production, including relying on our network of trusted co-manufacturing partners. In the fourth quarter, we expect factors such as limited labor availability, production inefficiencies due to Covid-19 safety measures and unseasonably low levels of inventory to challenge our ability to meet the increased demand for certain products.»

Covid-19 response

«We continue to ensure employee safety is our top priority,» Snee said. «We are seeing success from our awareness initiative, KEEP Covid OUT!, which reinforces the importance of taking preventive measures at our production facilities and in our communities where we work and live.»

The company’s safety procedures continue to meet or exceed CDC and OSHA guidelines, ensuring its operations reflect best practices in the food industry. In addition to numerous safety procedures enacted once the pandemic started, the company has expanded automated temperature screenings, added more staggered production shifts and increased training on Covid-19 best practices.

In the third quarter, the company absorbed approximately USD 40 million in incremental supply chain costs primarily related to lower production volumes, employee bonuses and enhanced safety measures in its production facilities. On a year-to-date basis, total incremental costs were USD 60 million, and the range of incremental costs in the fourth quarter is USD 20-USD 40 million. The total incremental supply chain costs are anticipated to be USD 80-USD 100 million in fiscal 2020.

Corporate responsibility

«Being a good corporate citizen is about more than just writing a check to worthwhile causes. It’s about making a difference and doing our part every day to lift up our communities and use our size and position as a global branded food company to make a difference through our philanthropic pillars of food security, community support and education,» Snee said. «Since the start of the pandemic, we have continued to support our communities by contributing to hunger relief efforts, including donating cash and products to global, national and local hunger-relief organizations.»

«Hormel Foods remains committed to supporting equality and education,» Snee said. «Through the great work of our Inclusion and Diversity Guiding Coalition, in July we announced employee and corporate donations to three organizations: Minorities in Agriculture, Natural Resources and Related Sciences (MANRRS); the NAACP Legal Defense and Education Fund; and United Negro College Fund (UNCF). In addition, today we separately announced a college assurance program, Inspired Pathways, which will provide full tuition for any child of a Hormel Foods employee to attend community college. I’m very excited to see the difference these programs will make in our communities.»