“Our Jennie-O team went through a lot this quarter,” beginning with the confirmation in March of the highly pathogenic avian influenza, HPAI, in the supply chain which prompted the team to quickly and effectively mobilize into crisis mode, Hormel CEO Jim Snee told investors during the company’s second quarter earnings call yesterday.
“This involved working long hours over the course of many weeks to protect the safety of the turkey flocks, provide transparent communication to customers and operators and plan for future business interruptions, all while operating the day-to-day business,” Snee said.
Despite these efforts and effective biosecurity measures implemented during the 2015 avian outbreak to protect flocks against the virus, Hormel’s turkeys were still negatively impacted with their number dwindling by about 25% to date, he added.
“Our Jennie-O Turkey Store team is facing an uncertain period ahead due to the impacts and risks to its supply chain from HPAI,” and large gaps in the poultry supplies are expected beginning in the third quarter, he said.
As it is safe to do so, Snee said, Hormel will begin to repopulate the farms, recognizing that there is strong demand across retail and foodservice.
Inflation, labor challenges compound flu's impact
At the same time the team is navigating HPAI, it also faces other challenges, including inflation and labor strains, according to Hormel.
“From a cost perspective, feed prices are significantly higher with corn and soybean meal up more than 125% and 40% respectively, as of early May. Additionally, there is further upside risk to feed prices with later plantings due to cold and wet weather across the Midwest this spring,” Snee said.
He added: “The cost of production labor at company manufacturing facilities has also increased more than 50% on average compared to 2015.”
The higher cost of inputs has caused breast meat prices to rise to their highest levels since 2015, currently trading above $6 compared to the previous all-time high of $5.85, Snee said.
These pressures likely will increase before easing, CFO Jacinth Smiley cautioned.
Smiley explained that Hormel’s hedging program at Jennie-O Turkey Store has effectively helped the company manage risk near term, but looking to the back half of the year, it expects protein and feed costs to remain volatile and elevated compared to historical levels. Likewise, costs for packing and supplies are up double-digits on average over the last year and accelerated during the most recent quarter, as did trucking freight expenses.
As for labor, Smiely said, Hormel is seeing positive trends in staffing, which has helped it boost production of some brands, including SPAM, raw bacon and pizza toppings, but “inefficiencies related to new team members and turnover continue to impact operations.”
Sales, profits soar despite challenges
Despite these challenges and higher prices, consumer demand for Hormel’s products, including turkey, remained high during the company’s second quarter, according to executives.
For example, Jennie-O Turkey Store saw sales surge 16% and segment profits lift nearly 400%, thanks in large part to rebounding foodservice, which helped offset higher freight expenses and costs for other items featured in Hormel’s grocery products, including avocados for its Wholly-Guacamole, meat and packaging, Smiley said.
Overall for the quarter, Hormel sales increased 19% to $3.1bn compared to the same period last year and gross profits increased 16% or $77m in the quarter over the previous year, Smiley said.
Given these increases, Snee reaffirmed Hormel’s sales guidance range between $11.7bn and $12.5bn and narrowed the earnings range down to $1.87 to $1.97.