Hormel Foods - Earnings Call - Q1 2020
February 20, 2020
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods first quarter 2020 earnings release conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Thursday, February 20, 2020. I would like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead, Mr. Ennis.
Nathan Annis (Director of Investor Relations)
Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2020. We released our results this morning before the market opened, around 6:30 AM Eastern. If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investor section. On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer, and Jim Sheehan, Executive Vice President and Chief Financial Officer. Jim Snee will provide an overview of the Sadler's Smokehouse acquisition, a review of each segment's performance for the quarter, and our outlook for the remainder of 2020. Jim Sheehan will provide detailed financial results and further assumptions relating to our outlook. The line will be open for questions following Jim Sheehan's remarks. As a courtesy to the other analysts, please limit yourself to one question with one follow-up.
If you have additional questions, you are welcome to get back into the queue. An audio replay of this call will be available beginning at 11:00 AM today, Central Standard Time. The dial-in number is 888-204-4368, and the access code is 4720526. It will also be posted to our website and archived for one year. Before we get started, I need to reference the Safe Harbor Statement. Some of the comments made today will be forward-looking, and actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to pages 7-9 and 28 in the company's Form 10-K for the year ended October 27, 2019, for more details. It can be accessed on our website.
Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance by excluding the volume and sales impact of the CytoSport divestiture. Discussion on non-GAAP information is detailed in our press release located on our corporate website. Please note that during our call, we will refer to these non-GAAP results as organic volume and organic sales. I will now turn the call over to Jim Snee.
Jim Snee (Chairman, President, and CEO)
Thank you, Nathan. Good morning, everyone. At our Investor Day last October, we outlined our 2020 path forward, which included growing our deli and food service brands as a top priority. This morning's announcement of an agreement to acquire Sadler's Smokehouse is another step forward on this initiative. Sadler's Smokehouse, based in Henderson, Texas, has been making authentic pit smoked barbecue products since 1948. Hormel has been fortunate to have the Sadler organization as a key supplier for over two decades. When the Sadler family decided it was time to sell the business, they knew Hormel Foods was the company to call. Over the past few months, we have been working on finalizing this deal, and I am personally excited to welcome their brand, products, and team members to the Hormel Foods family. Authentic barbecue remains on trend in the U.S.
The number of menu mentions has increased at a strong pace over the past 10 years, and today, barbecue extends well beyond the traditional barbecue restaurant format. With Sadler as a key supplier, we have been able to capture this favorable trend through our Austin Blues barbecue brand. Austin Blues is a line of genuine, slow-smoked beef, pork, and chicken products for the food service and deli channels. As one of our premium prepared protein brands, Austin Blues has seen great success and growth. We are doing the difficult work of preparing the product so the operator doesn't have to. However, they still get the flexibility to customize the product with their own signature sauce. We see similarities between this acquisition and the acquisitions of the Burke Corporation in 2008 and Fontanini Italian Meats and Sausages in 2017.
Both Burke and Fontanini have been very successful contributors to our food service growth, and each has required capacity expansions to keep up with the growing demand. Sadler's will strengthen our position in food service, and we see a tremendous opportunity to further extend their authentic barbecue products into both the retail and deli channels with our dedicated sales forces, innovation capabilities, and track record of brand stewardship. We expect to close the acquisition in March, and Jim Sheehan will provide more details relating to the financials in his prepared remarks. Now, let's turn to our first quarter results, which were in line with our expectations as we delivered earnings per share of $0.45. Volume decreased 1%, while organic volume increased 2%. Sales increased 1%, and organic sales increased 4%. Three of our four segments, Refrigerated Foods, JENNIE-O Turkey Store, and International, delivered volume and sales growth.
It is encouraging to see JENNIE-O Turkey Store deliver a second consecutive quarter of volume, sales, and earnings growth. We have made capital and marketing investments into many brands which are driving these results. These brands include, but are not limited to, BAM, Hormel Black Label, Fontanini, Columbus, Hormel Bacon 1, and Hormel Fire Braised. Looking at the segments, Refrigerated Foods grew volume 3% and sales 6%. We generated strong demand across many of our value-added businesses, including retail and food service. In addition to some of the brands I just listed, Hormel Cure 81 and Hormel Gatherings also showed nice growth. A notable contributor this quarter was Applegate, which is doing really well in both the retail and food service channels with their line of natural and organic products. Their snacking platform is growing with products like the Applegate Charcuterie Plate made with their natural meats and cheeses.
We also feel really good about Applegate's meat and plant-blend products and have seen success in the food service channel. We will continue to innovate in this space with new and exciting offerings for consumers. Refrigerated Foods grew earnings 3%, led by growth in our food service business and higher commodity profits. Refrigerated Foods benefited from lower deli prices during the quarter, but that benefit was offset by significantly higher pork and beef trim prices. While volatility in input costs negatively impacted our retail and deli divisions due to the longer lead times for pricing, our food service team reacted swiftly to the changing market conditions. Our balanced pork supply chain is intentionally designed to take volatility out of our total pork costs during extreme market conditions, and that played out this quarter as expected.
While hog market prices were lower during the quarter, the balanced mix of hog contracts and our long-term supply contract at Fremont limited some of the upside profit potential that we may have captured five or 10 years ago. With our new structure to reduce volatility, we did not capture the entire upside, but we also expect to minimize the downside when opposite market conditions occur. This supply chain is the right structure for our business, and Jim Sheehan will expand upon my comments. Looking forward, the fundamentals in Refrigerated Foods continue to be very strong. The large categories we compete in, such as pizza toppings and bacon, continue to grow as consumer and operator demand remains favorable. Pizza and bacon are not only ubiquitous in both at-home and away-from-home eating occasions, they are also showing excellent growth.
Differentiated brands like Fire Braised, Bacon 1, Fontanini, Columbus, and Black Label are all outpacing industry growth, and we continue to make long-term investments into those product lines. JENNIE-O Turkey Store delivered a second consecutive quarter of volume, sales, and profit growth. Higher volumes and pricing for the commodity and whole-bird businesses drove the improved results. Operational improvements across their supply chain also contributed to growth. It is encouraging to see the efforts to realign our cost structure start to pay off, as we described at our recent Investor Day, and we do expect this trend to continue throughout the year. The sales and marketing teams have done a good job regaining JENNIE-O lean ground turkey distribution. In conjunction with these efforts, we have broadened our advertising campaign for JENNIE-O and continue to see positive results from those investments.
We are taking the necessary steps to fully restore our position in the lean ground turkey category, and with two consecutive quarters of growth at JENNIE-O Turkey Store, we now have strong momentum across the business. Grocery products volume declined 14%, and sales declined 11%, primarily due to the divestiture of CytoSport. Organic volume decreased 4%, and organic sales decreased 1%. We continue to see growth in the SPAM family of products, Wholly Guacamole, and Herdez salsas and sauces, and also expect this trend to continue. We saw lower organic volume during the quarter and attribute some of the decline to the timing of the SNAP disbursement last year. While hard to quantify the exact impact, higher shipments during late January in 2019 did not repeat with the same magnitude this year.
Earnings for grocery products declined 28% due to the divestiture of CytoSport, higher raw material costs, a decline in contract manufacturing profits, and lower volumes. Skippy Peanut Butter continued to experience headwinds this quarter as the category was negatively impacted by a competitor's deflationary pricing actions last year. We will lap the pricing declines after the second quarter, and we remain focused on building the Skippy brand through effective promotional strategies, advertising, and continued innovation. Another dynamic in grocery products is our strategy shift on Hormel Chili. Historically, chili was heavily promoted during the football season. Using revenue growth management, we learned that many of the promotions during this timeframe drove volume but did not provide acceptable returns for us or our retail partners. This year, we made the strategic shift to reallocate some promotional expenses to advertising investments.
This shift impacted results in the quarter, but we believe it will ultimately lead to a stronger and more profitable Hormel Chili brand for us and our retail partners. International volume and sales increased for the quarter, primarily due to fresh pork exports and strong growth in China. However, segment profit declined by 20% as significantly higher pork prices negatively impacted our businesses in China and Brazil, in addition to our affiliated businesses in South Korea and the Philippines. Our global team continues to take the necessary pricing actions to offset cost increases. Like the rest of the world, we are monitoring the coronavirus outbreak in Asia. First and foremost, we are concerned for the safety of our employees in the region. We are working closely with our management team in China as the situation unfolds.
Our team members across all functions of our business in China, from sales and marketing to plant professionals, observed the extended Lunar New Year holiday and started to return to work as of February 10. However, we still have a majority of our employees who have not returned to work due to self-quarantine and transportation restrictions. Similar to other companies in China, all aspects of our in-country supply chain are operating more slowly and at higher costs than normal. From a sales perspective, the demand for our food service products, which represent the majority of our sales in China, has dropped off considerably as patrons are not eating out. On the other hand, we have seen a large uptick in retail sales of shelf-stable products like SPAM and Skippy as consumers dining at home.
We do expect a very difficult second quarter for international, primarily due to the impact of the coronavirus. However, if the outbreak is contained soon, the second half of the year could be more favorable as we refill the sales pipeline and get our plants back to running at full speed. Taking all these factors into account, we are maintaining our full-year earnings guidance at $1.69-$1.83 per share and our sales guidance at $9.5 billion-$10.3 billion. At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter and key assumptions for fiscal 2020.
Jim Sheehan (CFO)
Thanks, Jim. Good morning. Net sales for the quarter were $2.4 billion, up 1%. Organic net sales were up 4%, with three of four segments showing growth. Pre-tax earnings were $290 million, down 5%. The decline was driven primarily by the sale of CytoSport.
The effective tax rate was 16.3% compared to 21.3% last year. The rate was impacted by the large volume of stock option exercises in the quarter. This is a timing issue and does not impact our expected full-year tax rate, which remains between 20.5% and 22.5%. Earnings per share for the quarter was $0.45, one cent above last year and in line with our expectations. For the quarter, SG&A excluding advertising was 6.7% of sales compared to 7.1% excluding the two-cent legal settlement benefit in 2019. Net unallocated expense for the quarter decreased by $9.7 million. Last year, we incurred expenses associated with the Fremont sale. We expect net unallocated expense to be between $40 million and $60 million for the year. Advertising investments for the quarter were $35 million, up from $34 million excluding CytoSport. Operating margins were 11.8% compared to 13% last year.
Lower gross margins for grocery products were the primary driver. We generated cash from operations of $188 million during the quarter, a 1% increase. We paid our 366th consecutive quarterly dividend effective February 18th at an annual rate of $0.93 per share, an 11% increase over 2019. Capital expenditures were $58 million. We expect capital expenditures for the year to be approximately $360 million. Large capital projects include the Burke facility expansion, which will be completed in the summer, a new Columbus dry sausage facility, and Project Orion. Working capital increased as we continue to build inventory in anticipation of the upcoming relocation of the value-added production lines from Fremont to other Hormel facilities and higher input costs due to African swine fever. The company did not repurchase stock in the first quarter. As Jim mentioned, we announced the acquisition of Sadler's early this morning.
The purchase price is $270 million, with a $40 million cash tax benefit. This makes the effective purchase price $230 million. The deal includes the Sadler's brand and a production facility in Henderson, Texas. The acquisition will be funded with cash on hand and will import into the refrigerated food segment. The transaction is an asset deal which results in the $40 million cash tax benefit from the asset valuation step-up. Hormel is one of the largest customers of Sadler's as they produce numerous items for our Austin Blues product line. Annual sales excluding Hormel are approximately $140 million. Sadler's operating margins are in line with the total company average. We estimate this deal will be neutral to slightly diluted in 2020 as we plan to make immediate investments into the business and production facility.
In total, raw material costs were up from last year, with volatility across many commodities, which can shift profitability between quarters. As a reminder, approximately half of our pork raw materials are sourced through the purchase of hogs, and half are sourced externally based on primal values. Our cost of hogs increased over last year, driven by two factors. Hogs purchased on the cutoff formula were above last year and significantly exceeded the spot market. We also experienced higher costs for hogs purchased on future contracts. Hogs purchased on market-based formulas were down from last year, but not enough to offset the cutoff formula and future contracted hogs. USDA composite value of hogs increased 4% over last year. This is the valuation method for raw materials contracted through our former Fremont facility.
Our strategic shift to purchase pork raw materials at market prices through a long-term partnership with Fremont was a key driver to the reduction in volatility. However, due to strength in the trim and ham markets, total pork costs through this partnership were higher than last year. Beef and trim markets were up from last year. Delis were down in the quarter. We have previously discussed pricing action in refrigerated foods; retail and deli lag the market by 30 to 45 days. The outlook for the remainder of 2020 assumes higher protein prices for key inputs with periods of volatility. As we look at the fundamentals in the hog industry, the most recent USDA supply and demand report estimates a 4.5% increase in production and a more than 15% increase in exports. The forecasted additional supply of pork is in line with the increase in export demand.
Pork in cold storage was at record levels at the end of the year. African swine fever continues to impact global hog supply in China, Southeast Asia, and Europe. Worldwide demand for U.S. pork remains high, with the industry setting an all-time record for exports in December. Recently, we have seen downward pressure on domestic hog and pork prices. Since the start of our second quarter, market hogs and the USDA composite value have declined by more than 10%. Bellies and pork trim have been lowered by as much as 30%. The outbreak of the coronavirus in China may be a contributing factor. Turkey market conditions continue to improve as industry measures show poult placements down 3% for 2019. Overall, turkey inventory in cold storage is down 23% compared to last year, with breast meat inventory down 18%. Feed costs for the first quarter were flat to last year.
We anticipate higher feed costs for the remainder of the year, driven by lower levels of protein in the corn crop relative to prior years. This is requiring us to reformulate our feed with higher-cost ingredients. We began the implementation of Project Orion in January with the global rollout of the Oracle Human Capital Management System, which updates our payroll, benefits, talent management, and workforce management. Additional integrations for finance and supply chain are taking place throughout 2020. Incremental costs associated with the phased implementation are fully reflected in the guidance for the year. At this time, I'll turn the call over to the operator for the question-and-answer portion of the call.
Operator (participant)
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press star one to ask a question. Now we take our first question from Benjamin M. Theurer from Barclays.
Benjamine Theurer (Managing Director and Head of Latin America Equity Research)
Okay, perfect. Thank you. Good morning, Jim and Jim. I have one question on the acquisition you've announced. Clearly, you've laid out how this is going to fit in and what the financials are. You've also said you're going to immediately invest in the operation. Is that something we should consider from a CapEx point of view? Is that going to be meaningful with what's up to the $360 million you've announced prior? Where do you think you have most of the potential? Is it within food service or actually taking those products into retail, as you've mentioned in your prepared remarks? I have one quick follow-up.
Jim Snee (Chairman, President, and CEO)
Good morning, Ben. I mean, there's a couple of areas. I mean, as we go through facilities in the acquisition process, we usually find some opportunities to upgrade facilities. That's the case here. Also, perhaps some needed maintenance. That's not unusual. As we look at our overall budget of the $360 million, we're holding that number the same because we have projects that ebb and flow throughout the year. We don't really see the need to modify that number at this point. In terms of the opportunity, in the short term, this is definitely going to have a bigger impact in the food service space.
I think as we move further down the line, that's when we see the opportunity to really build out a bigger retail presence and expand it into the deli. Of course, it aligns well strategically with all those areas. Over the last several years, we've talked about it at various times, different strategies we have in place to expand all of those businesses. It stays on track with our food service strategy. From a deli perspective, we've talked a lot about how retailers are looking to expand and improve their prepared food offerings. This will be a great opportunity for us to do that. We already have a presence in the retail space with Loy's barbecue, but we think this will be an opportunity for us to really improve the product offerings that we have. As you go around the different businesses, there's a lot of boxes that it checks in a very positive way.
Benjamine Theurer (Managing Director and Head of Latin America Equity Research)
Okay. Perfect. And then just one follow-up on ASF. I mean, clearly, we've been in a situation where prices, for example, in your international operations being in Brazil, China have been significantly impacted already. In the U.S., it's more of a volatility thing. What measures have you taken to kind of reduce further that volatility? Is there anything you can do in terms of medium-long-term contracts to kind of lock in some sort of pricing and then ultimately take the pricing action you need to do on the shelf to offset maybe that higher input cost on a year-on-year basis? Anything you've been doing on that hedging strategy?
Jim Sheehan (CFO)
Certainly, Ben, thanks for the question. We have taken hedged positions. In fact, we talked a little bit about the fact with the unusual market conditions that we experienced in this quarter. As hog prices went down, the spot market went down as the primal's carcass value was going up. I mean, that's a very unusual market condition. In fact, it's only happened in three quarters of the last 21 quarters where that market condition has existed. Some of those future contracts were negative to the P&L in the first quarter. We are taking future contracts. We feel that our various approach with multiple formula pricing for our acquisition of hogs is a sound approach to the volatility that exists.
Jim Snee (Chairman, President, and CEO)
I would add, I mean, clearly, there is a level of uncertainty in the marketplace now that you have got the impact of the coronavirus in China and the impact that is having on export markets in terms of reports of exports backing up and the idea of what happens to the hog supply here in the short term. There is still a lot of uncertainty because of ASF, because of the coronavirus. As you would expect, we are watching all of the fundamentals very closely. If we get to the point where we have to take pricing, as we demonstrated last year, we are willing to do that.
Benjamine Theurer (Managing Director and Head of Latin America Equity Research)
Okay. Perfect. Thank you very much. I will pass it on.
Operator (participant)
Thank you. We take our next question from Mr. Thomas Hinsdale Palmer from JPMorgan. Please go ahead. Your line is open.
Thomas Hinsdale Palmer (Research Analyst)
Good morning, and thanks for the question. I first wanted to clarify your segment guidance. I think you previously expected organic EBIT, so excluding CytoSport, to be up in all four of your segments. If I interpreted the release correctly, I think you're still looking for refrigerated and JENNIE-O to be up year over year. It sounded like international down, and then I wasn't sure on the grocery side. I guess, one, is that correct? What is the grocery outlook for the year?
Jim Snee (Chairman, President, and CEO)
Yeah. Thomas, your assessment is correct. Refrigerated foods and JENNIE-O up. Uncertainty, obviously, in the international segment given what's happening in the marketplace. We did call out in our fourth quarter call that net of CytoSport, grocery products would be up. We are still holding to those numbers and that comment.
Thomas Hinsdale Palmer (Research Analyst)
Okay. Thank you. Just to follow up on the grocery side, you did call out the headwinds from rising trim, and it sounds like that's come in a bit. Did you elect to take any pricing? Are we going to see any flow through here as we look towards the second quarter of pricing on products that are exposed to trim, or did it roll over fast enough that it was not needed?
Jim Snee (Chairman, President, and CEO)
That's exactly right. I mean, although the markets ran up, they did not hold long enough for us to take any pricing activity. We did not take any in the first quarter. We do not have anything on the radar right now for the second quarter. The point that you made in terms of it impacting the quarter is exactly right. We saw that in our chili business. Of course, as we changed our strategy, we had kind of a double effect of the rising market, and then we made an intentional decision to change the strategy and how we went to market. No pricing and really nothing on the radar.
Thomas Hinsdale Palmer (Research Analyst)
Okay. Thank you.
Operator (participant)
Now we take our next question from Peter Galbo from Bank of America. Please go ahead. Your line is open.
Peter Galbo (Director and Head of U.S. Consumer Staples Equity Research)
Hey, guys. Good morning. Thanks for taking the question. Jim, I just want to get your kind of higher-level thoughts. I mean, I asked you yesterday that you guys would be moving to racks opening free pork and just should we reason about it all as maybe commodity is going to start making up a greater portion of the business again because it just provides more export opportunities? Or just how should we think about that at a high level?
Jim Snee (Chairman, President, and CEO)
I mean, at a high level, this isn't new news to the industry. You've seen some other big players already make that move. We've had it on our radar for some time. Do we think that it makes us all of a sudden a huge export, a bigger export player? It won't be huge, but we do think there will be some opportunities. The other thing to consider is that our ability to really make this shift is tied to the sale of the Fremont Plant, our relationship with Holstone, who has a vertically integrated supply chain. We are given that opportunity. We think that it's advantageous for us to do. Yeah, there'll be some opportunities on the export side, but in the short term, Peter, I wouldn't say that it's going to be a tremendous opportunity.
Peter Galbo (Director and Head of U.S. Consumer Staples Equity Research)
Got it. Okay. That's helpful. Maybe just switching to JENNIE-O. Obviously, the distribution gains are positive and volumes moving in the right direction, but pricing, at least for the industry, is still challenged. And Jim Sheehan, I think you gave some statistics around cold storage and cold placements, but breast meat in turkey in particular has remained pretty weak. Just any thoughts there and what is it really going to take to get that to kind of accelerate?
Jim Snee (Chairman, President, and CEO)
Yeah. I mean, I think it is really that is more of a seasonal issue, seasonally lower. I think the market conditions or the fundamentals that we are describing are positive to the business. It is nice to have the market fundamentals positive in addition to the positive work being done in the business, really the things that we can control as we talk about delivering excellent results across the supply chain, live production, manufacturing, the improvements in lean ground turkey sales, and continuing to gain back that distribution. In my prepared remarks, Peter really talked about the momentum that we are seeing in the business. For us, that is really the key takeaway. There are a lot of things moving in our direction, and that is why we are optimistic.
Peter Galbo (Director and Head of U.S. Consumer Staples Equity Research)
Great. Thanks very much.
Operator (participant)
Thank you. Now we take our next question from Heather Jones from Heather Jones Research. Please go ahead. Your line is open.
Heather Jones (Founder)
Thank you for the question. Good morning. I was wondering if we could talk about China a little bit. You mentioned that the majority of your employees are still not back at work due to quarantines and transportation issues. I was wondering if you could give us a closer look at what have you seen over the last week or so? Has there been any improvement in that cadence of sales, or does it seem like the country is still largely as it was a week or so ago?
Jim Snee (Chairman, President, and CEO)
Yeah. All of our reports, Heather, are that it is as it was a week ago and probably even slightly before that. What we were describing is the largest portion of our sales in China are food service sales. You have seen multiple reports, and we are no different, that the food service industry has essentially come to a halt in China. Not only are we having the demand side in food service where there are opportunities, we're seeing some retail shelf-stable items. We talked about SPAM and Skippy peanut butter. The supply side and getting the plant to produce those products, get that up and running, has been an issue as well. You have it on both sides of the supply and demand equation. Again, as we said, we understand where we are today. The problem is really forecasting when do we see it start to change? If it changes in the back half of the year and you get a pipeline fill, that can change the business in a hurry. It is really too early to call. Back to your original question, we have not seen anything noticeably different here in the last week or two.
Heather Jones (Founder)
As a follow-up to that, I've read some things that were talking about restaurants selling their inventory and all because they're not open and they need to sell it or lose it. You talked about the second half potentially having a pipeline fill. I mean, is it correct to think that you would have not only the pipeline fill at the retail level but a pipeline fill at food service? I mean, does that make sense to think of it that way?
Jim Snee (Chairman, President, and CEO)
Yeah. I think when we're talking about the pipeline fill, we are thinking more of it from a food service perspective since that's a bigger part of our business. If you've got people who are emerging from this quarantine, this lockdown, one of the things that they probably will want to do in resuming their normal day-to-day life is going back to eating out. Yeah, I think that's a good way to think about it. It's just the uncertainty around timing.
Heather Jones (Founder)
Okay. Perfect. Thank you so much.
Operator (participant)
Now we take our next question from Ben Bienvenu from Stephens. Please go ahead. Your line is open.
Ben Bienvenu (Research Analyst)
Hey, thanks. Good morning.
Jim Snee (Chairman, President, and CEO)
Morning, Ben.
Ben Bienvenu (Research Analyst)
Ask on the inventory side. Last several quarters, you guys have leaned into inventory a little bit and bought in advance of what you needed in light of opportunistic deflation and some of the primals that you typically buy. With delis having been depressed as of late, what kind of opportunity does that give you? When we look at the still elevated inventory in this quarter, can you just help us think about where your inventory sits today versus the comments you might have made a quarter ago? To the extent you can talk across the primals, that would be helpful.
Jim Sheehan (CFO)
Certainly, Ben. First of all, we have been building inventory because of the transfer of production from Fremont into other facilities. Part of that has been just a safety stock, if you will, to make sure that if there is any slowdown in the startup of those lines, we have plenty of inventory. You are right. We have been building inventory in anticipation of higher ASF costs. In some cases, it has mitigated the cost, like pork trim for SPAM. In other cases, it has actually hurt the decrease of the deli prices.
The deli prices that closed at $1.40 at the end of the first quarter are now down to $92. I mean, a $48 drop in those deli prices is not expected at this time frame. We will continue to make decisions and determine case by case as to what we are seeing in the marketplace. This volatility that we are seeing is making it harder to time the market. About the time that you think that this is the time to build inventory on deli or bacon, for instance, you see this kind of drop in delis. It is a difficult task, but we are staying on top of it and trying to use our best knowledge as to what to build and when to build it.
Ben Bienvenu (Research Analyst)
Okay. Great. And then asking a follow-up on Sadler's. It seems like a nice fit in your portfolio. How representative would this deal be of the types of additional deals that you would like to do given the additional balance sheet capacity that you have? How representative would it be from a purchase price perspective and/or valuation of what the landscape looks like and/or the pipeline of deals that you would be looking at?
Jim Snee (Chairman, President, and CEO)
Yeah. That's a tough one to say because, I mean, we evaluate these deals, the pipeline on a deal-by-deal basis. We have talked about our ability to do a bigger deal. That remains. Are we willing to do a bigger deal? Absolutely. It's got to be the right deal. We have to have it come to market, and you have to be able to get it to the finish line.
We like deals like the Sadler's deal, just like we like the Burke deal, like we like the Fontanini deal. The beauty of those deals is it really is a one-on-one negotiation, a relationship that we've built over time. They've been a supplier for over 20 years, so you really know the people, you know the business, they know us. Is it representative of the deals we like to do? Absolutely. We can put it into a very strategic part of our business in food service. If we like to do a bigger deal, sure. Could we do a bigger deal? Absolutely. If we have deals like Sadler's, Fontanini, and Burke that come along on a regular basis, I mean, we'll take them all day, every day.
Jim Sheehan (CFO)
The item that I would add on this, Ben, is that it's not only the quality of the deal, but when you look at the purchase price net of the tax benefit, you're talking about a deal that was done at an even a multiple of about nine. And once we get through purchase accounting, we see this as a $0.02-$0.04 per share accretive to the business. So it's not only a great strategic fit, but we were able to get this at a reasonable price.
Ben Bienvenu (Research Analyst)
All right. Great. Thanks for the comments and good luck with the rest of the year.
Jim Snee (Chairman, President, and CEO)
Great. Thank you.
Operator (participant)
Thank you. Now we take our next question from Ken Zaslow from Bank of Montreal. Hey, good morning, everyone. The line is open.
Ken Zaslow (Analyst)
Yes. Just an overarching question first. It seems like the commodity environment, though volatile, is lower than you would have expected. Does that mean that you'll get the timing benefit later in the year and generally you should get a tailwind? It just seems like if I go back to your original expectations across the board, you're in better shape than you started. Is that not the fair question and it's just a timing issue?
Jim Sheehan (CFO)
We've talked about this before. When you're seeing this kind of volatility, it's going to move profitability between quarters. Even since the end of the first quarter, you've seen the carcass value drop $12 while hogs have only dropped $3. We're getting into a more favorable market condition than we certainly had in the first quarter. Again, this was a very unusual market condition, especially with the structure in which we buy the majority of our raw materials off of basically the carcass value. We did not see the benefit of the lower spot market because we do not buy a majority of our raw materials that way. Still, we were profitable in the pork operating area. I think our structure is sound. We have built the inventories. We are trying to take advantage of the lower market. We believe that we are in good shape going into the rest of the year.
Ken Zaslow (Analyst)
I just would have thought you would have been a little bit more positive given the environment. My second question is on groceries. Can you talk about the possibility it came in lower than we would have expected? Can you talk about are there trends within it? Is it the peanut butter side? What is really preventing this to regain its margin structure?
Jim Snee (Chairman, President, and CEO)
Yeah. Again, I'll just kind of tack on to the first question you asked. I think Jim gave a great answer to how we're thinking about it. Your comment around you would have been more optimistic. I think the kicker in all of this is just that volatility that we saw in Q1 and how does that play out for the balance of the year. We're in a good position, but we really can't predict that volatility. Leapfrogging to the GP question, there's a lot of moving parts, as you can appreciate. Obviously, Spam's off to a great start. If the trend continues, it'll be our sixth consecutive record year of sales.
We did make this shift in Chili where we've moved some of the promotional activity into advertising to really support the brand, talk to consumers. We believe it's going to be a longer-term benefit for us and the retailers. That is a work in process. Megamix continues to perform well. You mentioned Skippy. Yeah, Skippy is having a dramatic impact on the profitability of grocery products. It's all tied back to the deflationary price action that was taken. That is still a work in process. I mean, our team is focused on customer-by-customer revenue growth management, making sure that we're effectively spending those trade dollars and having advertising to support the brand, continuous innovation. As we saw in the first quarter, we've got input costs, that volatility that can create noise in the year.
With all those moving pieces in GP, I mean, the fact is we have work to do. We've got work to do to make sure that we keep Skippy on track. We have work to do to make sure that we execute this shift in the Chili strategy. When we do that, I mean, we'll achieve the results that I talked about in the fourth quarter, which was an increase year-over-year net of CytoSport. I mean, like I said, there's a lot of moving parts, but we know we have work to do. The business still has a lot of favorable parts to think about.
Ken Zaslow (Analyst)
Great. I appreciate it. Thank you, guys.
Operator (participant)
Now we take our next question from Robert Moskow from Credit Suisse. Please go ahead. Your line is open.
Robert Moskow (Senior Equity Analyst, Food and Food Retail)
Yeah. Hi there. I guess I'm a little confused as to how did the next few quarters shape up significantly well enough to offset what I think was an operating profit miss in the first quarter? I don't see how Chili makes up for the there's not going to be another Super Bowl for the rest of the year. It sounds like Skippy, it sounds like you're saying that even though you're lapping last year's price increase, peanut butter will still be down in terms of profitability for the rest of the year. In refrigerated, are you saying that just the commodity environment is just much more favorable now? You have better visibility in it. First quarter was just it looked good for a while, and then it didn't shape up the way you thought it would. Now it does. Is refrigerated really carrying the day for the next few quarters?
Jim Snee (Chairman, President, and CEO)
Yeah, Robert, I think going back to your opening comment, I mean, in total, our pre-cash earnings met our expectations for the first quarter. GP clearly did not meet our expectations. Refrigerated did. JOSS exceeded. International was slightly below what we thought. As we think about the rest of the year, we do think I get what you're saying about the Super Bowl, but the idea of making sure that that business is not entirely focused at one part of the year, we know that consumers are using Chili throughout the year. We need to make sure that we're reminding them we're increasing that velocity and that frequency. We do believe that that's an opportunity, and that's why we've shifted the strategy. Refrigerated food is going to be a critical piece for the balance of the year.
JENNIE-O Turkey Store remains a critical piece for the balance of the year, and we have nice momentum there. Got to do what we said we would do in GP for the balance of the year to get the results that I've talked about. Really the wild card, the uncertainty, is international. What happens? When does it happen? A lot of timing issues. I mean, as we think about the rest of the year, we feel good about the business, the fundamentals in refrigerated, the momentum in JENNIE-O Turkey Store. Jim, I don't know if there's anything you would add.
Jim Sheehan (CFO)
No, I mean, you are right, Rob. The market conditions have turned drastically in refrigerated foods. As you've seen, the cutout dropped $12. The spot market on hogs has only dropped $3. The market conditions that are unfavorable to the pure packer are favorable to us. I think that's the important issue as we go into the future quarters. Really, this is the market that we're structured for.
Robert Moskow (Senior Equity Analyst, Food and Food Retail)
Okay. All right. Got it now. In fresh pork, did you say that it was profitable in the quarter? Was that the commentary?
Jim Sheehan (CFO)
Yes.
Robert Moskow (Senior Equity Analyst, Food and Food Retail)
Okay. Can you give us a rough estimate? How much? Or just profitable is fine.
Jim Sheehan (CFO)
It was profitable. Even in the market conditions that we were faced with, it was a very nice performance by the pork operating group.
Robert Moskow (Senior Equity Analyst, Food and Food Retail)
Okay. All right. If you need me to eat chili during the summer, I do do that. I'm happy to help.
Jim Snee (Chairman, President, and CEO)
Chili and chili dogs. Get them both, Rob.
Robert Moskow (Senior Equity Analyst, Food and Food Retail)
You got it half right there. Thanks.
Operator (participant)
Thank you. Now we take our next question from Michael Lavery, from Piper Sandler. Please go ahead.
Michael Lavery (Managing Director and Senior Research Analyst)
Good morning. Thank you.
Jim Snee (Chairman, President, and CEO)
Morning.
Michael Lavery (Managing Director and Senior Research Analyst)
When you look at the international segment, you had such strong volume and sales growth, but obviously, EBIT was down significantly. Can you just give a sense of how much that's a proxy for how a broader ASF outlook impact might look? And how would you compare and contrast what you expect in the business more broadly?
Jim Snee (Chairman, President, and CEO)
Yeah. I think it's in line with what ASF impact would be. We saw a run-up in raw material costs, and we took corresponding pricing actions, which are always tough to get through as quickly as you'd like. We saw that in our business in China. We've been seeing that in the business in Brazil as product has been exported out and markets have moved up there as well. I mean, I think Q1 is probably a good proxy for what we would expect. I mean, the key is going to be that we take pricing, and we all know that it takes time to get that pricing. And the pricing that we did take in China and retail and food service as it has flowed through, up until the coronavirus, we did not see a significant drop-off in volumes.
Michael Lavery (Managing Director and Senior Research Analyst)
I just want to make sure I understand your answer. In the quarter you are reporting, there is less coronavirus impact or very little. It is just that the pricing had not come in in the timing that covers the input cost pressure. It is kind of that front end of the lag. Is that the right way to think about it?
Jim Sheehan (CFO)
That is exactly the way to think about it.
Michael Lavery (Managing Director and Senior Research Analyst)
I guess what is next? I mean, this is obviously a pretty steep decline. How quickly does that rebound? Maybe in the hypothetical ex-coronavirus view anyway, what would you expect? Maybe more importantly, tying it to your refrigerated foods segment, how should we think about the parallels? If you see that cost pressure flowing back here, more broadly, would a 20% EVIT decline be the right expectation for that first quarter before the pricing really gets in place?
Jim Snee (Chairman, President, and CEO)
I don't know that you want to think about a direct correlation. I mean, you've had a lot of moving parts in China. I mean, there's still a lot of unanswered questions in terms of what's happening with their supply. They're hurt in China. I wouldn't use it as a direct proxy for the U.S. at all as we think about what we're seeing domestically with pork production. Our pork production is expected to be up 4.5%, which essentially offsets the exports, which are covering down ASF implications, right? They're going to be up 15% for 2020. I don't know that I would keep that isolated to China. I wouldn't carry that over to the U.S.
Jim Sheehan (CFO)
No, this is isolated to China. As Jim said, we're watching the fundamentals very closely. The increase in supply is in balance with the amount of export that was expected. I will point out that that level of export was really earlier. We don't know what it will look like based on the conditions in China. There's record cold storage levels. We think the fundamentals are solid domestically for the pork industry and are improving significantly for the turkey industry.
Michael Lavery (Managing Director and Senior Research Analyst)
Just a follow-up then. If you look at your description about the favorable conditions for refrigerated foods now, but the profit growth there is up but pretty modest, how much acceleration should we expect? Is it going to be more likely to be more similar to this quarter? What's the catalyst for really pushing that further in terms of, say, the balance of the year?
Jim Sheehan (CFO)
Again, here's what's difficult to forecast. The bellies at the beginning of the quarter and end of the quarter were close to the same price, but they moved $70 during the quarter. It's that volatility that is creating a difficult environment to really forecast what the change is and how solid the change is. We have seen a lot of volatility, we believe, based on ASF. What we have not seen is a long-term trend. Until you see the trend really develop, it is tough to manage this through the volatility.
Jim Snee (Chairman, President, and CEO)
Hey, Michael, just at a higher level, as we have talked about a couple of times already, for the full year, I mean, you think about refrigerated foods and JOSS delivering to offset the international downturn and then GP doing what we need to do. I mean, refrigerated foods and JOSS will be important for us for the balance of the year.
Michael Lavery (Managing Director and Senior Research Analyst)
Okay. Thank you very much.
Operator (participant)
Thank you. Now we take our next question from Rupesh Parikh from Oppenheimer. Please go ahead. Your line is open.
Rupesh Parikh (Managing Director and Senior Analyst)
Good morning. Thanks for taking my question. I have two quick ones. On the JENNIE-O business, I just thought I'd get a sense in terms of where we are in terms of regaining some of the distribution you lost last year. And then on the Skippy side, I understand, obviously, you're still lapping some of that headwinds from last year, but wanted to understand if there's any change in the component dynamics in the peanut butter category.
Jim Snee (Chairman, President, and CEO)
Yeah. The distribution gains, Rupesh, are continuously incremental, right? I mean, the team's doing a really nice job gaining back distribution, retailer by retailer. One of the things that we've talked about a couple of quarters ago that continues to play out is that we are seeing a 4 percentage point better growth in retailers who are selling and distributing the JENNIE-O brand. As we're out telling the story to regain distribution, it's a really good story to be told, and our team's doing that, and it's an incremental gain. We said it's going to take some time, but as you can see in the results, it's really playing out. We haven't seen any additional change to competitive activity since the deflationary pricing actions. As we said, we're lapping that coming at the end of Q2. We're hopeful that we can return to a sense of normalcy and growing the business that we do in terms of innovating, brand building, and driving the business the way we know how.
Rupesh Parikh (Managing Director and Senior Analyst)
Great. Thank you.
Operator (participant)
Now we take our next question from Eric Larson from Buckingham Research Group. Please go ahead. Your line is open.
Eric Larson (Director and Senior Research Analyst)
Yeah. Thanks, everyone. I know we're running out of time, so I'll make it pretty quick. Thanks for sneaking me in here. The recovery in JENNIE-O is actually really encouraging. I think it's been the longest down cycle in turkey that I've seen in a long time. Can you give us a little better flavor, just to dive a little deeper into the recovery? Have we seen actual capacity reductions by the industry? Obviously, we're seeing placements and egg sets and stuff going down, but is it for real? Are the competitors more rational than what we've seen maybe in the past year? Just a little more detail on that would be helpful.
Jim Snee (Chairman, President, and CEO)
Yeah. I think the key thing there, Eric, and you talked about it, is really the fundamentals, right? I mean, we're seeing favorable fundamentals, which would be driven by the entire industry. How they're doing, what they're doing, when they're doing, what all feed into the fundamentals. That's what we're watching, and we do see those positive trends. You add to that the excellent results across our supply chain and live production and manufacturing, combined with the incremental gains on regaining distribution. That's why we're a bit optimistic when we talk about the momentum that the business has.
Eric Larson (Director and Senior Research Analyst)
Okay. I may have missed this. This is my follow-up. You may have already stated this, but when do you actually lap year over year the deflation that you saw in peanut butter pricing?
Jim Snee (Chairman, President, and CEO)
That's at the end of Q2.
Eric Larson (Director and Senior Research Analyst)
End of Q2. Q3 will be at least apples to apples on that factor.
Jim Snee (Chairman, President, and CEO)
Exactly. We should start getting a clearer read on the business.
Eric Larson (Director and Senior Research Analyst)
Okay. Thank you.
Operator (participant)
Thank you. We take our next question from Adam Samuelson from Goldman Sachs. Please go ahead.
Adam Samuelson (Senior Equity Research Analyst)
Thanks. Thanks for squeezing me in. Maybe a clarification question. In refrigerated, you alluded to higher commodity profits. In the past, you've given some dimension to changes in commodity profits. Anyway, if you frame that this quarter. Also, you said you took some hedging losses on hogs. Might come out in the Q, but is there any way to frame kind of what the impact of that was?
Jim Sheehan (CFO)
The commodity margins or the commodity margins, the pork operating margins were in line with our long-term profile.
Adam Samuelson (Senior Equity Research Analyst)
Okay. In the refrigerated business and the commentary about the Nespresso solution on the call today, did not hear any mention of Columbus or Fontanini. Any just characterization of how those businesses have been progressing?
Jim Snee (Chairman, President, and CEO)
Sure. Thanks for bringing those up. We just had a lot of other things to talk about. Been really pleased with the work being done by our deli group, specifically with the Columbus brand. We had a great holiday season with Columbus. You probably saw the announcement that we're building a new facility in Omaha, Nebraska, to support the growth of that brand. Things are going really well. Same thing with Fontanini. We put in a new line there last year because we needed the expanded capacity. Our food service team has really taken that business and run with it just the way we designed the strategy. Both those businesses are very healthy and in great shape.
Adam Samuelson (Senior Equity Research Analyst)
Okay. I appreciate the call. Thank you.
Jim Snee (Chairman, President, and CEO)
Thanks, Adam.
Operator (participant)
Thank you. Now we take our last question from Rebecca Schoenemann from Morningstar. Please go ahead.
Rebecca Schoenemann (Analyst)
Good morning. Thanks for squeezing me in. Real quick on the lower profit margins in the grocery products segment, is there any way you can somewhat quantify the different factors that you talked about? The divestiture having an impact, lower volumes, lower contract manufacturing, higher raw material costs, etc. Is there any way you can kind of help quantify that? Related to that, I believe that when you talked about the CytoSport divestiture, you said that the operating margins were slightly lower than the corporate average, which would mean that they're definitely lower than the segment. I would think it would be margin accretive, the divestiture, unless you're talking about stranded overhead or something in that regard. Just some clarity there would be great. Thanks.
Jim Snee (Chairman, President, and CEO)
Yeah. The two biggest issues are the impact of the contract manufacturing business. That has been a difficult business. Then the second part would be the run-up in the raw material costs for the segment. Those really are the two things. Really, in terms of your second part of your question, we can have Nathan follow up with you and give you a little more detail, but there's really not anything of any magnitude that are impacting it left over from the CytoSport divestiture, but we'll have him follow up with you, Rebecca.
Rebecca Schoenemann (Analyst)
Okay. Sounds great. Just real quick then, so the contract manufacturing, is that something that's going to drag throughout the remainder of the year?
Jim Snee (Chairman, President, and CEO)
Yeah. I mean, we've seen that recently trend down. Just as a reminder, it's not a business that is, I'll say, strategic for us. It has been more of a capacity play. It does ebb and flow, but I mean, the key takeaway is that it has trended down, and it's been a difficult business.
Rebecca Schoenemann (Analyst)
Okay. Thank you.
Operator (participant)
Thank you. It appears that I have no further questions at this time. Mr. Snee, I'd like to turn the call back to you for any additional closing remarks.
Jim Snee (Chairman, President, and CEO)
Great. Thank you all for joining us today. We are off to a solid start in Q1, and we know that we must continue to execute our plan for the balance of the year. To our team members on the line, my sincere thanks for everything all of you do to keep our company uncommon. Have a great day.
Operator (participant)
This concludes today's call. Thank you for your participation. You may now disconnect.