US food group Hormel Foods has said it is “heading in a good direction” with its refrigerated foods business, despite the unit performing “weakly” in the third quarter.

Hormel yesterday (22 August) recorded “solid” earnings and sales in its third quarter and reiterated its full-year guidance.

However, while earnings were up in four of its divisions, the firm’s refrigerated foods unit saw operating profit decline 26% and volumes fall 3%. Hormel said elevated raw material costs squeezed margins in certain retail categories, with bacon being impacted the most.

KeyBanc Capital Markets analyst Akshay Jagdale questioned the reason for the “surprising” fall, and suggested it was “unique” relative to some of Hormel’s peers.

CEO Jeffrey Ettinger said the weakness in the division was most pronounced earlier in the quarter and was a result of some “continued weakness” in processing margins, but mainly due to a spike in some raw material costs, particularly bellies for bacon and trim costs for a number of products, including pepperoni.

“Belly costs are still at historically very high levels, but they have moderated some from the peak. And we expect now, as we kind of head out of the summer season, they should start to return to more normalized levels. For refrigerated, those are the big challenges,” Ettinger told analysts.

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The CEO said the second half of the year represents and “investment time” for Hormel with the REV brand in particular. The wrap range was launched by Hormel in July targeting the teen market.

Ettinger said he is “pleased” with where the company is at with the brand and will be launching four additional items to the range later in the fall.

“The refrigerated foods has really a significant opportunity, frankly, just to get back towards some of the performance levels that we enjoyed a couple of years ago. We had two consecutive years of around 7% net and these last couple of years have been more like 5% with this most recent quarter even dipping below that with the struggle we had in periods ’07 and ’08. So we think there are some things on top of the innovation as we head into a different environment that will be favourable for refrigerated foods.”

The CEO said if the REV line is well received, the group might see it as a platform for other products that are “more oriented toward a younger audience, toward on-the-go, immediate consumption-type items”.

Early this year, Hormel acquired the Skippy peanut butter brand from Unilever for a consideration of around US$700m.

Ettinger reiterated that Hormel will be looking at investing in and “rejuvenating” the brand, initially through an advertising campaign in its next fiscal year.

On news of the acquisition in January, Hormel said the acquisition would expand its global footprint. The Skippy business has a presence in more than 30 countries, including China where it operates one manufacturing facility.

Ettinger said the addition of Skippy in China will bring its facility count to three. “We’ll kick that business well over $100m once the Skippy contribution is in there, which we expect to occur in the next fiscal year,” he told analysts.

The CEO said he is “encouraged” by the firm’s international performance in the quarter, which grew segment profit by 34% and net sales by 31%, driven by stronger exports of Spam, an “improved” China performance, and the addition of the Skippy export business.

“[International] had three solid quarters this year, but this will be the third consecutive year of really solid, both top line and bottom line, growth for international. Our strategy of focusing on the Asia base market has proven out well and so we have good solid business performance in Korea and Japan … and then the more majority-owned China ventures. China, in particular, we do feel we’ve now gotten to the point where we have sufficient scale in that business, that now it can generate a solid profit.

“It’s become a more and more meaningful component of our overall performance and it’s one that I think we’ve articulated in the past we have solid expectations that it will grow at a faster rate than our overall company average.”