Hillshire said the drought and heat events will “no doubt” impact commodity prices over time

Hillshire said the drought and heat events will “no doubt” impact commodity prices over time

Hillshire Brands has said the expectation of rising commodity costs has placed more importance on innovation and brand building at the US meats firm.

The company, formed after Sara Lee spun off its coffee and tea business earlier this year, said yesterday (9 August) its commodity bill increased by US$8m in its fourth quarter, which comprised the three months to the end of June

The company said it had absorbed $385m of commodity cost increases into the business over the last two years. However, the US is experiencing its worst drought for 50 years, which has put pressure on grain stocks.

Hillshire said the drought and heat events will "no doubt" impact commodity prices over time, but more specifically will be an "issue" in the back half of fiscal 2013 and into fiscal 2014.

"It really has to do with the cycle times associated with raising different livestock species," CEO Sean Connolly told analysts on the firm's earnings call. "So we expect the grain prices to roll through the proteins later, not sooner."

CFO Maria Henry added that, in the near term, some of the meat commodities the company is most exposed to will have have declining prices.

"The timing of exactly how the conditions will flow through the market and affect the basket of commodities we purchase will continue to evolve."

She added: "The expectation for rising commodity cost at the end of this fiscal year and into fiscal '14 places even more importance on our strategy to build our brands, so that we have the brand strength and pricing power to adjust changing input cost. Our SG&A for fiscal '13 is expected to be up versus last year."

Connolly said Hillshire intends to increase its MAP spend in fiscal 2013 in a bid to "further strengthen" its core brands and support new innovations. This, the CEO reveals, will include expanding into alternate channels.

"In the fourth quarter, our efforts in non-traditional grocery channels continued to pay dividends as we gained some new or expanded distribution in dollar channels, convenience stores and club stores. This is another key piece of our growth strategy, and we will continue to focus on it in fiscal '13 and beyond," he told analysts.

Connolly said the company will air an advertising campaign in the first half of its current fiscal year, with new product and packaging changes to follow.

"We've got innovation that's going to sprinkle out into the marketplace throughout the year. I think as important as the innovation that's going to hit the marketplace this year is the rebuilding of the innovation pipeline, and that is exactly why we brought in [chief innovation officer] Sally Grimes and created a fully dedicated team.

"Fiscal '14 and '15 will really hinge on the work we're doing right now, and we have lots of good ideas that we're pursuing that we've got to validate that will come to the marketplace later."

Hillshire yesterday forecast flat sales for the new fiscal year and operating segment income to be "flat to down" as it booked a drop in full-year operating income.

The company did not report net earnings for the fourth quarter or the full year, due to the need to restate historical results to reflect accounting irregularities at the spun-off tea and coffee company.

Sanford Bernstein analyst Alexia Howard described the outlook as "disappointing".

"Given the expected step-up in both marketing, advertising and promotional spend and innovation this year, this may be conservative. Moreover, the company's retail segment volume growth seems to be improving sequentially in measured channels, particularly now that price gaps in lunchmeats have been fixed."