African swine fever in China is taking a toll on Hormel Foods Corp., digging into its latest profit and forcing the company to raise prices on most of its pork-related products.
The disease has devastated China's hog population, killing 150 million to 200 million hogs, more than U.S. farmers produce in a year. As the world's largest producer and consumer of pork, China's situation led to extreme volatility in global pork pricing that hurt Hormel.
"The biggest unknown in the protein industry is related to the outbreak of the African swine fever in China," Jim Snee, Hormel's chief executive, told investors Thursday.
The Austin, Minn.-based company lowered its financial outlook for the rest of its fiscal year. Consumers will see higher prices for pork products in coming months, Hormel executives said.
"We are preparing for a multiyear event," Snee said. "But in the short term, it's really interesting how the information and dynamics are changing so rapidly."
The situation developed as Hormel is walking away from its position as a meatpacker toward a more consumer-branded food company. As a result, the company is more dependent on raw pork belly and trim costs that it buys from others.
While some U.S. pork companies stand to benefit by filling the supply void through increased U.S. exports, Hormel has structured its international business to be less reliant on exports. This softens the blow from challenging tariff dynamics, but it also means the company is more dependent on in-country production in China.
Hog prices in China increased by about 20% during Hormel's second fiscal quarter, which ended April 28. Snee said the U.S. will play a "vital role" in filling the gap in global pork supply created by the disease in China.
"Prices will likely move higher as cold storage stocks in China are drawn down … domestic prices have already increased and will likely increase even further," he said.
Reactions were mixed on Wall Street as Hormel shares closed down 1%. Aaron Siegel, of CFRA Research, maintains a sell rating for the stock. "Compared to competitors, we think [Hormel] is disadvantaged due to a lack of vertical integration and for not having a prominent export business, which will likely curb opportunities," he wrote in his note following the quarterly report.
Still, many investors like the company's long-term strategy of moving away from being a commodities company — as seen in its decision to sell the Fremont, Neb., slaughterhouse — and increasing its investment in the higher-margin branded consumer products.
"African swine fever is a risk, but these things do tend to dissipate over time and eventually we think that a lot of the things they've done with the company will pay off," said John Boylan, a food analyst with Edward Jones, who maintains a buy rating. "These guys have a very strong balance sheet and we think they have a lot of positive options to grow their business over time."
Meanwhile, Hormel's Jennie-O Turkey Store brand continued to slog through challenges that have dogged that business. Its profit fell 45% in the latest period.
For months, the company has grappled with an oversupply in U.S. turkey oversupply that has applied price pressure to the industry. Snee said they are now beginning to see prices come back up, but cold storage levels are still robust, slowing the rebound.
Just as the supply was looking to rebalance, and whole-bird and food-service turkey sales turned promising, Jennie-O faced some unexpected setbacks in the quarter. Startup costs for its new plant in Melrose, Minn., were higher than expected, as were feed costs, and retail sales were lower than anticipated as a result of two voluntary recalls of ground turkey last fall over Salmonella fears.
The company lost shelf space at stores following those recalls, Snee said, and is now working hard to regain that trust with its retailers. And while they lost shelf space, the company's market research suggests the Jennie-O brand remains strong among consumers.
"Obviously, having the No. 1 brand really does matter," Snee said. "It's clearly the best acquisition we've ever made."
Hormel plans to restart some advertising and promotions around the turkey products in order to jump-start sales in the second half of the year.
For the quarter ended April 28, Hormel's profit rose 19% to $282.4 million. Its adjusted profit, which accounted for the sale of its CytoSport business and other one-time items, amounted to 46 cents a share, beating analysts' expectations by a penny.
The company's profit was helped by a temporarily lower tax rate of 11% compared to last year's 20%.
Sales rose less than 1% to $2.34 billion, slightly missing Wall Street's expectation of $2.37 billion.
Executives lowered full-year sales guidance to a range of $9.5 billion to $10 billion from the previous range of $9.7 billion to $10.2 billion. Earnings per share were dialed back to between $1.71 and $1.85 from $1.77 to $1.91.