Q3 2019 Earnings Call
Ladies and gentlemen, you're on hold for today's Hormel Foods third quarter 2019 earnings release conference. At this time, we are still assembling today's audience and planned to be underway. Shortly we appreciate your patience and I say you police continue to stand by.
Good morning, ladies and gentlemen, and thank you for standing by.
Welcome to the Hormel Foods third quarter 2019 earnings release conference call. At this time, all participants are need to listen only mode.
Other minor this conference is being recorded Thursday August 22nd 2019, I like turn the conference over to Nathan and this director of Investor Relations.
Please go ahead Mr. Janice.
Good morning.
Welcome to the Hormel Foods conference call for the third quarter of fiscal 2019.
We released our results this morning before the market.
Around 630 A.M. Easter.
If you did not receive a copy of the release.
You can find it on our website at <unk> Dot com under the Investor section.
When our call today's gyms me chairman of the Board, President and Chief Executive Officer.
She is executive Vice President and Chief Financial Officer.
Jim C. will provide a review of each segment performance for the quarter and our outlook for the remainder of 2019.
Jim She N. will provide you pill financial result in further assumptions relating to our <unk>.
The line will be open for questions following Jim chance remark.
As a courtesy to the other analysts please limit yourself to one question what one follow up.
If you have additional question you are welcome to get back to you.
Audio replay of the automobile they'll go beginning at 11 A.M. today Central standard time, the dialing number is 888.
204.
4368 in the access code at 815 600 zero.
It will also be posted to our website and archive for one year.
Before we get started I need to reference Safe Harbor statement.
Some of the comments made today will be forward looking and actual results may differ materially from those expressed in or implied by the statement maybe.
Please refer to pages 35 to 41 in the company or 10- Q4 the quarter ended April 28, 2019 more detail.
It can be accessed on her website.
Additionally, please note the company uses non cap result to provide investors with a better understanding of the companies operating a coupon.
By excluding the volume and sailed impact other titles sports divestiture.
Discussion on non gap information is detailed in our press release located on our website.
Please note that during our call we will refer to the non gap result, as organic volume.
Organic sales.
I will now turn the call over to Jim neat.
Thank you Nathan.
Good morning, everyone.
Hormel foods isn't on a common company.
Unique in our industry.
We have a tenured management chain.
Oh is able to quickly adjust your dynamic.
And volatile market conditions.
A balanced portfolio a branded products so treated the retail food service Kelly and international channels.
A direct sales force that is able to build and maintain relationships to help our customers grow their businesses.
Hey reputation for bringing industry, leading innovations to the marketplace.
As an increasingly at giant any efficient supply chain.
Our financial position and business fundamentals remain strong.
This enables fast should deliver grow organically and it's very strict dziedzic acquisition.
Our leadership position as a global branded food company allows us to take a long term perspective.
As we navigate near term uncertainty related to various market conditions.
Our third quarter results demonstrate many other qualities that make us that uncommon.
This morning, we announce earnings per share of 37.
Eight 5% decrease compared to last year, but in line with our expectations.
The decline in earnings per share was driven by a higher tax rates.
Pre tax profit screw 1%.
As excellent results from refrigerated foods offset declines from grocery products.
Yeah sales decline, 3% do today best pitcher Cytosport.
On an organic basis sales were flat on a volume decline of 1%.
Looking at the segments refrigerated food sales increased 1%.
Volume decline of one per cent.
Segment profit increased 13 per cent.
Driven by higher value added profitability.
Well, we're operational costs and higher commodity profit.
Beta smaller role in a profit improvement.
Refrigerated foods achieved record third quarter net sales.
Value added fails.
Segment profit.
And value added profit.
This was quite an accomplishment by the refrigerated food aid.
Our Hormel Foods service Division had another solid or.
The team continues to leverage their direct sales organization object real brands, such as Hormel Bacon, one Carmel fire braids natural choice.
Pacini and old smokers.
I remain impressed with the innovation this team continuously delivers to the food service industry.
They are also making excellent progress.
Filling the new capacity or pre cooked bacon and five to any any product.
We remain very competent and our ability to grow the applegate bread.
Our food service team is making great progress growing applegate with healthcare providers colleges and universities.
He's operators appreciate the point of difference.
The Applegate brand provide for the needs of their patrons.
For example.
The Applegate Landenberger is filling in need in the college and universities diagonal.
Astuteness looking for more ways to enjoy natural and organic alternative protein product.
The New Hormel Valley Solutions Division continues to pursue his vision.
Helping retailers create the deli up the future.
Mm.
While the Columbus spread and our prepared foods portfolio of products are showing call it grow.
The lower margin behind the glass category continues to decline.
Consumer preferences are changing.
Shoppers are looking for more convenient options in fact, just grabbing go products like our Hormel gatherings party trade and our our authentic line Columbus Charcuterie.
While this shift away from that behind the glass category presents a near term challenge to sales volume.
I'm confident the ongoing <expletive> .
Benefits the consumer the retail or add to our company over the long term.
As category leaders, we took price increases across many of our branded value added products. When we started to see sharp increases any input costs.
During the third quarter, we were price high relative to others and many retail category.
Which created higher elasticity is bad and we would typically expect.
What higher input costs did not materialize as forecasted.
We realized our pricing to more closely match the commodity market.
Once again.
Refrigerated foods has demonstrated an ability could generate growth in volatile market conditions.
The long term growth for this segment continues to be driven by value added products.
Discipline pricing.
And a clear focus on innovation.
Well, we have seen how rapid changes in input costs can create noise in its quarterly results pit clarity focus.
Refrigerated foods demonstrate.
We'll continue to deliver sustainable growth.
Grocery products volume declined 10 per cent.
Well sales declined 11%.
Organic volume sales increased by 1%.
Segment profit declined 30% year over year.
Due to the divestiture of Cytosport.
Higher avocado costs for our Holy Guacamole business.
And lower earnings from our Skippy peanut butter spreads business.
Similar to what we experienced in 2017.
I'll ocado costs increased by over 100 per cent during the quarter.
A smaller, California crop and a strong global demand are driving the avocado market prices.
In response.
The Megamex team is actively managing promotional tactics.
And we'll be evaluating pricing as the new crop is harvested during September .
As always we continue to focus on growing the Holy Guacamole brand through effective brand building.
Advertising and innovation.
Our skippy spread suspicious was negatively impacted by the price decline, we took last quarter interest spots both competitors deflationary priced.
Well, we are disappointed in the category dynamic.
We remain focused on building the sticky brand.
True revenue growth management effective advertising and continued innovation.
He resented for acquiring the skimpy brand was to deliver out of the jar innovation choose a category.
A recent launch a skippy P.B.M. jelly minis has been met with great retailer and consumer acceptance.
<unk>.
Live item.
Sold in the frozen section.
Is versatile.
Portable and perfect for today's busy families.
We have now reached national distribution.
At a trial and repeat rates continue to improve.
I'm very optimistic about the success of this product.
While skimpy spread hallway guacamole had a difficult or the balance at the grocery products portfolio performed Wow.
Many of our center store brands such as spam.
Pinkie more air Jazz Black label, Bacon, Bad and Hormel complete.
All had a great Porter.
I fully expect all of these brands will show growth for the full year.
Jenny O. turkeys store volume decreased or per sad well sales feet braced 5%.
Segment profit decline nine per se.
Due to lower value added fail.
As we discussed last quarter.
We are reactivating promotional activity to gain back loss retail distribution.
Well, we continue to laugh distribution losses, we have had a few small with.
We expect the process of regaining distributorship will go well into 2020.
Over the last few months, we have made changes to the Jenny organization to bring in several experienced leaders from other parts of the company who are charged with restoring row.
True new and bold ideas participants.
From an industry perspective, we continue to see lower pole placement, but cold storage remains that elevated levels.
Turkey market prices have not materially changed since last quarter.
International volume in sales were flat.
Organic volume of sales increased 2%.
Well segment profit was up 1%.
Our team in China delivered strong results driven by our food service business. In addition to growth from Mississippi and spam for it.
Exports continue to be affected by global trade on certain key.
Related to African swine fever and terrorists.
Similar to the prior quarter.
The uncertainty in the protein industry is related to the outbreak of African spoiled people.
On our second quarter call.
We discussed our view that commodity markets would start to increase on higher demand or or from China.
While we have not seen consistently higher prices.
We have seen higher volatility and expect that trend <unk>.
As we evaluate the global impact of African swine fever.
We are still confident that pork markets will eventually increase.
At the appropriate time, we will take the necessary price increases to manage our profitability, which may create short term marginal come crashing.
As pricing generally lacks input costs increase.
Taking all factors into account.
We are reaffirming our full year guidance public dollar 71.
To $1.85 per share.
We are also reaffirming our sales guidance of $9.5 billion to $10 billion.
But expect to be on the lower end up their range.
Given market prices have not increased as we previously expected.
I have confidence in our team's ability to adjust to the changing market conditions and deliver our full year outlet.
At this time I will turn the call over to Jim machine.
Discuss our financial information relating to the corridor and our earnings guidance. In addition to key assumptions for the remainder of fiscal 2000 they cheat.
Like Jim.
Good morning.
That sales for the third quarter, where $2.3 billion [noise].
Organic sales grow through the three of before business segments was offset by declines that Julio Turkey store.
<unk>, where $261 billion up 1% from last year.
Net earnings were $199 million and diluted earnings per share was 37 cents.
Down 5% due to a higher effective tax rate.
A significant increase the tax rate was driven primarily by <unk>. The one sided game <unk> deferred tax liability last year.
The tax rate was higher than we anticipated because of the lower volume of options exercise in the quarter.
The full your tax rate is now expected to be between 18.3 and 20.3%.
Oh from the previous estimate of 17.5.
19.5%.
Yeah, S.G.N.A., excluding advertising with 6.5% of sales compared to.
7.3% last year.
The decline was due to the impact of the Cytosport transaction.
And lower employee related expenses.
Net and allocated expense decline $10 million.
Driven by lower interest expense.
Yeah, Universal stock option expenses in the prior year.
Advertising for the quarter was $32 million.
Down from $40 million last year.
Advertising investments are expected to be lower primarily due to the sale of cytosport.
Operating margins, where 11.2% compared to 10.9% last year.
Strong results in refrigerated foods unfavorable S.G.N.A. led to the improved performance.
Year to date cash flow from operations was $573 million down 23%.
The primary driver was increased levels of working capital.
As we build inventory in anticipation of higher raw material costs.
This thoughtful approach to building inventory should mitigate some of the input costs volatility as markets rice.
For the quarter capital expenditures for $67 billion compared to $103 million last year.
We expect to spend approximately $250 million in 2000 and like G.
Weather delays and changes in project scope impacted the projected capital spent.
We paid to 364 consecutive quarterly dividend effect of August 15th at an annual rate of 84 cents per share.
A 12% increase over the prior year.
This completes or 91st year of consecutive dividends.
Jerry purchases in the quarter, where $107 million, representing 2.7 million shares.
We will continue to repurchase stock to offset dilution stock option exercises.
And based on or in turtle evaluation.
Or balance sheet remains strong.
That allows us to fund the strategic investments to grow the business.
Plendil battles of the Turkey industry or mix.
Oh placements are down 4% year to date.
Breast, beating cold storage is about last year in the five your average.
Turkey prices remained above $2 for the quarter, a 10% increase for last year.
Oh birds were seven cents above the prior year.
But remained below the five your average.
Feed costs for the quarter with similar to last year.
Oh bicoastal prices are expected to decline through October , but we've made a boat last year.
We will have better visibility as the Mexican crop was harvested in the next few weeks.
Pork input costs, the third quarter did not dramatically increase as we forecast of last quarter.
Cold storage reserves in China.
[noise] uncertainty caused by global trade dynamics.
And robust hug production likely contributed to lower markets.
The U.S.D.A. cut out traded between a wide range of 72 and $89 for 100 weight.
During the quarter.
Never reach you never forecasted level.
Bugged markets exhibited similar behavior trading between 68 and $85 per hundred way.
Really prices for the quarter were significantly below the forecast.
Trading you know 49 dollar range between 127 and $176 for 100 weight.
Trim briefly met the forecasted eyes before dropping 40%.
The third quarter, clearly demonstrated our team's ability to manage through extreme volatility in port commodity markets to deliver results in line with our expectations.
The guidance for the fourth quarter assumes higher prices berkey inputs with potential for volatility.
Like we experienced in the past quarter.
The overall fundamentals they'll support I sustained high cost environment import bark, but.
Beginning as soon as the fourth quarter due to African swine fever.
Bugs supplies in China.
Southeast Asia and now regions in Europe .
Are being affected.
The exact timing of magnitude at the impact remains uncertain.
We will provide a detailed view of market assumptions and the outlook for fiscal 2020 on Nov call.
We were making significant progress project Orion.
And our one supply chain initiative.
For example, we were in the process of opening to new distribution centers in the coming months.
Oh, what a combined basis.
We will save over 3 million miles in our grocery business Oh well.
Project Orion will unlock more opportunities for cost savings similar to this project.
The team is focused on implementing major phases related to finance.
H.R. in supply chain.
During fiscal 2020.
At this time I'll turn the call over B. operator for the question and answer portion of the call.
Thank you.
The question and answer session will be conducted electronically if you'd like to ask a question. Please do so by pressing the starkey followed by the digit one on your touch tone telephone if you on a speaker phone. Please be sure. Your mute function is turned off till your signal to reach our equipment to allow everyone an opportunity to ask a question. We I say you. Please limit yourself to one question with one related follow up once again, please press star one to ask the question.
Yeah, we'll take our first question from <unk> <unk> with Oppenheimer.
The morning. This is actually <unk>. Thanks, a lot for taking a question.
No.
Thanks.
I see my hair down you know nearly 15% that's quite I and she's having a better understand you know what the estimate <unk> <unk> <unk> <unk> <unk>.
You know, what's driving that performance in hiring thinking about that deep depends opportunities going forward.
Well, we think good morning, we take that the Runrate will be.
Generally lower than it was in the fourth quarter of last year.
Because primarily because of the cytosport.
Sail.
Okay.
And then I mean, given a lot of moving <unk> tend to say just for you know to Skip Beach Anyhow African <unk> you know just wondering about any thoughts you can provide on you know it's called 20 at best.
Juncture, you know just any any protect takes me should be thinking about would be helpful.
Yeah. It is early for 2020, given the the uncertainty in the volatility that we've seen in in the markets but.
You know as as we think about all of that different segments.
Refrigerated foods continues to be very well positioned and you know they've demonstrated their ability there long term ability to grow in volatile markets across food service.
Retail.
You know grocery products, although we had some noise in a quarter a web avocados.
We remain positive on on many many of the brands and of course, you know we could have some input pressure there, but I think that the longer term friends story and the insights wet innovation have us boys to for for growth.
You know just continues to make it work in progress as I said in my prepared comments you know, we've we've had some small wins, but we do expect the recovery to to spill over well into into 2020.
Stabilized and and now we do need to get back to grow.
You know international is obviously, a wild card on certain T. based on an African swine fever in tariffs, but where we're optimistic about the business that we have in China, you feel like we can reflect pricing too.
Accommodate any of the input costs that we have and then also the spam in skimpy businesses that we've developed are very strong.
And then you know any any conversation about our business has to has to finish with a strong balance sheet. So we are poised for m. and they were always ready to make acquisitions when when the time is right, but it. It's early for 2020, given some of the uncertainty in the market place, but you know we are confident in our ability to grow over the long term.
Okay, great that's how apartments just too much.
And next will go to bend the end of the newest Stephens Inc.
Keep the morning, I want to ask a clarifying question about the guidance for this year.
You said that you expect full year sales type guidance to be toward the lower end of the range.
Yearnings guidance for four Q. was quite why would you expect the P.B.S. guidance to reflect your commentary on the sales guidance.
Yeah, No I don't think that's a fair Harris option fan I think from a from a top flying perspective, you know it. It is how we are pricing and as we mentioned in the prepared comments L.S. market did not materialize the way we thought.
The we did realign pricing in the quarter to make sure that we remained in a very competitive position. So I think that the sales Guy who says one thing and it has different from the earnings guidance.
Okay great.
Go up on the pricing and.
Can you help us think about how you think about using trade promotions and to reduce the pricing increases that you had put in place versus actual list price reductions, particularly in an environment where input costs are involved.
Then over the last several months.
Yeah, I mean, yeah.
Thing is it is unique and different retailer by retailer and you know we've talked about that over the last several quarters about how that's important to engage our direct selling organization with what the customers.
To understand what the optimal solution is for their customer base and so yeah. When we do move promotional dollars or tray dollars around to make sure that that we've got them price properly.
<unk>, we work closely of course to make sure that the shelf price is reflective of of where it needs to be.
But I mean, we again, depending on the situation, where we're willing to invest the tray dollars, but it is a customer by customer decision.
Okay. Thanks.
An x. or go to other Jones with Heather Jones Research L.L.C.
Good morning, and thanks taken a question.
You go back to the comment you made about.
Material like you were talking about castle, you said gosh.
And so I was just wondering if you could.
Well I sat out more of a which segments are you building raw materials and like any practical limitations I mean.
Do you have the capacity Hmm.
No substantial raw material I'm into words that could cover.
Portions of 2020 or is it.
More limited <unk> Wonder if you can help us to understand that more.
Certainly the inventories really be built in the refrigerator G.P. and international areas.
Are there limits, yeah, there's a supply limit as to how much you can build inventory.
We take a look at the trends that we believe are going to take place and we build selectively.
Yeah uncertain commodities in certain finished goods.
Okay.
Thank you and then my next questions on Jenny.
Yeah.
That the recovery is going to.
Spill over into 2020.
So.
Hi, there and your efforts to regained distribution I would assume you have to be somewhat sharper on price.
I was wondering.
It's the anticipation that that would be.
Only for like a year or so or how how long do you think you would have to lock it into place.
To regain the distribution I basically trying to get a sense of.
What kind of like are we see Jenny recovering with water protested markets over the next year or so.
Yeah.
As we said.
This does remain a desperate <unk> a distribution issue you know our velocities, where we're in distribution remain very strong you know we have had some small when it says I sat in my prepared remarks. So so we are gaining some momentum.
Yeah, we've turned on advertising and select markets.
And will be will have the opportunity to evaluate the effectiveness before expanding.
I also mentioned in my prepared remarks that we have brought in.
Some additional experience sales and marketing leaders from other parts of the of the organization to really jump start that business, but it's still going to take time and so it's worth thinking about it you know, it's probably going to be men 2020, and you're right. There are some investments that have to be made to regain distribution, but we're prepared to make those investments and really that.
Is that we do feel like Hes businesses stabilized and it is time for us to get this business back to growth.
Okay. Thank you so much.
Yep.
And next will go to Adam Samuel son with Goldman Sachs.
Oh Ya thanks, good morning, everyone.
Uh huh.
I guess.
Just taking a little bit more into the outlook just for the fourth quarter and.
Yeah, there's a wide range on on the earnings side and and Jim I appreciate the comments at the sales and.
Burnings done a stereo necessarily a line.
At the lower end of the range, but just helped me understand kind of the range of outcomes that they get you towards the low and high end of the range, presumably the bigger variable is pork raw material costs, but just.
To tell me think about kind of the range of outcomes as you've laid out in your outlook.
<unk> you hit it right on the head had it is I mean, it is all about the the input costs.
And that will impact you know pricing and of course, the the elasticity is that come along with the pricing so.
You know if if we'd yet some additional false positives like we had in the second quarter that could be problematic.
You know, but the run off an input costs as as you know I mean, it does create that short term marching compression.
But well be aggressive with our pricing as a category leaders that's what we do.
But we know that pricing does lack the input costs. So you hit it right on the head that is going to be.
The primary driver for that range and we do believe that the range is warranted given some of the volatility that we've seen in a in a third quarter.
Okay.
And then.
I was hoping to.
To understand a little bit more.
Digging into 10 to 2020.
The things that are in your control maybe it on project Orion specifically in some of the supply chain initiatives.
How can you quantify how much those actually benefited the quarter on on that basis, how much they're benefiting 2019 on that basis are kind of what you're run rate.
Exiting the year looks like to think about kind of potential savings into 2020 before we then layer on a sales or raw material input costs view.
Sure.
If we go back to my earlier comments, starting starting with the segments.
From a 2020 outlook you know with the food service business continues to be hitting on all cylinders, we feel really good about the L.E.D.F. as the retail business, whether it's our hormel retail business Applegate retail business and we're we're optimistic about all of them. We know that there could be some some of that short term noise that margin compression as a result of input costs, but refrigerated food is really going on a nice round and we expect that to continue you know grocery products of work that the team has done they are around brand building with center, though so our France has been really really impressive.
We do think that you know that the avocado crop that's coming in will have a better read on that probably some more favorable input costs that'll give us some relief there that outside of our control, but what Santa or control is our ability to make sure that we're building that brand for promotion and advertising innovation will continue to do that so so we don't feel good about grocery products.
Probably that the one that outside of our control. The most will be international based on what happens with African swine fever, and tariffs and really the global trade on certain key.
Part of S.N.R. control with our ability to run our business in China, but there are going to be some market impacts.
And you know to their jobs pieces is going to be in our control and our ability to execute the business, so or execute distribution games.
Gotta get that done.
Continue to get that down in the fourth quarter and into 2020.
From from a supply chain perspective, you know, what we're not going to get into the 2020 outlet for that but you know we're committed to the savings number that we gave this year the $75 million.
We've had a lot of success with a lot of projects, we referenced in C.M. machines comments. The fact that we've got our new grocery products D.C. opening that'll save US 3 million miles and there is a <unk> corresponding financial benefit.
We're evaluating our refrigerated foods network.
And you know we've had a better global view of five for performance. So I mean, there's a lot of benefits that we've seen from.
Not only are one supply chain, but project or right and we expect that to continue over the next several years.
And if I could just sneak a one quick kind of follow up the cat backs reduction for this year. There was some timing, but there's also the allusion to project scope changes I mean, how much of that I think it was 100 million dollar reduction.
Really comes in next year versus the actual cost of the programs are there projects goes down.
Yeah.
Vad is timing you know we had a really wet spring here in the Midwest and we've got a very big project going on at bar in so that's shifted some of those expenditures back.
But the one thing I I want everyone to know is that there is not a lack of commitment.
Our commitment to cap expanding and investing in our value added physicists as strong as it's ever been.
Okay I appreciate the color. Thanks.
Yep.
And as a reminder, ladies and gentlemen to join the queue at Star one on your telephone Keypad next will go to Erik Larsen with Buckingham Research group.
Yeah. Good morning, everyone. Thanks for taking my question.
Either Jim can answer this question, but you know we've we've seen just you know a lot of hawk supplies on the market, particularly June and July accept run.
I got a lot of all <unk> <unk> <unk> with lean Hawk pricing.
My My question is.
[noise] are have farmers.
Anticipated S.F. have you do you think there's then expansion in the.
In the Hurd industry, because the S.F. or not or what what might be some of the dynamics that you see going on there obviously, we've got corn prices back down sharply as well, so I'd be meal as well but.
<unk>, what what might be the mentality for a hog expansion that we see out there for the next 12 months and what's happened recently de Sac.
Well I think some of it as a reaction to the additional hog processing.
Caple capacity, that's in the industry right now and they anticipating that capacity increasing they've they've increased their production. We certainly do see that that you know hugs today are about $70.
They're relatively cheap input there's cheap input you as you said the grain as that I.
Low cost basis right now.
So I think there there are encouraged wants to increase the dog production. It's it's in line with what expectations were.
But I think probably the biggest driver was that there's been a.
There has been probably two years or more of discussion about the additional capacity coming on line they've had time to react in those talks are available to us.
Okay.
And then and then you know just so a broader follow up you know, it's it's to your comments Mister <unk>, Jim Oh about your your supply chain efforts in it's it's a <unk>. It's it's a mall tie a year.
You all kind of kind of project in so you've quantified what you thought your supply chain savings would be this year.
Mmm without getting into specifics <unk> is this.
This is something that is you know a mall tie your project is is there.
Is there a way to try to quantify what that might be or.
You know are you in a position you you can talk about that.
Yeah, I mean, I I think when we get into our our fourth quarter call will obviously give a little more color and clarity and then the other variable and has a week continue down the path with project Ryan Yeah, we'll have more opportunities that will reveal themselves, but you know.
The part about testing a multi year.
Project I mean, I don't even know if I would refer to it as a project I mean this is a permanent part a permanent structure that we have in our organization.
That we've needed you know I I cited a couple of specific examples.
We think about just having that global view of of plant performance better meet utilization and then you have some of the I'll say some of the software things about how we're better prepared to approach training and recruitment you know in A.A. environment, where workers are harder than ever to come by it's important that we have one standard approach to how we're doing things and so the the benefits of the one supply chain initiative have been a very impressive and far reaching in the organization on a number of different fronts.
Okay. Thank you.
Yep.
Next we'll go to a Robert Moscow with credit Suisse.
Hi, Thanks, a couple of questions.
The price increases that you took in may or the all reverse now or are there is there any residue of that pricing still on the market.
Hi, Rob the morning, it really depends on the the categories. So you know if you think about what happened and fake and for example.
You know that pricing does tend to re align itself more more frequently and so we've we've seen realignment down and you know the market now he's taken another run back up so.
It's it has moved a couple of times since we last talk.
But you know we.
We know that that's what we have to do to remain competitive.
You know in terms of pepperoni the pricing that we took the air was rail line because the the trend of market did not at all sustain what we thought it was going to do and remains low today.
You know in in our grocery products front, the spam pricing that we took that held but that is that we've really was less related to raw material more other inflationary measures. So it's fairly fan a mixed bag across the different categories, but I mean, we feel good about the pricing actions, we took and the corresponding realignment.
Got it and then a follow up the grocery division I mean, I I haven't seen the margins dip below 11% and a quarter I I don't I don't remember the last time.
I I I think you're kind of hinting around here that hey, a lot of his transitory related to the crop availability and all that but.
Why wasn't the crop availability this big of an issue in second and first quarter for avocados like why why is it suddenly.
Hurting the margin to this degree.
And then as we look forward.
You know how quickly can we assume that a normal crop in September will will adjust the margins higher.
Yeah that that's a great question. So this secondary crop.
Impacts our supply situation primarily in Q3.
And if you go back to 2017.
You know not on an overall G.P. margin structure, but if you go back I mean, we had a very similar situation in 2017.
And at that time, we were very aggressive with our pricing.
And.
Time, we we re evaluated in thought we were going to be in a better position just wait to see what the next crop looks like.
So this secondary crop primarily impacts us c. Q3.
And then in early queue or we start to get a better read on the primary crop.
And so early indications are that that's more favorable so that will have some impact in Q4, but then we'll have the primary impact again in Q1 and Q. too.
Okay.
That's very helpful and it's August so I'm going to ask a question number three here.
Huh.
I I think you you know you you talk about project Orion and the <unk> plight chain.
Efforts and and I get that.
You also mentioned finance H.R.
As well as supply chain as areas, where you'll be evaluating.
Evaluating more productivity.
Can you be more specific on what that means.
Certainly we will be implementing.
A single instance of all of our ear piece systems across fighting against H.R. endless supply chain.
Meaning that all operations will be will be.
Paraded on a common platform will create greater efficiencies in the in the operations. We're also focusing on automation and robotics within certain processes. So those are those are things a project Orion brings to us.
It's going to make us more efficient company in many aspects.
And obviously the the other issue is is the quality of of information and the decisions that we can make.
Based on that data, where before we'd we'd have to mine through multiple systems to get information, where this will provide a common platform. The information will be readily available and we can do analysis across all aspects of the business.
Very good thank you.
And once again, ladies and gentlemen to ask a question. It's star one on your telephone keypad next to go to Thomas Palmer with J.P. Morgan.
Oh good morning, Thanks for the the questions wanted to I guess first kick off just talking about the price elasticity is that you saw on pork products was it as you expected do you think it was a little more severe.
Because you were out of line with the industry and kind of what insight does that give you as you as you think about potentially leering on.
New price increases in the coming year.
We we sought greater elasticity family fought especially and Bacon and pepperoni.
And it really was the fact that the markets did not perform on a continuous basis. So we we reached some points of elevation in the belly market M. a trend market that really put us into action on the pricing front.
What what changed was we took pricing some of the others and the category didn't and then the markets didn't sustain.
And so when that happened we were priced higher than the category, which created those higher than expected elasticity.
And that's where our pricing realignment came in.
We got our pricing realign.
We felt like the elasticities were in line with what we expected Fey comes back on track.
I always say pepperoni is and then you know we did talk a little bit about the grocery products pricing that we held with with spam.
And you know from from spam perspective volume was relatively flat and sales are up 4%.
So if anything that out perform the elasticity we expected.
So as I said earlier, it really wasn't mix bad across all of the the different categories, where we took pricing.
Okay. Thanks for that and then I I just wanted to circle on the avocado side.
So it sounds like you elected not to take pricing in part because you think that.
At least a portion of the severe inflation you're experiencing is temporary.
If you do decide early in the fourth quarter is you get the read through how long does it take to implement pricing when does that start to materialize in in terms of the P.N.L. impacts for him from a cog standpoint that either the the crops favorable or not is this come from the first quarter. We we would see both you know kind of pricing and Cox basket changing.
For the new crop or the timing different than that.
Got it.
Expectancy impact tail end of a fourth quarter really into the first quarter either way you know from a pricing perspective, if we do choose to take pricing, it's very consistent with the other retail pricing dynamics that we see and expect it to take approximately 60 days to get into the market place.
So I came all have a a pretty hard raid on it and in short order and won't be able to make the right business decision.
<unk>. Thank you.
Yep.
Next week, we'll go to Rebecca shoot them in with the morning Star.
So I have a question about the.
Products margin.
Well is there any part of the margin decline there that can be attributed to the sale of the cytosport business or is that.
Entirely explained by avocados, and peanut butter pricing.
The Yeah go ahead, Jim Yeah from a margin standpoint, it's really about the avocado prices in the peanut butter.
Okay, So nothing and awesome cytosport.
No I mean, as we stated the Cytosport would have about a four cents impact for the back half of the year from a PML standpoint, but from margins, it's really driven by the the avocado cost certainty.
Peanut butter and a fee.
In a sense that we have yeah.
Okay. Thanks, and then my second question is.
With this global protein shortage, resulting from Asaph is there any reason to believe that this will improve the demand for Turkey heading into next year.
Yes, I think that's a fair assumption when we need to see how this how this all plays out for this global trade uncertainty and how the global supply reorganizes, but I do think there is a point of view out there that says poultry products, Turkey in particular could could benefit.
So I mean, we'll see how that materializes the balance of this year and into 2020, but I think that's that's a fair assumption.
Yeah, Okay, great. Thank you so much.
And once again it is star one if you would like to ask a question once again star one we'll pause for just a moment.
Sure we have no further questions I'll now turn the call back over to our speakers for any additional comments or closing remarks.
Great. Thank you.
Thanks to all of you for your participation and interest this morning.
While our team continues to navigate near term uncertainty I remain very certain in our team's ability to deliver our key results and finish 2019, and a very strong manner.
Thank you have a great day.
And that does conclude today's conference. We thank you for your participation you may now disconnect.