Market Overview

Hillshire Brands Delivers Strong Fourth Quarter Growth

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CHICAGO--(BUSINESS WIRE)--

The Hillshire Brands Company (NYSE: HSH) today reported results for the fourth quarter and full fiscal year 2014.

  • Fourth quarter net sales grew 10.7% to $1.1 billion
  • Fourth quarter adjusted1 operating income grew 18.8%; reported operating income grew 20.9%
  • Full-year net sales grew 4.2% to $4.1 billion with growth in both operating segments
  • Fiscal Year 2014 adjusted diluted EPS of $1.80; reported diluted EPS of $1.71

CEO Perspective

"I am pleased with our results for fiscal year 2014, which culminated in a very strong fourth quarter," said Sean Connolly, president and chief executive officer of The Hillshire Brands Company. "Despite acute cost inflation, we delivered better than expected performance through a disciplined approach to brand building, pricing and cost management."

"I am very proud of the entire Hillshire team and the terrific job they have done with our brands. We delivered against our goal of building a different kind of food company, one that is simultaneously innovative and lean. This approach has created significant value for our shareholders and a fulfilling work experience for our people."

"We are excited to move forward with Tyson Foods. We have been working closely with the Tyson team to plan out the successful integration of the two companies and look forward to executing the merger."

Discussion of Continuing Operations Results

In the fourth quarter, net sales of $1.1 billion grew 10.7% versus the prior year's fourth quarter as positive price/mix in both the Retail and Foodservice/Other segments more than offset volume declines resulting largely from pricing actions. The sales growth rate also benefitted from a soft quarter in the prior year and the later timing of the Easter holiday this year. Adjusted operating income of $75 million increased 18.8%, and reported operating income increased 20.9% to $59 million primarily behind higher sales and a continued focus on expense management.

On a full year basis, net sales of $4.1 billion grew 4.2% versus the prior year period as positive price/mix more than offset volume declines. Adjusted operating income of $387 million increased 6.5% and reported operating income increased 3.0% to $306 million as positive mix and cost efficiencies more than offset under-recovery of input cost inflation through pricing.

Retail

Retail net sales grew 8.5% in the quarter versus the prior year as price/mix and volume were both favorable. Volume growth was driven by new innovation and increased distribution, and also benefited from a soft quarter in the prior year. Operating segment income increased 25.1% versus the prior year as increased sales and cost efficiencies more than offset higher input costs.

Hillshire Farm lunchmeat showed strong base volume growth behind an effective advertising campaign. New Hillshire Farm Naturals and Farm Classics products are shipping into the market, and the new American Craft sausages are outperforming distribution expectations. Jimmy Dean continued its strong momentum in the quarter, fueled by breakfast sandwich growth. The new Jimmy Dean lunch and dinner offerings have been well received by retailers and consumers as distribution expands. Ball Park hot dogs continued to gain share during grilling season, and Flame Grilled Patties showed strong double-digit sales growth in the quarter.

Foodservice/Other

Net sales increased 16.7% in the quarter as commodity-driven pricing and favorable mix offset volume declines. Operating segment income in the quarter grew $8 million versus the prior year's fourth quarter behind increased sales and continued cost management.

The Foodservice business has been outperforming industry growth rates in both meat and bakery. Sales in the convenience store channel have been strong as the new Jimmy Dean roller grill sausages continue to perform well. Bakery grew behind new innovation in convenient pre-sliced Luxe Layer pies.

Corporate

Excluding significant items, corporate expenses for the quarter totaled $18 million, higher than the prior year's quarter primarily driven by higher compensation-related expenses and $2 million of unfavorable mark-to-market expenses.

Transaction Update

As previously announced, on July 1, 2014, Hillshire Brands entered into a definitive agreement with Tyson Foods, Inc. (NYSE: TSN) (“Tyson”) under which Tyson will acquire all outstanding shares of Hillshire Brands for $63 per share. On August 12, 2014, each of Tyson and Hillshire Brands received a request for additional information, each often referred to as a “second request,” from the Antitrust Division of the Department of Justice (the “Antitrust Division”) in connection with the proposed acquisition. Each second request was issued pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The second requests relate only to a very small portion of the combined Tyson/Hillshire Brands business, and the parties are working expeditiously to resolve this matter with the Antitrust Division. Tyson and Hillshire Brands continue to expect that the transaction, which remains subject to customary closing conditions, will be completed by September 27, 2014.

No Outlook for FY 2015 Provided

As a result of the proposed merger, the company is not providing public targets for FY 2015 and is not holding a conference call to discuss results.

The company expects to file its Annual Report on Form 10-K on or before August 27, 2014.

About The Hillshire Brands Company

The Hillshire Brands Company (NYSE: HSH) is a leader in branded, convenient foods. The company generated more than $4 billion in annual sales in fiscal 2014, has more than 9,000 employees, and is based in Chicago. Hillshire Brands' portfolio includes iconic brands such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Van's, Sara Lee frozen bakery and Chef Pierre pies, as well as artisanal brands Aidells, Gallo Salame and Golden Island premium jerky. For more information on the company, please visit www.hillshirebrands.com.

1   The term “adjusted diluted EPS” and other financial measures identified as “adjusted” are explained and reconciled to comparable GAAP measures at the end of this release.
 

Forward-Looking Statements

This release contains forward-looking statements regarding Hillshire Brands' business prospects and future financial results and metrics, including statements contained under the heading “CEO Perspective,” and “Outlook.” Forward-looking statements are typically preceded by terms such as “will,” “anticipates,” “intends,” “expects,” “plans,” “likely” or “believes” and other similar terms. These forward-looking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events and are inherently uncertain.

Investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements, and the company wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could cause Hillshire Brands' actual results to differ from such forward-looking statements are those described under Item 1A, Risk Factors, in Hillshire Brands' most recent Annual Report on Form 10-K, as well as factors relating to:

  • The risk that the acquisition of Hillshire Brands and any related tender offer and merger may not be consummated, or may not be consummated in a timely manner, or the time necessary to obtain required regulatory clearance;
  • The consumer marketplace, such as (i) intense competition, including advertising, promotional and price competition; (ii) changes in consumer behavior due to economic conditions, such as a shift in consumer demand toward private label; (iii) fluctuations in raw material costs, Hillshire Brands' ability to increase or maintain product prices in response to cost fluctuations and the impact on profitability; (iv) the impact of various food safety issues and regulations on sales and profitability of Hillshire Brands' products; and (v) inherent risks in the marketplace associated with product innovations, including uncertainties related to execution and trade and consumer acceptance;
  • Hillshire Brands' relationship with its customers, such as (i) a significant change in Hillshire Brands' business with any of its major customers, such as Wal-Mart, its largest customer; and (ii) credit and other business risks associated with customers operating in a highly competitive retail environment;
  • Hillshire Brands' spin-off of its international coffee and tea business in June 2012, including potential tax liabilities and other indemnification obligations; and
  • Other factors, such as (i) Hillshire Brands' ability to generate margin improvement through cost reduction and productivity improvement initiatives; (ii) Hillshire Brands' credit ratings, the impact of Hillshire Brands' capital plans on such credit ratings and the impact these ratings and changes in these ratings may have on Hillshire Brands' cost to borrow funds and access to capital/debt markets; and (iii) the settlement of a number of ongoing reviews of Hillshire Brands' income tax filing positions and inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which Hillshire Brands transacts or has transacted business.
   

Income Statement Summary: Reported to Adjusted

For the Fourth Quarter ended June 28, 2014 and June 29, 2013 (in millions, except per share data—unaudited)

 

Fourth Quarter ended
June 28, 2014   June 29, 2013
  Significant     Significant  
Reported   Items  

Adjusted(1)

Reported   Items  

Adjusted(1)

Continuing Operations:
Retail $ 766 $ 766 $ 706 $ 706
Foodservice/Other 298           298   256           256  
Net sales 1,064 1,064 962 962
% change from prior year 10.7 % 10.7 %
 
Cost of Sales 770     (12 )   782   698     5     693  
Gross Profit 294 12 282 264 (5 ) 269
Gross Margin 27.6 % 26.5 % 27.4 % 28.0 %
SG&A
MAP 38 38 47 47
SG&A (excluding MAP) 198 29 169 166 7 159
 
Net charges for exit activities, asset and business dispositions (1 ) (1 ) 2 2
                 
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