Q1 2020 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Hormel Foods first quarter earnings.
Earnings release confidence gone at this time all participants.
As a reminder, confidence is being recorded Girthy that's already.
It's like a 20.
I'd like to sort of confidence over to Nathan Annis detected.
So.
Please go ahead.
Good morning, welcome to the Hormel Foods conference call first quarter fiscal 2020.
When we spoke before market open around.
Sure.
He becomes really.
Going to the other website <unk> dot cool wondered investor section.
Our call today is generally chairman of the board.
Chief Executive Officer, interim Chief Executive Vice President and Chief Financial Officer.
He will provide an overview favour smoke house acquisition.
Hey review each cycle.
For the quarter and no for the remainder of 2020.
She is quite detailed financial result for the assumptions related to.
Well, one will be open questions following joshing remark.
The current seem to the other analysts we wouldn't yourself to one question Juan Pablo.
Additional questions, you're welcome to get back into queue.
An audio replay of this call will be available beginning.
Today Central standard Todd.
I wouldn't number it's easy to use your core or 360, and the access code for someone to drill five to six it will be cool interim looks like Oh God for one year.
Before we get started I need to reference Safe Harbor statement.
Some of the condensate before looking in actual results may differ materially from those expressed.
Or implied by the Steven Nike.
Please refer to pages seven to nine and 28.
The company form 10-K for year ended October 20, 720, I can't come working through it can be accessed on our website.
Additionally, we felt the company uses non-GAAP results provide investors better understanding of the company's operating performance.
Excluding the volume and sales impact Cytosport divestiture.
Discussion on non-GAAP information to help culturally located at all [laughter].
Please note that during our call war refer to these non-GAAP Crystal palace organic volumes and organic sales.
I will now turn the call to Jim's me.
Thank you Dave.
He never one.
At our Investor Day last October.
Oh wind or 2020 passport, what's your included growing our deli and foodservice brands as a top priority.
Good morning downstream open agreement to acquire Sadler smoke house, it's another step forward on that's an issue.
That or smoke house, it's an endorsement of Texas has been making authentic smoke barbecue products since 1940.
Well I know I've been fortunate, perhaps sattler organization out the key supplier for over two decades.
On the Sadler family decided it was time to tell the business.
Now Hormel foods with a company Nicole.
Over the past few months, we've been working on finalizing this deal.
I am personally excited to welcome their brand products and team members.
Elephants family.
I think barbecue remains on trends in the U.S.
The number of many dimensions has increased kinda strong pace over the past 10 years and today barbecue extends well beyond the traditional barbecue restaurant format.
With travelers are the key supplier.
It's been able to capture in this favorable trends through our Austin abuse barbecue brand.
Austin layers, there's a line of genuine suppose smoked beef pork and chicken products are that's good service and Kelly channels.
As one of our premium prepare approaching granite wash terribly interesting great six downstream growth.
We are doing a difficult work preparing the product.
Operator got some housekeeping.
However, they don't get the flexibility to customize the product what their home signature sosh.
We see similarities between that's acquisition and the acquisitions out there for Corporation 2008, and Fontenay Me Italians meets the passengers in 2017.
Bostock Infantine I've been very successful contributors to our food service growth and each that's required capacity expansions keep up the growing demand.
First of all strengthen our compression on food service and we see a tremendous opportunity further expand their authentic barbecue products enter older retail any daily channels with our dedicated sales force.
Innovation capabilities and track record of brand stewardship.
We expect clumsy acquisition, our March and June machine, and we'll 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 deliver earnings per share of 45 cents.
Volume decreased 1%, while organic volume increased 2%.
Hey else increased 1% and organic sales increased 4%.
Three of our four segments refrigerated foods.
You know, Turkey store and international delivered volume and sales growth.
It is encouraging to see Jennie O, Turkey store deliver a second consecutive quarter Oh I am.
Sales and earnings growth.
We've made capital and marketing investments into many brands, which are driving news Russell.
These brands include but are not limited to fail Hormel Black label, alternating Columbus, Hormel, Bacon, one and Hormel fire braised.
Okay and my second.
Perjury did food screwball your trade percent kind of sales were 6%.
We generated strong demand across many of our value added businesses, including retail and food service.
In addition to some other brands I just listed.
Carmel cure 81 in Hormel gatherings also showed nice growth.
And notable contributor and this quarter with alky.
Which is doing really well in called for retail and foodservice channels like airline of natural and organic products.
Snacking platform is growing what products like Applegate charcuterie plate made with they are naturally cheeses.
We also feel really good about applegate meat and client land products have seen success in the foodservice channel.
Well continue to innovate in this space, what's new and exciting offerings for consumers.
Refrigerated foods grew earnings 3% led by growth in our foodservice business and higher commodity profits.
Refrigerated foods.
Hi, good from lower belly prices during the quarter.
Got it was offset by significantly higher pork and beef prices.
Well volatility in input costs negatively impacted our retail and Kelly divisions to took a longer lead times for pricing.
Our foodservice team reacted swiftly to the changing market conditions.
Our balance pork supply chain internationally can sign the tank volatility out of our total pork costs during extreme market conditions and that played out this quarter.
Yes.
Well talk market prices were lower during the quarter.
The balance to make some talk contracts and our long term supply contract that Fremont laminate and some of the upside profit potential that we may have captured five or 10 years ago.
Our nearest structure to reduce volatility we didn't capture the entire outside.
We also expect minimize the downside when authorship market conditions occur.
Yeah. Its supply chain is that right structure for our business and Jim Sheehan will expand upon my comment.
Looking forward.
The fundamentals in refrigerated foods continues to be very strong.
A large categories, we compete in such as Pizza toppings and Bacon.
And the other grow as consumer and operator demand remains favorable.
He tried to bake in are not only.
And Paul at home and away from home eating occasions. They are also showing excellent growth.
Differentiated brands like fire braised taken one fantini, Columbus, and Black label, Oh outpacing industry growth.
We continue to make long term investments into those product lines.
Jennie O Turkey Star delivered a second consecutive quarter of volume sales and profit girl.
Higher volumes and pricing for the commodity and whole Burke businesses.
I will be improved results.
Operational improvements across their supply chain also contributing to growth.
It is encouraging to see these efforts realign our cost structure dark to pay off as we described in 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 important genio and continue to see positive results from those investments.
We are taking the necessary steps.
While we restore our position in the lean ground, Turkey category.
Two consecutive quarters of broke 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% in organic sales decreased 1%.
We continue to say growth in the spam family of products.
Welcome all week and their dad, salsas and sauces, and also expect Thats trends to continue.
We saw lower organic volume during the quarter.
And I attribute some of the decline to the timing of the snap disbursement last year.
Hard to quantify the exact impact higher shipments during the late January in 2019 did not repeat with the same magnitude this year.
Earnings for grocery products declined 20%.
Due to divestiture cytosport.
Higher raw material costs, a decline in contract manufacturing profits.
Lower volumes.
Okay peanut butter continue to experience headwinds this quarter as the category. It was negatively impacted by competitors 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.
Her tizing and continued innovation.
Another dynamic in grocery products is our strategy shift on Hormel chili.
Historically, Chile was heavily promoted during football season.
Using revenue growth management, we learned that many of the promotions during this timeframe drove volume.
Not providing an acceptable returns for us for our retail partners.
This year, we made the strategic shift to reallocate some promotional expenses.
Hi, Jay investments.
This shift impact results in the quarter, but we believe it will ultimately lead.
Ray stronger and more profitable Hormel chili brand for us and our retail partners.
International volume and sales increase for the quarter.
Primarily due to fresh pork exports and strong growth in China.
However segment profit declined by 20% at 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 pay necessary pricing actions.
Offset cost increases.
Like the rest of the World we are monitoring the Corona virus outbreak in Asia.
First and foremost we are concern 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.
Sales and marketing to client professionals observed any extended lunar new year holiday and started to return to work has held at worried Ken.
However, we still have a majority of our employees, who have not return to work here to self quarantine and transportation restrictions.
Similar to other companies in China, all aspects of our in country supply chain, our operating more slowly and out higher cost than normal.
Although sales perspective, the demand for our foodservice 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.
Shelf stable products like spam and skippy as consumers dine at home.
We do expect a very difficult second quarter for international.
Primarily due to the impact up the Corona virus.
However.
Frank is contained to the second half for me or could be more favorable as we sell 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 kind of $1.69 to $1.83 per share and our sales guidance at $9.5 billion to $10.3 billion.
Hi, I will turn the call over to Joshing to discuss our financial information relating to the quarter and key assumptions for fiscal 2020.
Thanks, Jim Good morning.
Net sales for the quarter were $2.4 billion up 1%.
Organic net sales were up 4% three to four segments showing growth.
Pre tax earnings for $290 million down 5% 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 ALC option exercises during the quarter.
This was a timing issue when does not impact or expected full year tax rate, which remains between 20.5 from 22.5%.
Earnings per share for the quarter was 45 cents.
One said about last year ended in line with our expectations.
Well the quarter SGN, a excluding their advertising was 6.7 percentage of sales compared to 7.1% excluding the two steps legal settlement benefit in 2000 like James.
Net unallocated expense for the quarter decreased by $9.7 million.
Last year, we incurred expenses associated with a pretty much sale.
We expect net that allocated expense to be between 40 and $60 billion 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.
Our gross margins for grocery products was the primary driver.
We generated cash from operations of $188 million during the quarter, a 1% increase.
We paid or 366 consecutive quarterly dividend.
Active February 18 at an annual rate of 93 cents per share at 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 drive sausage facility and project Orion.
Working capital increased as we continued to build inventory in anticipation of the upcoming relocation.
Value added production lines from freemont.
Hormel facilities.
Higher input costs due to African swine fever.
Company did not repurchase stock in the first quarter.
As Jim mentioned.
We announced the acquisition of said it's early this morning.
The purchase price was $270 million.
40 million dollar cash tax benefit.
This makes the effective purchase price of $230 million.
The deal includes assessors brand into production facility in Henderson, Texas.
The acquisition will be funded with cash on hand, and we'll report into the refrigerated foods segment.
The transaction as an asset deal, which results in the 40 million dollar cash tax benefit from the asset valuation step up.
Well as one of the largest customers are sadler so they produce numerous items for our Austin Blues product line.
Annual sales, excluding hormel are approximately $140 million.
Sadly operating margins are in line with a total company average.
We estimate this deal will be neutral to slightly dilutive in 2020, as we plan to make the 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 or sourced through the purchase of hogs and half are sourced externally based on credible values.
Our cost deposits increased over last year, driven by two factors.
Purchased on the cut out for mill robust last year and significantly exceeded the spot market.
We also experienced higher costs for hogs purchased on future contracts.
Oh, it's purchased on marketplace for analysts were down from last year, but not enough to offset the cut out formula.
Feature contracted clogs.
You must be a composite value parts increased 12% over last year.
This is the valuation method for raw materials contracted through our formal remote facility.
Our strategic shift to purchase pork raw materials at market prices through a long term partnership with freemont.
What's a key driver to the reduction in volatility.
However, due to strengthen will trend on him markets total pork pause through this partnership were hired with last year.
Decent trim markets.
Well up from last year those were down in the quarter.
We have previously discussed pricing action they were surgery to foods, we tailwind deli lags 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 industry. The most recent U.S.P.A. supply and demand report estimates a 4.5% increase in production.
A more than 15% increasing exports.
Forecasted additional supplier pork is in line with the increase in export demand.
Working cold storage was at record levels at the end of the year.
African swine fever continues to impact global hubs supply and show you Southeast Asia and Europe.
Worldwide demand for us pork remains high with the industry setting an all time record.
Sports.
So.
Recently, we have seen downward pressure on domestic pulp input prices.
Let's start over second quarter.
Market hogs, and the U.S.J. composite that you'll have declined by more than 10%.
The only support trim lower by as much as 40%.
The outbreak in the Perona virus insightful they'd be a contributing factor.
Turkey market conditions continue to improve as industry merger show, both placements down 3% for 2019.
Overall, Turkey inventory and cold storage is down 23% compared to last year with breast meat inventory down 18%.
Because for the first quarter were flat last year.
We anticipate higher feed costs for the remainder of the year.
By lower levels of protein and record crop relative to prior years.
This is required us to reformulate bird feed with higher cost ingredients.
We began the implementation of project the road in January with the global rollout the Oracle human capital management system, which updates of our payroll benefits talent management.
Workforce.
Additional integrations for fighting some supply chain or taking place throughout 2020.
Incremental costs associated with the phased implementation are fully reflected on the guidance for the year.
At this time I will turn the call over the operator for the question and answer portion of the call.
Yes.
Thank you you people would like to ask a question. Please signal by pressing star one on your telephone keypad.
We are using the speakerphone. Please check your mute function east end up to and I guess signals that each other but then again.
God Bless you asked a question and I'll be Pico first question from Benjamin Survey from Barclays.
Hey, good morning.
Okay perfect. Thank you good morning, German Jim so.
One question on on the acquisition this amount could you give me.
Now houses and selling it and then what the fundamentals are now you've also said you're going to immediately and invest in the operation and that's something we should consider have come up from a capex point of view that could it be meaningful.
What's up to the 360 million Youve, given announced prior and where do you think you have most of the potential within foodservice or actually taking those plug that into.
Retail that you've mentioned in your prepared remarks that up one quick follow up.
Right.
I mean, it's a couple of here is means we'd go through facilities in the acquisition process.
Usually find some opportunities to upgrade facilities. That's the case here you know all told me, perhaps some some needed maintenance that's not unusual.
As we look in our overall budget a $360 million, we're holding that number the same because we have projects.
Throughout the year. So 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.
Peter impacting or in the foodservice space and 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 expanding into into the deli and of course, it aligns well strategically with all those two years and over the last several years, we've we've talked about.
Various times different strategies, we have in place.
Spans all of those businesses.
You know its stays on track with our foodservice strategy permanently Kelly perspective, you know we've talked a lot about how retailers are looking to expand and improve their prepared food offerings.
Okay, great opportunity for us to do that we already have a presence in the retail space with Lloyds barbecue, but we think that's will be a an opportunity for us to really improve the product offerings that we have so.
Go around the different businesses. It there's a lot of boxes that it checks in a very positively.
Okay, Perfect and then just one follow up on assets I mean, clearly we've seen in that situation were places for example in your international operations the than Brazil, China has been significantly impacted already in the US it's more of the volatility. So what measures. If you take into kind of figure is over that.
The tool to do anything you can 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 that needs to do on the shelf to offset maybe back higher input costs on a year over year basis anything you've been doing on about hedging strategy.
Certainly Ben Thanks for the question.
We have taken hedged positions and in fact, we talked a little bit about the.
Backed with the unusual market conditions that we experienced to this quarter.
His focus hard prices with sales of spot market went down to the titles circuits value whats going up I mean, that's a very unusual market conditions sector totally happened in three quarters of the last 41 quarters, where that market condition that's existed.
Some of those.
Future contracts.
Good.
Negative to the PML that in the first quarter.
But we are taking future contracts, we feel that are for various approach with multiple.
Formula pricing.
Our acquisition to close so hogs.
Is it sounds approach to to the Volatilities that exists.
I would add I mean, clearly there's a level of certainty in the marketplace now that you're lucky impact I think grown up virus in China, and the impact that having on export markets in terms of.
Reports.
Exports backing up and you know the idea of what happened so hog supply here in the short term so.
There's still a lot of uncertainty because of assets I was hoping thrown a virus and you know as you wouldn't expect we're watching all of the fundamentals very closely and if we get to the point, where we have to take a happy to take pricing.
We demonstrated last year, we're willing to we're willing to do that.
Okay perfect. Thank you very much on deposit on.
Yes.
Thank you and nobody could next question from me said, Tom Palmer from JP Morgan. Please go ahead your line.
Good morning, and thanks for the question I first wanted to clarify on your segment guidance I think you previously expected organic EBIT, so excluding cytosport to be up in all four of your segments.
Right interpreted the release correctly, I think you're still looking for refrigerated and Jennie O to be up year over year.
Got it sounded like international down and then I wasn't sure on the grocery side. So I guess, what is that correct and into what is the grocery.
Outlook for the year.
Yeah, Tom I share your assessment is correct, so refrigerated foods ingenio up.
Uncertainty, obviously I mean international segment, you know what's happening in the marketplace and we did call out in our fourth quarter call. The fact that no cytosport.
GP wouldn't be up and so we are still holding to those those numbers and that comment.
Okay. Thank you and just to follow up on the grocery side.
You did call out the headwinds from from rising trend, but it sounds like that that's come in a bit but would you like to take any pricing.
We're going to see any flow through here with me look towards the second quarter of pricing on products that are exposed to trim or did it rollover fast enough that it was not needed.
And that's exactly right I mean, the although the private markets ran off of they Didnt holds long enough for us to take any pricing activity. So we didn't see any in the first quarter.
You know, we don't have anything on the radar right now for the for the second quarter.
And you know the.
The point that you made in terms of it impacting the quarter is exactly right you know we saw that.
In our Chile, Paris and of course since we changed our strategy I know you had kind of a double effect jobs are rising market and that we made an intentional decision to change the strategy and how we went to market itself held pricing and really nothing on the radar.
Okay. Thank you.
[laughter].
And nobody could next question.
I'm pleased to God <unk> from Bank of America. Please go ahead your line is.
Hey, guys. Good morning thing that's happened in the question.
Jim I just wanted your kind of high level thoughts on all announcement yesterday that you guys.
Wrestle Freeport themselves.
Should we read about at all as maybe commodity is gonna start moving up a bigger portion of the business again, because it will provide more that's what opportunities are just just housekeeping about that at a high level.
Yeah, I mean at a high level or this isn't new news to the industry you've seen some other big players already make that make that move.
Yeah, we had it on our radar for some time.
We think that it may sound Solomon saga huge export a bigger ex parte player.
It won't be arrangement, we do think there won't be some opportunities.
The other thing kick in the center that our ability to really make a shift is tied to the sale of the freeze frame off plants, our relationship with whole stone.
Has a vertically integrated supply chain and so now were given that opportunity.
We think that its advantageous for us to do.
And yes, there will be some opportunity coming on board aside thought you know and much shorter term Peter I, Wouldnt say that it's going to be a tremendous opportunity.
Got it okay. That's helpful Linzess switching to the Danielle.
The distribution gains there are a positive volumes moving into right direction, but.
Pricing it was for the industry is still talents and convince me and I think you gave some statistics round.
Cold storage and pull placements, but roughly.
In Turkey, and particularly for me pretty weak so just any thoughts there and what's it wasn't affected with that kind of accelerate.
No I mean, I think it's really you know that's more of a seasonal issues seasonally lower I think that's a market conditions are the fundamentals that that were describing our positive.
Yes.
So it's nice to have the market fundamentals positive. In addition to the positive work being done in the business really the things that that we can control you know as we talk about delivering excellent results across the supply chain fly for adoption manufacturing the improvements in lean ground, Turkey, failing and.
Any linked to gain back that distribution so.
In my prepared remarks, Peter really talked about the momentum that we're seeing in that business and for US. That's right. That's really the key takeaways here in a lot of things moving in our direction and that's why we're optimistic.
Great. Thanks very much.
Thank you.
Next question from headed Johnson <unk> Johnson.
Please go ahead your line is moving.
Thank you for the question good morning.
I Wonder if we could talk about China, a little bit. So you mentioned that the majority of your signal a of your employees.
Are still I'm not talking what do the quarantines and transportation issues, but I just wonder if you could give us a.
A closer look at like what have you seen over the last.
We could so has there been any improvement in that cadence of signals or does it seem like.
The country. This is still largely.
As it was a week or so ago.
Yeah all of our reports have there are that it as it was a week ago, and probably even slightly see hopeful for that.
What we were describing is the largest portion of our sales in China, our foodservice sales.
And you see multiple reports and where no difference that foodservice industry has essentially you know come to a halt in China.
And so not only are we having the demand side you know.
Service, where there are opportunities you know, we're seeing some retail shelf stable items, we talked about spam and skippy peanut butter.
Supply side and getting the plant to produce those products get that up and running has been an issue as well so you've got it on on both sides of the supply and demand equation.
And again as well as we said you know we understand where we are gay.
Problem is really forecasting.
When do we see blended leasing it start to change as you know if it changes in the back half a year and you get a a pipeline fill well that that can change the pessimistic in a hurry, but it's really too early to call. A vaccine original question, we haven't seen anything noticeably different here in l.
The last week or kids.
Oh, the follow up to that well I've read some things that we're talking about restaurants like how long.
Their inventory at all because they're not opening or they need to selling or those that so we talked about the second half potentially having a pipeline. So I mean is that correct in saying that you could we would have not on the pipeline fill up the retail level, but a pipeline. So things are those who is at all.
Makes sense to think of it that way.
Yeah, I think when we're talking about the pipeline itself and we are thinking or from a telephone service perspective since I know the bigger part of our business.
You know you've got people who are emerging from this quarantine that's foxtel health one of the things that they probably all I can do and resuming their normal day to day license going back to eating out so.
Yeah, I think that's a good way to think about it it's just the uncertainty around timing.
Okay. Thank you so much.
[noise] and though we think our next question from Ben Beone venue.
<unk>.
Please go ahead your nines.
Good morning.
Yes.
I want to ask.
For the last several quarters, you guys have leaned into less inventory, a little bit and bought in advance of what you needed in light of opportunistic.
And in some of the prime loans that you typically buy.
But with Belize, having been depressed as in late what kind of opportunity does that give you and when we look at the elevated still elevated inventory in this quarter. You just help us think about where your inventories that today versus the comments you might have made a quarter ago.
So you can talk across the prime on site will be helpful.
Certainly Ben.
First of all we have been building inventory because as the transfer of production from Fremont into other facilities. So part of that was just a safety stock. If you will to make sure that if there's any.
Slowdown in the start up of those lines, we have plenty of inventory that you're right. You have been building building inventory in anticipation of hiring is up costs.
[music].
In some cases is dedicated to the closely fourth trim for arose but it never cases.
It's actually hurt the decrease of the belly prices you know the belly prices that.
Closer to $1.40 at the end of the first quarter are now down to $92.
$48 dropping though those belly prices is not expected at this time frame. So we'll continue to make decisions you know and determine case by case as to what were seen in the marketplace. This volatility that were seen as is making it harder to try and lubricants.
About the that's the time that you think that you. This is the time to build inventory on on Bell either Bacon for instance, you see this kind of dropped and in Belize, and it's a difficult pass the word stayed on top of goods and trying to use or.
Best knowledge as to what to build and when to build.
Okay, Great and then I'm asking a follow up on Sadler just seems like a nice said in your portfolio.
How representative would this deal b of the types of additional deals that you would like to do given the additional balance sheet capacity that you have.
And then.
How representative would it be from a purchase price perspective, and revaluation of what the landscape looks like and or the pipeline of deals that you'd be looking at.
Yeah.
[laughter] on SAP, because I mean, when we evaluate our fees. These deals the pipeline on a deal by deal basis, you know, we've talked about our ability to doing bigger deal and that remains and you know are we willing to do a bigger deal absolutely. One it's kind of you know rights deal and you know we've got.
I haven't come to market and you've got to be only get into the finish line. You know we like the also I like the Sadler steel just like we like upper deal like we like the Foxconn any deal.
Yeah. That's the beauty of those deals is it really is you know one on one negotiation that relationship that we filled over time, they've been a supplier for over 20 years. So you really know that people you know the business they know us.
So in that representative of the deals we'd like to do.
Absolutely.
And we can put it into a very strategic part of our business and food service.
So where.
We'd like to do a bigger deal sure we do a bigger deal absolutely you know, but if we have deals like Sadler spontaneity Burke that come along on a regular basis and we'll take them all day everyday the the item that I would add on this then is that it's not only the quality of the deals that would you look at the purchase price that.
The tax benefit you're talking about a deal that was gonna did the EBITDA multiple was about nine.
And once we get through purchase accounting, we see this is a two to four.
Two to four cents per share accretive to the business. So it's not only a great strategic fit that we were able to get this it.
At a reasonable price.
Alright, great. Thanks for the comments and good luck with rest of the here.
Thank you.
Thank you know we've taken next question from Ken Zaslow from Banco someone Jan.
Hey, good morning, everyone nineties.
It just the overarching question first in it seems like its money environment, the volatile lower than you would've expected does that mean that you'll get the timing benefit later in the year in generally you should get a tailwind. It just seems like if I go back to your original expectations across the board.
Sure in better shape than you started is that not put their questioning is just a timing issue.
Well I, we've talked about this before when you're seeing this kind of volatility.
It's going to move profitability between quarters.
You don't even since the end of the first quarter, you've seen the carcass value dropped $12, while hogs that will be dropped $3. So we're getting into a more favorable market condition that we certainly had in the first quarter.
This was a very unusual market condition.
Especially with the structure in which we buy the majority of more raw materials also basically the carcass value.
We didnt see the benefit of the lower.
Spot market, because we do not by a majority of our raw materials that way, but still we were profitable.
In the pork operating area I think our structure is sound.
We have built inventories were trying to take advantage is four buckets. So we believe that we're in a good we're in good shape going into the rest of the year.
I just would have thought you would have been a little bit more.
Positive given the environment.
My second question.
It's on a groceries can you talk about possibly came in lower than we would've expected can you talk about our their trends with it isn't the peanut butter side, what do you really.
Preventing institute to regain its margin structure.
Yeah. So okay I'll just tend to tack onto the first question, Yes, and I I think you know Jim gave a great answer how we're thinking about your comment around you would have been more optimistic.
The kicker and all of this is just that volatility that we saw in in Q1, and then how does that play out for the balance of the yourself, what a good position, but we really can't predict that volatility.
Probably going to the GP question you know, there's you know theres a lot of moving parts. As you can appreciate you know and obviously spans ops are great start if the trend continues it will be our sixth consecutive record your sales.
It didn't make a shift in Chile.
Where you know we've we've moved some of the promotional activity into the advertising to really supports the brand talk to consumers and we believe it's going to be a longer term benefit for us and retailers. So that that's a work in process Megamex continues to perform while you mentioned skippy and yes.
He is having a a dramatic impact on the profitability of grocery products and it's all tied back to you know the deflationary price action that was taken and so that is still a work in process and we and our team is focused on customer by customer revenue growth management.
Making sure that were actively spending those trade dollars, you know and having advertising to support the brands continuous innovation.
And then you know as we saw in the first quarter was going to input costs out volatility that can create noise and ways in the here, but you know there with all those moving pieces and GP me. The fact is we have work to do that we've got work to do to make sure that we keep skippy on track, we haven't worked to do to make sure that we execute.
Shifting that truly strategy. So we do that and we'll achieve the results that I talked about in the fourth quarter, which was a an increase year over year net of net of Cytosport. So I mean I get that there's there's a lot of moving parts, but you know we know we have work to do business still has a lot of favorable parts to it.
To think about.
Yes, I appreciate you guys.
Okay.
No. We can't go next question from it all back Moscow from Cody.
Please go ahead your I, Yeah, Hi, there Rob I.
I guess I'm.
A little confused as to.
Hi, how your your how the next few quarters, she Bob significantly a well enough to.
Office had when I think was not an operating profit mess in first quarter.
I don't see how.
Surely makes up for them.
Not could be not the Super Bowl for the rest of the year it sounds like could be.
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 are you, saying that just the commodity environment is just much more favorable now you have better visibility in its first quarter was just if you look good for awhile and then it and then it didnt shape up where you thought it would.
But now it does so these refrigerated really carrying today for the next few quarters.
Yeah, Rob Kearney going back here in your opening comments I mean in total our pre tax earnings you know met our expectations for for the first quarter, you know GP clearly did not meet our expectations refrigerated desktops exceed it.
International was slightly below what we thought.
But as we think about the rest of the year you know, we do think I cant, what you're saying about the Super Bowl, but you know if the idea of making sure that business is not entirely focused at one part of the year. We know that consumers are using Chile threw out a year, we need to make sure that were reminding.
We're increasing that philosophy and frequency. So we do believe that that's an opportunity and that's why we shipped into strategy.
But refrigerated foods, its that'd be a critical piece.
For the balance of you.
Jennie O Turkey store remains a critical piece for the balance of the year and we have nice momentum there.
Scott or due to what we said we would do in GP for the balance of a year to get the results that I've talked about and then you know really the wildcard. The uncertainty is international you know and what happens when does it happens a lot of timing issues.
So I mean, as we think about the rest of year, we actually we still 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 no. I mean, you are right relative to market conditions have turned drastically in refrigerated foods.
And as you've seen the cut out dropped $12.
The spot market on hogs is only drove $3. The perfect conditions that are unfavorable to the pure pack or are favorable to us.
As I take that importantly important issue as we go into the future quarters. This is really this is the markets that were structured for.
Okay got it now and in fresh pork did you say that it was profitable in the quarter.
That the commentary.
Yes.
Okay can you give us a rough estimate how much or.
It's profitable fine.
It was profitable in.
Even in the market conditions, but we're faced with that was the it was a very nice performance right.
The pork operating group.
Okay, all right well, if you need me de Chile during the summer I do that so I'm happy to help so thank you know he actually dogs, so gennum Paul for us.
Got it you've got it half right there Greg.
[laughter].
Thank you and your next question from Mike Levy from my family.
Please go ahead.
Good morning, Thank you.
Why don't we when you look at the International Secondly, you've had some strong volume and sales growth, but obviously that was down significantly.
Can you just give a sense of how much that's a proxy for how a broader and stuff outlook maybe.
In fact might look and and how would you compare and contrast, what you expected in the business more broadly.
Yeah, I think it's in line with what a you know south impacts with me you know we saw run up in raw material costs and.
We took a corresponding pricing actions, which are always tough to get through as quickly as you'd like.
So we you know we saw that in our business in China.
We've been seeing that into the business in Brazil as products has been export it out and markets I've lived up there as well so.
Right.
Q1's, probably a good proxy for or what we would expect feeling that the key is going to Mississippi that we take pricing and you know we all know that it takes time to get that pricing and the pricing that we did take in China retail and foodservice.
You know as it was flowed through up until the Corona virus, we didn't see a significant drop off in volumes.
Well.
So I just want to make sure I understand your answer so.
In the quarter, you're reporting theirs.
Let's grown a diverse impact or very little and it's just that the.
Pricing had and.
Them in the timing that covers the input cost pressure. So it's it's kind of that front end of the lag is at the right way to think about it.
That's exactly the way to think about it.
Well I guess, what's next.
The a pretty steep decline how quickly does that rebound and you know maybe in a hypothetical ex Corona virus view anyway, what would you expect them, maybe more importantly, tying it to your refrigerated foods segments.
Hum how should we think about the parallels it's if you see that cost pressure flowing back here, what we know more more broadly would that 20% EBIT decline be the right expectation for that first quarter before but the pricing really gets input.
I don't know that I don't know that you're.
I don't know you want to take about a direct correlation I mean, you've had a lot of moving parts in China.
And there's still a lot of on answered questions in terms of what's happening with their supply there are heard in China.
No I wouldn't use it as a direct proxy for for the U.S. at all you know 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 to the exports, which are covering down and assess applications right there, they're going to be up 15% for 20 Twond. So.
I don't know that I I went to keep that isolated to keep trying I wouldn't carried over to the U.S. No. This is this is isolated in China.
As Jim said, we're watching the fundamentals very closely.
The increase in supplies and salads with the amount of exports that what's expected now I will point out at that level of export was really.
[music].
Earlier, we don't know what it will look like.
Based on the conditions and in China.
There's a record cold storage levels.
And so we think the fundamentals are solid domestically for the so the fourq industrial and are improving significantly for the Turkey industry.
Well then then 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 pretty modest.
How much acceleration should we expect institutes isn't going to be more likely to be more similar to this quarter or what's the catalyst for early pushing that further.
In terms of don't sit balance of the year.
Thank you forget here's what's difficult to too.
Forecast.
Belize were close to that.
At least at the beginning of the quarter and ended the quarter were close to the same price.
But they move $70 during the quarter.
It's that volatility that is creating a difficult environment to really forecast.
What the changes in how solid the changes.
We have seen a lot of volatility we believe they started to yourself, what we haven't seen as a long term trend.
And.
Until you see the trend.
Really developed.
It's tough to two made it just through the volatility and Michael just at a real at a higher level you know as we've talked about a couple of times already for the full year, I mean, you're thinking about refrigerated foods and Josh.
Delevering to offset the international downturn and then you know she can give you doing what we need to do so I mean refrigerated foods in jobs will be important for us for the balance Leo.
Okay. Thank you very much.
Thank you May now be Pico next question from Middle Class Buddy.
From Oppenheimer.
Please go ahead your line is open.
Good morning, Thanks for taking my question. So two quick ones. So on the Jennie O business I just wanted to get a sense in terms of where we are in terms of regaining some of the distribution you off last year and then on the Skippy side I understand obviously, you're still lapping some the headwinds from last year, but wanted to understand if there's any change in their competitive dynamics that we in the peanut butter.
In other words.
Yeah. So.
The distribution gains your franchise continues to be incremental right I mean, so the team's doing a really nice job gaming in fact distribution retailer by retailer.
You know why the things that we've talked about a couple of quarters ago.
That's.
That continues to play out as Pat you know we are seeing a.
Four percentage points better growth in retailers, who are selling and distributing the Jennie O brands. So that's where out telling your story to regain that distribution. There's a really good story to be told and our teams doing that and it's an incremental gain insight is going to take some time when I see you can see and the results.
Yes, it's really playing out.
Yeah, we haven't seen any additional change to a competitive activity since the deflationary pricing actions you know as we said, we're lapping right coming.
End of Q2, and so you know were hopeful that weekend returns through you know a sense of normalcy and growing the business that we do in terms of innovating brand building and.
You know driving with US today, we know how.
Great. Thank you.
And now be Pico next question from Eddie can license from Buckingham Research.
Please go ahead, Sir your line is.
Yeah. Thanks, everyone I know, we're running out of time, so I'll make up I'll make a pretty quick thanks for.
Sneaking me in here so.
Okay.
The you know the recovery and jobs are actually really encouraging I think it's been the longest down cycle in Turkey the art.
Well I've seen on a long time.
So can you give us a little better flavor just to dive a little deeper into the recovery.
Have we seen you know actual capacity reductions by you know the industry, obviously, we're seeing.
You know placements.
Egg sets and stuff going down but is it for real and other competitors more rational.
Yeah, you know them than what we've seen maybe in the pasture, just a little more detail and that would be helpful.
Yeah, I think a key thing Eric and you're talking about a really good fundamentals right. I mean, we're seeing favorable fundamentals, which you know what he threatened by the entire industry. So you know how they're doing what they're doing when they're going what all feed into the fundamentals. That's what we're watching and we do see we do see those policies.
It in France.
So you add to that the excellent results across our supply chain Allied production in manufacturing combined with the incremental gains on on regaining distribution.
That's why we're a bit optimistic in when we talked about the momentum that the business has.
Okay, and then I'm I may have missed this this is my follow up you may have already stated this but when do you actually last year over year. The the deflation that you saw in peanut butter pricing.
That's at the end of Q2.
End of Q2, so Q3 will be more will bite at least apples to apples on that on that factor.
Exactly we should start getting a clear or read on the business.
Okay. Thank you.
Yes. Thank her.
Thank you and I would take go next question from Adam Samuelson Goodman.
Equally.
Thanks, Thanks for squeezing me in maybe.
Fixation.
Clarification question.
In refrigerated you alluded to a higher commodity profits in the past youve given some dimension to changes in commodity Proppants anyway, you can frame that this quarter and also you said you took some hedging losses on.
Might come out in the queue bus any great way to frame kind of what that the impact that list.
Well, the commodity margins or the commodity margins the pork operating margins were in line with our long term.
[noise] profile.
Okay, and then I just.
In the refrigerated business and the commentary, but in the press release and on the call today I didn't hear any mention of Columbus or or fund many any just characterization of how those businesses consistent.
Okay. Thanks for breaking those out.
Yeah, we get that a lot of other things to talk about.
Yeah, then they were really pleased with the work being done by our daily group, specifically with the Columbus brand.
Had a great holiday season with the Columbus are you probably saw the announcement that were yeah. We're building a new facility and in Omaha, Nebraska that supports the growth of that brands, but instead of things are are going really well.
Same thing, let's flip Flopping me you know Weve put in a new line there last year, because we needed they expanded capacity our foodservice team has really taken that business and run with it just the way we designed to strategy. So.
Both those businesses are very healthily in great shape.
Okay I appreciate the color. Thank you.
Thank you know we pick my last question from Rebecca showing among some money.
Please go ahead.
Good morning, Thanksgiving, So real quick I know lower profit margins in the grocery products like Matt.
Hmm is anyway, you can somewhat quantify the different factors that you you talk about right. That's some sort of having an impact when we're buying from a contract manufacturing high raw material costs et cetera.
Because I know you can kind of help quantify that and unrelated to that.
No 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. So I would think it would be margin accrete that.
The divestiture, unless you're talking about stranded overhead or something in that regard.
Clarity guarantee Grayson.
Yeah.
The two biggest issues are the impact of the contract manufacturing business. You know that that has been a difficult business and then the second part would be the run up in the wrong, that's really all.
Costs for the for the cycle.
It's really are the two things.
Really you know in terms of your your second part of your question.
Yeah, we can have lace and follow up with your give you a little more detail, but there's there's really not anything.
If any magnitude et cetera that are impacting it leftover from the cytosport divestiture, but well have been follow up if you look back at.
Okay sounds great just real quick then so the the contract manufacturing is is that something that's gonna drag throughout the remainder of the huh.
Yeah, I mean, we've we've seen that recently trend trend down you know just as a reminder, it it's not a business that is I'll say strategic for US. It has been more of a capacity site and so it does it does ebb and flow, but to me that the key takeaway is that it has trended down in it and it's been a a difficult.
Yes.
Okay. Thank you.
Thank you it appears that had no further questions at this time mistakes me I'd like to turn the call back to you for any additional color think Tonight.
Great.
Well. Thank you all for joining us today, we're off to a solid start in Q1, and we know that we must continue to execute our plan for the balance of videos.
So our team members on the line my sincere thanks for everything all of you do to keep our company uncommon.
Great day.
This concludes today's call. Thank you for your participation you may now disconnect.