Hormel Foods Corp. wants to improve its position as a food marketer and reduce the effects volatile hog markets have on it, executives said Thursday as they provided the first explanation for selling its giant Nebraska hog slaughterhouse.
The discussion came as Austin, Minn.-based Hormel reported sales growth that matched analysts’ expectations for its latest financial period but lowered their short-term outlook due to tariffs imposed by China on U.S. pork exports.
Those tariffs, high freight costs and low hog prices cut into Hormel’s operating profit during the May-to-July period, the third quarter of its fiscal year. A 15 percent jump in net profit came entirely because of the federal tax cut on businesses.
Hormel’s shares fell 3 percent on the news.
Jim Snee, the company’s chief executive, told analysts and investors that executives believe the company can get pretax profit growing in the next fiscal year, which begins in November.
“There’s certainly some headwinds out there and unknowns in terms of the tariffs and we’re going to battle through that,” Snee said. “But, yeah, we do think we can grow pretax earnings in 2019.”
Hormel disclosed it will receive $30 million in cash for the sale of its large Fremont, Neb., plant. The sale, announced last week, to farmers in Minnesota, South Dakota and surrounding states, is organized as WholeStone Farms. The deal came after Hormel conducted a multiyear review of its hog-slaughtering business, which the company was built on more than 120 years ago.
By selling the plant now, Hormel is avoiding a costly renovation needed to keep the facility competitive and lowering its exposure to swings in commodities prices. “Our stated goal is to not sell any commodity meat at all,” Jim Sheehan, Hormel’s chief financial officer, said.
The Fremont plant slaughters and processes about 10,500 hogs a day, one-third of Hormel’s hog volume. But it’s less efficient than several recently opened slaughter facilities across the Upper Midwest.
Last fall, three hog-slaughtering plants opened, including Seaboard Triumph Foods’ Sioux City, Iowa, plant that can process 2.6 million hogs a year, and Clemens Food Group’s Coldwater, Mich., facility that can do 3 million head annually.
Prime Pork, owned by Mankato businessman Glen Taylor, who also owns the Star Tribune, invested between $20 million and $25 million to turn an old PM Beef plant in Windom, Minn., into a hog plant last year. That facility can process 1.3 million head annually, according to data provided by Christopher Hurt, a professor of agricultural economics from Purdue University.
“If you have new competitor in the market, and that new competitor is technologically at the top of the industry in being able to compete at a lower cost, somebody may have to leave,” Hurt said.
Hormel recently invested $80 million to update a slaughter facility in Austin that supplies the company but is officially owned and operated by Dallas-based Quality Pork Processors. It would soon need to make a similar investment at Fremont to turn it into a double-shift plant, Snee said.
Instead, executives decided it was time to sell the plant, which has been a part of Hormel since the 1940s. “This was not an easy decision,” Snee said, but was necessary “given the changes in the market.”
Hormel expects it will spend $15 million to $20 million to relocate some of processing functions from Fremont to other company-owned facilities and pay down pension commitments.
WholeStone plans to make a big investment to upgrade the facility. Hormel will remain a key purchaser of the meat processed at the Fremont plant for at least three years.
In the latest quarter, Hormel’s commodity pork profits were down a staggering 88 percent to “near break-even levels,” Sheehan said.
The company’s profit grew 15 percent to $210.2 million, or 39 cents a share. Its operating income fell $18 million but its tax expense dropped $48 million.
Sales rose 6.9 percent to $2.36 billion. Organic net sales, which excludes the acquisition of Columbus Craft Meats and Fontanini Italian Meats and Sausages, and the divestiture of Farmer John, were flat.
The company reaffirmed its full-year profit guidance of $1.81 to $1.95 per share but trimmed its full-year revenue forecast to $9.4 billion to $9.6 billion, down from $9.7 billion to $10.1 billion due to higher tariffs in China. Tariffs are expected to reduce full-year earnings per share by between 4 and 6 cents, Sheehan said.
Like Golden Valley-based General Mills and other makers of consumer packaged goods, Hormel is grappling with higher freight costs caused by a shortage of drivers, reduced capacity and higher fuel costs.
The company sold more Jennie-O turkey products last quarter than a year ago, but the segment’s profit was still down 23 percent. Profits were flat in its refrigerated-foods business, which includes brands like Hormel Natural Choice and Applegate, while grocery products, including Wholly Guacamole and Skippy peanut butter, was up 4 percent.
Hormel’s international-business unit posted a profit jump of 9 percent due to higher export sales of Spam and Skippy. Tariffs tempered the unit’s overall results as fresh pork export volume, sales and profitability declined sharply in key markets.