Q2 2024 Earnings Summary
- Hormel Foods is experiencing strong performance in its foodservice segment, remaining well-positioned for continued growth due to channel diversification, innovation, and the competitive advantage of its direct sales force, which allows them to be front and center with customers and drive results.
- The company's international business has rebounded strongly, with sales up high single digits despite volume down high single digits, driven by a focus on higher-margin branded products, improvements in China, and successful investments in Indonesia and the Philippines.
- Hormel Foods is ahead of expectations and has delivered stronger margins in the second quarter and first half, demonstrating progress on key initiatives including the transform and modernize initiative, providing a clear line of sight to growth in the back half of the year.
- Production interruption at the Suffolk, Virginia Planters facility is expected to negatively impact third-quarter earnings by approximately $0.03, affecting service levels on high-volume products.
- Pressure in the retail segment's center store canned and convenient items due to increased competition, price elasticity from Q2 price increases, and heavier promotional activity is leading to softer demand in these categories.
- Despite strong first-half performance, the company only modestly raised its EPS guidance, citing headwinds including the Suffolk issue, ongoing turkey challenges, and higher tax rates, suggesting concerns about future earnings growth.
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EPS Guidance and First-Half Outperformance
Q: Why isn't EPS guidance raised more despite strong first-half results?
A: Management explained that despite being ahead of expectations and delivering stronger margins in the first half, the EPS guidance increase is appropriate due to certain headwinds. The Virginia plant interruption (Suffolk issue) is expected to affect earnings by about $0.03 , there's an incremental impact of $0.05 from turkey for the full year , and a tax rate impact of $0.01 to $0.02. These factors offset some of the first-half outperformance, and without them, they would have raised guidance more. They remain pleased with first-half performance and have a clear line of sight to growth in the second half. -
Second-Half Sales Growth Drivers
Q: What will drive the acceleration of top-line growth in the second half?
A: Management expects strong performance from foodservice and international segments, which are anticipated to provide robust growth. In retail, while some verticals like SPAM, refrigerated entrees, and Skippy are performing well , challenges remain in turkey and the convenient meals and protein verticals. They acknowledge that the most likely scenario is achieving sales at the low end of the guidance range. -
Retail Volume Declines and Recovery Strategies
Q: How will you address volume declines in retail, especially in turkey and center store?
A: The volume decline is primarily due to turkey, accounting for two-thirds of the decline in the first half. Management is implementing both short-term and long-term strategies to recover lost volumes. In the short term, they are increasing promotions, enhancing displays, and shifting dollars into advertising to support value messaging to consumers. Long-term efforts include price pack architecture work through their revenue growth management team, evaluating price points, promotions, and assortment, and investing in innovation to bring in new consumers. -
SG&A Growth and 'Transform and Modernize' Expenses
Q: What's driving the SG&A growth, and how should we think about it?
A: The biggest component of SG&A growth year-over-year is expenses related to their transform and modernize initiatives, which will drive a double-digit increase in the back half of this year and into next year. Additionally, higher compensation expenses contribute to the SG&A growth. Management indicates that these investments are crucial for effectively planning, buying, making, and moving the business. -
Strong Foodservice Performance Amid Industry Decline
Q: How is foodservice performing strongly despite industry traffic declines?
A: The foodservice team had an excellent start to the year and is well-positioned moving forward. They compete in both commercial and non-commercial segments with a broad customer base. Channel diversification, including growth in the convenience channel and grab-and-go opportunities, is driving performance. Their direct sales force offers a competitive advantage, and continued innovation—such as their Bacon 1 business and new Flash 180 sous vide fully cooked chicken item—supports growth. -
International Performance and China Outlook
Q: What's driving international sales growth despite volume declines?
A: International volume is expected to be down high single digits due to lower fresh pork and commodity businesses, but sales are anticipated to be up high single digits due to improved mix and more branded business. In China, the retail business is improving with efforts to regain distribution and innovate in their shelf-stable meat snacking portfolio. The foodservice business in China is strong and gaining momentum. Investments in Indonesia are yielding positive results, and partners in the Philippines continue strong performance. They expect acceleration in the second half, noting they will lap a weak Q4 comparison. -
Competitive Promotional Landscape in Retail
Q: How is the competitive promotional backdrop in retail affecting you?
A: The promotional environment varies by category, but overall, management is comfortable. In some cases, they are shifting dollars from trade into advertising or other areas to support growth. They acknowledge increased competition and heavier promotional activity in certain categories like convenient meals and protein, and they are adjusting promotions to support the right price points. -
Approach to Recovering Lost Retail Volumes
Q: What is your approach to recovering lost volumes in retail?
A: Management highlights that flagship brands like SPAM, refrigerated entrees, and Skippy are performing well. They are focusing on both short-term actions—such as promotions, displays, and activating social media—and long-term strategies like innovation and advertising. Their revenue growth management team is working on price pack architecture, evaluating price points, promotions, and assortments to drive overall category growth. -
Impact of Turkey Production on Volumes
Q: How does lower turkey volume align with production levels?
A: There is no change in their turkey outlook. They have strong internal supply and capacity, and teams are doing a great job at retail and foodservice. They are gaining share with lean ground turkey and regaining lost business in foodservice. They believe they have de-risked the turkey outlook for the rest of the year. -
Price Elasticity and Competition in Center Store
Q: What's causing weakness in center store categories?
A: The softness in center store is due to increased competition, heightened promotions, and expected price elasticities from price increases taken in Q2. Factors include the impact of lower SNAP benefits, softer weather affecting demand, and consumers pulling back in canned or center store areas. -
Retail Scanner Data vs. Reported Figures
Q: Why is there a gap between retail scanner data and reported figures?
A: Positive trends are seen in their Circana data, with five of six verticals showing growth. However, declines in turkey and non-tracked areas of the business—including some contract manufacturing showing declines—are driving the overall volume decline. -
Advertising Returns and Investments
Q: How are advertising investments performing versus expectations?
A: Advertising on flagship and rising brands like SPAM, Black Label bacon, and Jennie-O is yielding strong performance in both volume and market share gains. Innovation accompanies advertising, and new advertising with refreshed brand positioning is contributing to positive returns. They are excited about new campaigns, such as those for pepperoni. -
Customer Pricing Pressure and Retailer Dynamics
Q: Are you seeing pushback from retailers on price increases?
A: There's a heightened level of discussions regarding pricing, but the retail team ensures solid rationale and clarification for pricing needs. They are addressing issues both in the short term and with a long-term vision. Retailers control shelf prices, but the company influences decisions with insights and analytics as a category leader. -
Impact of Plant Interruption on Retail Sales
Q: What's the impact of the Suffolk plant interruption on Q3 retail sales?
A: The Suffolk plant interruption is expected to affect earnings by about $0.03. This translates to approximately a 3% to 4% impact on retail sales for Q3, which management agrees is probably close. -
Primary Drivers of Earnings Strength Despite Headwinds
Q: What are the primary drivers of earnings strength despite turkey, tax, and Suffolk headwinds?
A: Management cites strong performance from the foodservice business and the international business rebounding. Additionally, their transform and modernize initiatives have been effective in how they plan, buy, make, and move the business. These factors help overcome the headwinds from turkey, tax rate impact, and the Suffolk issue. -
Convenient Meals and Protein Volume Softness
Q: What's causing softness in convenient meals and protein volumes, and what's the plan to improve?
A: Soft demand is seen in canned or center store areas, partly due to reduced SNAP benefits, softer weather, and increased competition and promotions. Seasonally, Q3 is a lower quarter for this category. The team is counteracting this with promotions, displays, shifting dollars into the category, and advertising the value to consumers.