Hormel CEO sees fall as 'wild card' because of bird flu

Hormel Foods Corp.'s second-quarter profits topped Wall Street's expectations, and its stock jumped 4 percent Wednesday, but uncertainty persists over lethal bird flu, which is hammering the company's turkey business.

Jeffrey Ettinger, Hormel's CEO, said Wednesday he expects bird flu to ease during the warm summer months but called the fall a "wild card." The company's Jennie-O turkey division is "significantly challenged," he said, and its profit margins will fall in the next six months.

Jennie-O, the nation's second largest turkey processor, relies on Minnesota and Wisconsin for its supply, and both states have been hit hard by the highly pathogenic H5N2 virus. It has killed 8 million turkeys and chickens in Minnesota alone. Fifty-five farms that supply Jennie-O have been stricken, which should reduce the company's overall turkey sales by about 15 percent in the next two quarters.

"The sizable estimated loss of volume is not only due to bird losses over the past month, but also takes into account the fact that many of our barns remain empty under quarantine," Ettinger told analysts in conference call.

The bird flu didn't begin to impact Jennie-O until the end of its fiscal second quarter. So, the division did quite nicely during that quarter: Sales increased 15 percent; profits were up 41 percent.

Hormel, the maker of products including canned chili, bacon and Skippy peanut butter, posted overall net income of $180.4 million, or 67 cents per share, for the second quarter ended April 26. That's up from $140.7 million, or 52 cents per share, in the same period a year ago.

Analysts on average expected earnings of 62 cents per share and revenue of $2.4 billion, according to Thomson Reuters. Revenue came in short of estimates at $2.28 billion, but was up 1.5 percent over a year ago.

The company said last month that a dip in turkey supplies would push its full-year adjusted earnings toward the lower end of its forecast range of $2.50 to $2.60 per share. It reaffirmed that forecast on Wednesday.

"If not for the avian influenza incident, we would be talking to you about raising guidance today," Ettinger told analysts.

Hormel's refrigerated foods division, its biggest business, had a boffo quarter, its profit increasing 52 percent over a year ago. The results were driven by lower hog costs and strong retail sales of such products as pepperoni, fully cooked bacon and "party trays" of meat and cheese snacks.

"The refrigerated food [profit] margins were sky high," said Brian Yarbrough, a stock analyst at Edward Jones.

Investors reacted by pushing up Hormel's stock up $2.35 to close at $58.14.

"I'm a little shocked the stock moved up that much," Yarbrough said. Despite the strong quarter, the bird flu threat looms. "At the end of the day, this company raises turkeys, and there's a lot of volatility in that business."

The number of new bird flu outbreaks on Minnesota farms has slowed markedly over the last two weeks. Scientists had expected warmer weather to kill the virus. But they still don't know how the virus is spreading, and expect the bird flu threat to rise again in the fall when the weather gets colder.

Jennie-O's operating profit margins are expected to be in the 10 to 12 percent range in the second half of Hormel's fiscal year.

"That's a significant degradation," said Erin Lash, a stock analyst at Morningstar. Those margins were 17 percent in the most recent quarter and haven't been in the 10 to 12 percent range since 2010.

Weaker turkey profits could last well into Hormel's next fiscal year, Ettinger told analysts.

On Wednesday's conference call, one analyst asked Ettinger if the company had considered geographically diversifying some of its turkey production.

"Given this unprecedented and rare incident, it's kind of exposed a little bit of an Achilles heel to the strategy of being very centralized," he said. "We are still in the triage mode right now, and I guess that [geographically diversifying] is something on a strategic long-term basis I will be talking with the team about … But it is a valid question."

Staff writer Evan Ramstad contributed to this report.

Mike Hughlett • 612-673-7003