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Hillshire Brands reports strong Q2 results

January 31, 2014
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The Hillshire Brands Co. reported results for the second quarter and first six months of fiscal year 2014. Second quarter net sales increased 2.1% to $1.1 billion, and the adjusted operating income of $139 million was up 9.0%; reported operating income increased 16.9% to $116 million.

"I'm pleased to report a strong second quarter," said Sean Connolly, president and chief executive officer of The Hillshire Brands Company. "Despite significant input cost inflation, both sales and profit exceeded our expectations. This reflects the strong ongoing progress our team is making to build our brands and improve our cost efficiencies. We are now well into the second year of our plan and achieving our goal of delivering strong and sustainable shareholder returns."

"During the quarter, we implemented pricing actions on the businesses most affected by inflation. Encouragingly, the volume impact we saw was more modest than expected, with most consumers remaining loyal to our brands. The associated benefit, along with strong supply chain productivity and timing of expenses, enabled us to deliver strong performance on the bottom line."

"As we've moved into the second half, our pricing actions have become more broad-based. This reflects our revised expectation of significantly higher input cost inflation throughout the remainder of the fiscal year. We've also increased our investment plans for second-half MAP to further support our core brands and exciting new innovations."

"Given this strong first-half performance will be partially offset by our higher second-half investment plans, we now expect EPS to be near the high end of the previously provided guidance range. We also continue to expect sales for the full year to increase slightly, despite the near-term volume pressure we anticipate from additional pricing."

Net sales of $1.1 billion were up 2.1% versus the prior year's second quarter as positive price/mix in both the Retail and Foodservice/Other segments more than offset volume declines resulting largely from pricing actions. Planned declines in commodity turkey sales also contributed to the volume declines in the Foodservice/Other segment. Adjusted operating income of $139 million increased 9.0% over the prior year as pricing actions, lower MAP, cost efficiencies/favorability, and timing of SG&A and corporate expenses more than offset significant input cost inflation. Reported operating income was $116 million, up 16.9% from the prior year's second quarter.

On a year-to-date basis, net sales of $2.1 billion were up 1.6% versus the prior-year period as positive price/mix more than offset volume declines. Adjusted operating income of $215 million decreased 5.8% versus the prior year's 44.2% increase as pricing actions and cost efficiencies did not fully offset input cost inflation.

Retail net sales were up 2.7% in the quarter versus the prior year as favorable price/mix more than offset lower volumes resulting largely from pricing actions. Operating segment income increased 2.8% versus the prior year's 23.2% increase as increased sales, lower MAP, cost efficiencies/favorability, and timing of SG&A expenses more than offset higher input costs.

Jimmy Deangrew both volume and sales of frozen breakfast sandwiches and other frozen convenience items by double digits in the quarter. Jimmy Dean flatbread, which launched last January, continues to expand distribution and is performing well. Aidells also showed double-digit volume and sales growth behind new innovation and expanded distribution of meatball offerings. Hillshire Farm lunchmeat performed well, delivering flat volume versus the prior year's strong increase.

MAP was down $9 million in the quarter, reflecting a shift on certain businesses from advertising to merchandising support, aligning the timing of MAP investment with second-half innovation launches, and increased efficiency.

Net sales showed a slight increase of 0.3% from the prior year's comparable quarter as favorable price/mix offset volume declines. Excluding commodity meat sales, net sales increased 0.7%. Operating segment income increased 10.9% versus the prior year's 8.5% increase as the segment maintained a rigorous approach to cost management.

The business saw strong performance in desserts, where double-layer Luxe Layer pies are exceeding expectations and Bistro branded desserts sales are up double digits. The business also launched new innovation in the C-store channel, including a Jimmy Dean convenience breakfast sausage that is performing well. Overall, however, the macroeconomic environment remains challenging and the outlook for the segment remains modest.

The company's fiscal 2014 adjusted diluted EPS is now expected to be near the high end of the previously provided range as first-half over-delivery is partially offset by expense timing, investments, and higher than expected second-half inflation. Net sales are still expected to grow slightly as back-half innovation and higher than previously planned MAP investments help offset anticipated volume softness as consumers adapt to higher price points. As second-half input cost inflation is now expected to be significantly higher, the company expects second-half gross margin to be relatively consistent with the first half.

Corporate expenses are now expected to be between $50-$55 million, excluding significant items and mark-to-market adjustments. The company also expects an effective tax rate of 35-36% and continues to expect net interest expense of approximately $40 million.

Source: Hillshire Brands Co.

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