Hormel commits to building brands, adding value
Sept. 9, 2011
by Bryan Salvage
BOSTON – Hormel Foods’ means of addressing consumer expectations in a challenging economic environment, is long-term brand building, Jeffrey Ettinger, chairman, president and CEO, told the audience during his presentation at the Barclays Capital Back to School Consumer Conference.
“Our third quarter was another positive quarter for the company, generating a 10 percent increase in net sales and a 13 percent increase in earnings per share, both of which were record numbers for the company,” he said. “Tonnage during the third quarter flattened out a bit after several quarters in a row of more substantial growth, and it's something we're going to keep an eye on.”
Two of Hormel’s business segments, Refrigerated Foods and Jennie-O Turkey Store, had significant supply-chain implications, and the total amount of hogs or turkeys processed will impact tonnage. “For example, in the Jennie-O Turkey Store segment, total sales tonnage was down during the quarter, but value-added tonnage was up because we had a production cut that we had implemented the year prior that rolled through, keeping moderation in terms of the supplies we're seeing, but we grew that important value-added business,” he said.
All five Hormel segments again had sales dollar increases for the quarter, Ettinger said. “That's the sixth-consecutive quarter all five segments have increased,” he added. “On a segment profit basis, the leaders for the company during 3Q were Grocery Products with a 19 percent increase, Jennie-O Turkey Store with a 14 percent increase, and All Other Segments is basically our International segment. They had a very nice quarter with a very significant 60 percent-plus increase.”
Hormel ends its fiscal year at the end of October. “Sales for the year are up 12 percent, on pace to again be in that high $7 billion range on tonnage increase for the year of 4 percent and net earnings per share through three quarters at $1.31, or a 22 percent increase,” Ettinger said. “Once again, sales have been up in all five segments.
“We talk a lot at Hormel Foods about our balanced business model, the fact that we're in both the protein and the packaged food business... the fact that we have significant presence in branded resale items, but also nearly $2 billion of our sales in the foodservice segment -- even the fact from a balance standpoint that we manage our company conservatively from a financial standpoint,” he added. “But we push for innovation within our company.”
One key area of balance is the balanced performance between Hormel’s business segments. “They have somewhat different input challenges and macro-market opportunities, [but] they're all looking to grow their value-added items,” he said. “Historically, we have seen a pattern of certain pistons firing in certain businesses at a given time, and the net of it is that we've been able to accelerate and move our company forward.”
Ettinger said what is being seen at the end of 2011 is a bit of a shift as Refrigerated Foods and Jennie-O Turkey Store come off of several years of very robust growth with some favorable conditions to their backs. “We're now looking at the other three divisions – Grocery Products, Specialty Foods and International – to take up that slack,” Ettinger said.
Grocery Products concluded its third quarter with a 19 percent increase in segment profit and has some nice momentum going forward to finish out this year and heading into 2012, he added. “Grocery Products are a shelf-stable, center-of-the-store portfolio of items, our most-branded area of the company,” he said. “We certainly are looking for them to pick up the pace and be an even stronger contributor for the remainder of this year and into 2012.”
The Compleats microwaveable meals franchise is another growth area for Grocery Products, which achieved meteoric growth for the company during the last decade almost every year, Ettinger said.
“We are growing at a 30 percent to 40 percent clip with this item,” Ettinger said. “When the recession hit, it did slow down, and at some point we were starting to see a little bit of a decline in the business. We've put some new muscle against this. We are marketing against this product line. At our Investor Day here this summer, we unveiled the new segmentation strategy within the product line, and that's hitting the grocery stores right now.
“We were pleased during the last year to see an uptick in that business, and with that effort that we have going against it, we expect to restore momentum and is still an extremely convenient and affordable product line for the consumer,” he added.
Ettinger said regarding Refrigerated Foods and Jennie-O Turkey Store on a total segment profit delivery standpoint over the recent quarter or the next quarter, there may be a slight decline in terms of the growth both experienced. “Behind the scenes, the real focus of both of these business units is growing those value-added portfolios,” he added. “And in that regard, there's no decline going on whatsoever.”
Refrigerated Foods has been steadily moving its portfolio into higher and higher valued products, items for consumers that are easy to prepare at home, Ettinger explained. “They've done this through an environment where they have confronted poor operating markets that have swung back and forth,” he said. “A couple of years ago, the margins were compressed to almost nothing. This past year has been quite positive for it, and our expectation for the remainder of this year and into next year is a more middle-of-the-road level in terms of those operating margins.
“This unit has been tasked with pushing through pricing and has done a nice job of that, but overall that goal is to continue the unit growth of the higher-value items,” Ettinger iterated. “Three examples of this within the retail segment would be our Natural Choice product line, Hormel pepperoni franchise and Hormel Party Trays, all of which are exhibiting growth in terms of their distribution and, more importantly, in terms of total households.”
One of the key growth components for Refrigerated Foods is Hormel’s foodservice business. “It's a $1 billion business in and of itself,” Ettinger said. “Their forte has been outgrowing the marketplace. They, again, focus on operator satisfaction, delivering innovative niche products for operators that take labor out of their operations. Even in the recent times of a more difficult foodservice environment, this group year after year has been able to outperform the total industry and should be very well positioned when we get to a point in the economy where the overall industry starts to grow again.”
Jennie-O Turkey Store is actively raising the bar, in terms of both operating efficiencies and value-added growth. “Jennie-O Turkey Store is the most vertical operation we have within the company,” Ettinger said. “We're involved there from hatcheries to grow-out farms to basic processing to the further processing of items, and that team has really focused a lot of attention in the last couple of years on making improvements to the efficiency in those operations, improvements that can stand the test of time.
“This focus on the value-added side is really aimed at driving consumers towards Jennie-O Turkey Store branded turkeys, and the focus of that, in turn, has been in the burger and ground turkey category,” Ettinger said. “We've really been pretty much the only ones out there advertising our brand of turkey for the past few years, and if anything, we've stepped up that effort.
“Since our recent step-up – the focus on the burger and ground turkey standpoint, we've sold over 250 million turkey burgers,” he added. “Even though it's a niche, it adds up to some significant volume for us. And then in terms of purchase incentive, we've had the campaign in three different waves, so we started a baseline. Even though we really would regard ourselves as clearly the innovation leader in turkey, we’re clearly the branded leader in value-added items.
“Concluding in terms of cash, we have $500 million to $600 million in cash on the books, which we recognize is a healthy amount, and we would love to find good ways to put it to use on a more aggressive basis,” Ettinger said. “We also have next to no net debt.”
Hormel continues to look for opportunities to add to its business in the acquisition field, he continued. “In the meantime, we have committed to strong dividend growth,” he added. “We'd like that dividend to start going up at a faster rate than what our earnings are going up.
“We intend to grow our company at at least a 5 percent rate annually on a top line and at least a 10 percent rate annually on the bottom line. As we move to the conclusion of 2011, those numbers are at 6 and 14, so we've met, if not exceeded somewhat, those targets, and we're optimistic going forward that on a long-term basis, Hormel Foods can continue to deliver that kind of growth,” Ettinger concluded.