“We expected input costs to be higher this year, but not anything like what we’ve experienced,” said Sean Connolly, chief executive officer, during a conference call with financial analysts. “The increases we’ve seen in the pork and beef markets exceeded all of our forecasts and have driven major cost increases.”
Maria Henry, chief financial officer for Hillshire, drilled deeper into the issue of input inflation.
“The areas that they’re rising continue to be in beef and in sows and the outlook on PEDv [porcine epidemic diarrhea virus], that one’s tough,” she said. “We watch very closely the number of new reported cases on that and while we’re very hopeful that one of the vaccines that is being developed, as people try to combat this will work, that remains a variable for the second half of the year.”
Rabobank’s quarterly pork report, which was published Jan. 30, said the global implications of PEDv, which has been found in Canada, Mexico and the United States, are unknown. But the banking firm did say it expects the impact to the United States to be more severe than the U.S. Department of Agriculture is currently projecting, and that it likely will hamper US pork production growth into 2014.
For the quarter, Hillshire Brands’ operating income fell 23 percent to $116 million. Sales for the quarter rose 2.1 percent to $1,082 million.
“Our overall company sales growth was driven by pricing, which we took to offset higher input costs, and also by favorable mix in both [retail and food service]segments,” Henry said. “Gross profit dollars and rate were down versus last year, primarily as a result of significantly higher input costs.”
Connolly said much of the pricing taken during the second quarter was on seasonal items and that the company benefited from customer loyalty associated with holiday recipe usage of the products.
The pricing taken during the second half of the year will be on core items. In an effort to mitigate any negative elasticity from the price increases, Connolly said the company will spend more on marketing and promotion and new product innovation.
“In the second half of this year, we have exciting new innovations coming on a number of our core brands and some new news from our Golden Island acquisition as we build our presence in the very promising jerky category,” he said.
He declined to describe the innovation, noting that Hillshire Brands will be announcing the new products at the annual Consumer Analyst Group of New York conference that is scheduled to take place in Boca Raton, Fla., Feb. 17-21.
For the first half of fiscal 2014, Hillshire Brands’ total operating income was $171 million, a 44 percent decline from the first half of fiscal 2013 when it recorded an operating income of $215 million.
Sales for first six months rose 1.6% to $2,066 million.
