Jennie O
Low prices for turkey meat and more competition were among headwinds for the segment.
AUSTIN, Minn. – Turkey meat is facing tough times, and Hormel Foods Inc. is feeling the effects.

The company’s Jennie-O Turkey Store business reported an earnings decline of 29 percent for the second quarter. Sales in the segment were down 8 percent, while volumes retreated 6 percent. Continued weakness in turkey prices, increased competition and increased expenses all contributed to the financial struggles at Jennie-O Turkey Store during the second quarter, according to President and CEO Jim Snee.

“First, turkey prices, such as breast meat, have maintained their seven-year lows and in some cases, declined further since the first quarter as the industry continues to be in an oversupply situation,” Snee explained in a conference call with analysts on May 25. “History suggests the turkey industry will balance supply and demand and market conditions will improve in the coming months. In turn, we have made additional adjustments to our production levels and would expect volumes slightly under 2014 levels. The impact to our business continues as commodity sales pricing and whole bird pricing is much lower than last year. Lower turkey prices are also pressuring prices in Jennie-O Turkey Store’s three sales divisions: retail, deli and foodservice.

For the second quarter of fiscal year 2017, Hormel reported net earnings of $211 million, or $0.39 diluted earnings per share, down 2 percent from $215 million, or $0.40 diluted earnings per share in 2016.

Sales for the quarter were down 5 percent to $2.2 billion. Non-GAAP adjusted sales climbed 2 percent. Volume declined 11 percent; non-GAAP adjusted volume increased 1 percent.

Increased competition from other turkey suppliers, in addition to competing proteins such as beef, pressured results in the Jennie-O business, Snee noted. Additionally, the segment incurred higher operating expenses and related “bird performance issues” in the company’s conventional and antibiotic-free flocks.

Bright spots for the turkey business include recent 12 weeks scanned data showing the Jennie-O brand continues to outperform the ground turkey category. “Despite the market conditions and operating challenges, the Jennie-O Turkey Store team grew value-added volumes 1 percent this quarter and grew lean ground turkey tray pack volume by double digits,” Snee noted.

Jennie-O Turkey Store recently announced the start of construction on a new processing plant in Melrose, Minnesota. The plant will process mostly whole birds and is expected to cost more than $130 million.

“While our emphasis at Jennie-O Turkey Store is on value-added products, whole birds are an important part of the turkey supply chain,” Snee explained. “The new plant will increase operational efficiency through an improved layout and will also automate some of the most difficult production jobs. Construction begins this year, and we expect the plant to be operational in early 2019.”

Snee said the company expects percentage declines in earnings for Jennie-O Turkey Store “to be in the high teens for the second half of the year,” until the industry reduces turkey production levels.

While Jennie-O Turkey Store struggled, Refrigerated Foods, International and Grocery Products grew earnings.

Operating profit in the Grocery Products business advanced 15 percent, while volume climbed 2 percent, Non-GAAP adjusted volume was flat, while sales were up 8 percent. Non-GAAP adjusted sales grew 2 percent. Justin’s specialty nut butters, Wholly Guacamole, Spam and Herdez all contributed to growth in the segment, Snee said.

In the International business, operating profit jumped 38 percent on volume growth of 17 percent and sales growth of 19 percent. “Fresh pork exports and branded exports such as Spam had excellent results this quarter,” Snee said. “Our Skippy peanut butter business in China also performed well.”

The divestiture of the Farmer John business weighed on the Refrigerated Foods business. Second quarter operating profit was flat, with sales down 6 percent and volume down 14 percent. Excluding the divestiture, adjusted sales advanced 5 percent, while adjusted volume climbed 1 percent.

“Growth continues to come from retail foodservice value-added products,” Snee said. “In foodservice, items such as Hormel Bacon fully cooked bacon and Hormel pepperoni delivered excellent growth during the quarter. In our retail business, Hormel Black Label bacon, Hormel Natural Choice meats and Applegate bacon and dinner sausage delivered nice growth.”

Jim Sheehan, senior vice president and CFO, said Hormel expects some short-term volatility in the hog markets in the second half of 2017.

“Overall, hog prices are expected to be higher than last year,” Sheehan told analysts. “Belly prices increased sharply in the first part of the quarter but are now comparable to last year. On average, belly prices were approximately 10 percent higher than last year. We expect belly prices to be above last year as the industry continues to experience lower cold storage levels and high demand for bacon.”

Hormel will expand hog production capacity by 6 percent by late summer as two plants recently began production and two additional plants are expected to begin production.

“As we assess the long-term future of the hog industry, we see three areas of focus: export demand, domestic consumption and total US harvest capacity,” Sheehan said. “Year-to-date, export demand has been strong. The USDA expects exports to be up 10 percent in 2017. Domestic consumption also remained strong. For example, pork feature activity has increased significantly, and pricing has been stable. Depending on the long-term export and domestic consumption trends, we believe rationalization of less-efficient harvest operations may need to occur. We remain confident we are well positioned to make the necessary adjustments in our business to address changes in pork capacity.”

Specialty Foods’ operating profit declined 16 percent, sales declined 24 percent and volume declined 33 percent during the second quarter. Excluding the divestiture of Diamond Crystal Brands, adjusted volume was up 3 percent, while adjusted sales were flat.

Snee said Muscle Milk protein beverages performed well in the food, drug and mass channels. The company’s new Muscle Milk bars have been well received in the marketplace, he added.