Hormel Foods Corporation

Good morning and welcome to the Hormel Foods fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, This event is being recorded. I would now like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2020. We released our results this morning before the market opened around 6.30 a.m. Eastern. If you did not receive a copy of the release, you can find it on our website at HormelFoods.com under the investor section. On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer, and Jim Sheehan, Executive Vice President and Chief Financial Officer. Jim Snee will provide a review of the company's current and future operating conditions, commentary regarding each segment's performance for the quarter, an update on the impact of the COVID-19 pandemic and a perspective on fiscal 2021. Jim Sheehan will provide detailed financial results and commentary regarding the company's current and future financial condition. The line will be open for questions following Jim Sheehan's remarks. As a courtesy to the other analyst, please limit yourself to one question with one follow-up. If you have additional questions, you are welcome to get back into the queue. An audio replay of this call will be available beginning at noon today, Central Standard Time. The dial-in number is 888-317-6003, and the access code is 583-1860. It will also be posted on our website and archived for one year. Before we get started, I need to reference the Safe Harbor Statement. Some of the comments made today will be forward-looking, and actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to pages 34 through 41 in the company's Form 10-Q for the fiscal quarter ended July 26, 2020. It can be accessed on our website. Additionally, Please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance. These non-GAAP measures include organic volume, organic sales, adjusted diluted earnings per share, and operating free cash flow. Discussion on non-GAAP information is detailed on our press release located on our corporate website. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. Before we get into the business results of the fourth quarter, I want to say thank you to all of our supply chain and plant professionals. They continue to show up every day and their dedication is remarkable. They are the heroes in our company during this pandemic. We remain focused on keeping all our employees safe, supporting our communities through these difficult times, and meeting the needs of our consumers, customers, and operators with safe, high-quality food. With a dramatic increase of COVID-19 cases upon us, we are doubling down on our awareness campaign called Keep COVID Out. These various preventative measures are focused on stopping the spread of the virus in the communities where we live and work and keeping the virus out of our production facilities. In addition to our virus mitigation efforts and safety initiatives, in August we announced a milestone effort in our commitment to education. Our new program, called Inspired Pathways, will provide for every graduating senior who is the child of one of our employees the opportunity to attend community college on us. This program is one of a kind and truly uncomfortable. Our team is making excellent progress on the program, and we are excited for the first class to begin in the fall of 2021. We know the application process is a major roadblock to college admission. For this reason, we are building out a network of mentors in our company to assist employees and their children through the college application process. Hormel Foods is a changemaker. and we are excited for the impact this program will have for our families and all future Hormel Foods families for generations to come. Fiscal 2020 was, by all measures, challenging. This year certainly tested our balanced business model. Coming into this year, we were confident we could deliver record sales, but never could we have imagined how it unfolded. All four operating segments contribute to the record as each grew sales for the full year. This is even more impressive when you consider all four segments have sales into the food service channel, which showed sharp declines due to the pandemic. An important component to our growth this year was innovation. I'm pleased to say our team achieved our goal of having 15% of our sales coming from new products created in the last five years. Even in the midst of the pandemic, our team developed, launched, and grew new product sales. Key items contributing to this accomplishment were Skippy peanut butter squeeze packs, Hormel cup and crisp pepperoni, Herdez salsa cremosas, Happy Little Plants, plant-based pepperoni and food service, and many other innovative items. Earnings per share for the full year were $1.66 compared to $1.80 last year. This includes over $80 million in incremental supply chain costs, representing almost 12 cents per share. This is in addition to a 10-cent headwind from the divestiture of CytoSport in 2019. As you think back on 2020, our experienced team managed through a lot of rapid and unpredictable changes. We have been through a lot in the last nine months, and we have gained an understanding on how to appropriately operate in this environment while never sacrificing employee safety. In March and April, we all witnessed the food service industry collapse. On-premise dining was shut down completely. and most establishments were not prepared or structured to handle a large influx of pickup and delivery orders. Simultaneously, grocery store shelves were emptied due to incredible consumer demand. We saw raw material markets decline precipitously as demand dropped, only to see markets spike as some harvest facilities temporarily paused operations. We also put multiple production facilities on a voluntary pause to protect the health and well-being of our team members while also dealing with our suppliers pausing their production. It seemed like each week since the pandemic started, we had a different raw material, ingredient, or packaging component shortage to manage through. As we sit here today, we believe there is more stability across the industry because of the learnings from the last nine months, even as COVID-19 cases surge across the country. In the food service industry, even though on-premise dining is being restricted again in many states, operators are better prepared to effectively manage pickup and delivery. Our supplier community is also more experienced in how to handle manufacturing facilities in limited labor situations. There are countless other examples of improved stability across the food supply chain, but the bottom line is we do not expect there to be the same level of chaos as there was nine months ago. Looking at the fourth quarter, volume decreased 2% and organic volume decreased 3%. Sales decreased 3% and organic sales decreased 4%. Earnings per share was $0.43, down from $0.47 last year, fully reflecting $0.03 per share in increased supply chain costs related to COVID-19. Turning to our segments, grocery products volume increased 1%, and sales declined 1%. Low inventory levels and production limitations in certain categories, such as canned meats and chili, limited our ability to meet the unprecedented customer demand. In categories such as nut butters, where we had adequate capacity and labor, sales grew double digits. Earnings for grocery products increased 1%, as improved results in categories such as nut butters and microwave meals offset increased freight expense and lower earnings from our Megamex food service business. International volume decreased 1%, sales increased 8%, and segment profit increased 55%. The strong sales and earnings performance was led by our retail and food service business in China. Products like Spam and Skippy have shown exceptional growth, but we've also seen growth from innovative new items such as our Hormel beef jerky. This product was launched in the e-commerce channel and is the most successful new product launch in Hormel China's history. We remain very positive about the long-term prospects of our China business. International demand for Skippy peanut butter and Spam luncheon meat was very robust. Both our U.S. export business and our affiliated businesses in the Philippines, South Korea, and Europe benefited from this consumer demand. Genio turkey store volume declined 2 percent, and sales declined 6 percent. Growth in Genio lean ground turkey and whole birds was exceptionally strong. We did experience declines in food service, which was disproportionately impacted by lower sales to K through 12 schools. Segment profit decreased 21 percent. Lower food service sales and increased supply chain expenses associated with COVID-19 were key drivers to the profit decline. The plant pauses in the second quarter continue to impact performance within our vertically integrated supply chain. Refrigerated foods volume decreased 4%, and organic volume decreased 5%. Sales decreased 5%, and organic sales decreased 7%. Brands such as Applegate, Hormel Black Label, Hormel Fully Cooked Entrees, and Hormel Always Tender generated exceptional growth this quarter. Lower levels of inventory and production limitations on certain categories such as dry sausage and sliced meats limited our ability to meet the unprecedented customer demand. Our food service business, which has historically represented approximately 40% of refrigerated food sales, saw double-digit declines during the quarter. Earnings declined 17% due to lower food service sales and incremental supply chain costs related to COVID-19. Looking forward, our solid performance this year amidst the uncertainty posed by the pandemic along with our balanced business model, gives us confidence we can perform well in many different economic scenarios. To give you a sense for how we are thinking about the future, I'd like to walk through three important drivers to our near-term and long-term performance. Retail dynamics for our brands, our leadership position in the food service industry, and our supply chain performance. In the retail channel, Like most food companies, we have seen dramatic increases in measures such as sales, household penetration, buy rate, and repeat rate for our retail products as consumers ate more meals at home. Instead of reviewing all the metrics, I want to provide some insight into the underlying consumer dynamics we believe are important to understanding how Hormel Foods is positioned to outperform as the pandemic subsides. Long before the pandemic started, we were witnessing a shift away from the traditional sit-down family dinner. Anyone with kids has experienced this. Too many activities, not enough time, and dinner was whatever could be eaten between activities. The pandemic brought the sit-down family dinner back. Meals previously eaten on the go have become family activities and early on, were viewed as enjoyable and highly anticipated within the home. Through our research, we recognize that consumers are enjoying the new ritual of eating at home, but want products that are convenient, versatile, and flavorful. We have a portfolio of brands that meet these consumer needs. These brands were growing before the pandemic, and we believe they will have staying power as the pandemic subsides because they are uniquely positioned to meet the evolving needs of consumers. Another important trend in retail is e-commerce. We continue to drive market share gains in our biggest and most important categories as consumers quickly gain acceptance of ordering food online. We continue to shift our investments toward this channel and are excited by the growth we see. Turning to the food service channel, we are committed to the future of food service. We are confident consumers will want the choice to purchase food prepared away from the home. As a leader in the food service industry, we are adjusting and investing in our capabilities. We are shifting resources to faster growing channels, investing in our direct sales force talent, and continuing to support the food service distributor and operator community as they battle through this difficult time period. We cannot overstate the importance of relationships in this industry and the long-term competitive advantage our direct sales force provides. When the food service industry returns to growth, we understand operators will be looking for products to simplify their operation, save time, and minimize labor. all while preserving the flexibility to add their own unique touch to a menu item. Products like Hormel Bacon Lump, Hormel Fire Braised Meats, Sadler's Authentic Smoked Barbecue, and Cafe H Globally Inspired Proteins are well positioned to thrive in this market. Finally, I want to address our supply chain. In many categories, we have produced at very high levels relative to our historical performance. We have been able to steadily improve our throughput as we learn how to operate in a COVID-19 environment or supplement our internal production with trusted co-manufacturing partners. On our third quarter call, we talked about short-term supply chain risks, including lower inventory levels, limited labor availability, and production inefficiencies that could impact our ability to meet the unprecedented demand. This played out in certain categories in the fourth quarter. Production in categories like canned meats, pepperoni, and chili was constrained due to labor shortages, but also because of COVID-related changes in our production lines. Our supply chain team has done an excellent job solving for each individual issue and our production capacity is structurally higher as we move into 2021. We continue to focus on the health and safety of our employees, which impacts our ability to adequately staff our facilities. Our COVID-19 leadership team including operations, quality control, communications, R&D, and human resources, are working tirelessly to keep our team informed on COVID-19 preventative measures. We are much better at adjusting through rapid changes in staffing than we were when the pandemic started and will continue to keep the health and safety of our employees as the top priority. A benefit we have this coming year is additional capacity from the investments we made before the pandemic started. Our Burke expansion in Nevada, Iowa will open in our first quarter and will give us additional capacity for pizza toppings. Throughout the pandemic, we have seen sustained demand as pizza continues to be a favorite amongst consumers and patrons. This new capacity will help us meet that demand. We will also be opening our new dry sausage production facility in Omaha, Nebraska during the first half of the year. This facility will produce Columbus charcuterie products, which is an important milestone in the trajectory of this leading deli brand. We also announced an additional investment for pepperoni capacity. This will give us the runway to continue growing our retail and food service business. As you consider the various factors influencing our business and our favorable balance across the retail, food service, deli, and international channels, we are optimistic about our ability to grow sales and earnings in fiscal 2021. While uncertainty exists, we do want to give you some basic insight into how we see the year playing out. For our retail business, it will be hard to replicate 2020 from a sales demand perspective. However, we do expect continued growth, albeit at a slower rate. For food service, we expect a modest recovery in the industry, but likely not back to 2019 levels. food service operators are better equipped to drive growth even with fewer patrons physically in their restaurants or venues. We expect modest growth in our deli business as retailers are more experienced in operating their deli business in a COVID environment. As a reminder, our deli business exhibits characteristics of both retail and food service. Finally, Our international business is poised to continue growing and, barring any unforeseen geopolitical issues, is expecting a strong performance next year. Carmel Foods has the right strategy. Our business fundamentals are solid, and we are on sound financial footing. I continue to be incredibly optimistic about our long-term performance. even as we navigate all the uncertainty COVID has brought. As a global branded food company, our balanced and diversified business model positions us to win across all of our key channels. At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter, give an update on our financial position, and provide commentary regarding key input cost markets. Thank you, Jim.