Hormel Foods Corporation

Good morning and welcome to the Hormel Foods first quarter 2021 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 2. Please note, this event is being recorded. I would now like to turn the conference over to Nathan Ennis. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2021. 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 to the company of the COVID-19 pandemic, and a perspective on the balance of 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 analysts, 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 877-344-7529, and the access code is 10152030. 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 5 through 9 in the company's Form 10-K for the fiscal year ended October 25, 2020. It can be accessed on our website. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. As we approach the one-year mark of the pandemic, I want to express my gratitude to our plant professionals for their continued dedication, energy, and focus. They continue to be the true heroes of our company during this time. On our last earnings call in November, we were witnessing an increase of COVID-19 cases in the United States. Our number one priority has been to keep our team members safe. and we have been very focused on our best-in-class preventative measures and on educating our employees through our awareness campaign, Keep COVID Out. As the pandemic evolves and the vaccine becomes more widely available to our team members, we'll continue to keep the health and safety of our team members as the top priority. We were among the first to offer a COVID pay program to allow those who were ill or had symptoms to stay home from work and still be paid. Additionally, we paid $11 million in fiscal 2020 in unconditional bonuses to our team members to provide further financial security. Our program has resulted in minimizing the spread of COVID in our workplaces and our communities. Recently, we've been encouraged to see cases decline and the number of team members on our COVID pay program drastically decrease. This gives us increased optimism as we head into the second quarter. We were pleased to announce the entry into a definitive agreement to acquire the planters business last Thursday. We have many leading brands at Hormel and the acquisition of the planters will be an excellent addition to our company. Over the past 10 years, we've made numerous acquisitions, all of which are meeting our strategic objectives. The performances of Megamex, Holy, Skippy, Applegate, Justins, Seraci, Fontanini, Columbus, and Sadler's give us a high level of confidence in our ability to successfully integrate, operate, and grow the planters business. The acquisition of planters is the perfect strategic fit. The addition of this iconic branded high margin business continues our evolution as a global branded food company, moving us further away from a commodity oriented meat centric company. As one of our biggest brands, we will give it a high level of focus and attention. Our core competency in brand stewardship will be key to our success in unlocking the power of the Planters brand. We know how to manage brands, and Planters is right in our sweet spot, as we know Planters is more than simply peanuts in a jar. Planters also perfectly complements, enhances, and expands our existing snacking business, joining brands like Hormel Gatherings, Columbus, Holy, and Herdez. There are numerous opportunities to leverage the consumer insights from both portfolios to drive further innovation and improve growth for our entire snacking business. The planters business gives us another iconic brand to grow and increases our scale in key areas such as center store and convenience stores. Integration into our direct sales force is a high priority, and we know there are immediate opportunities to improve distribution and drive sales growth. Another priority for us is to integrate the business into our one supply chain and Project Orion platforms. We expect synergies from this integration for the planter's business and for our existing business. There's a lot to love about this acquisition, and I'm excited for the transaction to close so we can begin to give the planter's business the attention and focus it needs to grow. Now turning to our first quarter, our team generated strong top-line growth with sales increasing 3% to a record $2.5 billion. All four segments delivered sales growth. an achievement that hasn't been accomplished since 2016. Incremental supply chain costs related to COVID-19 of $15 million were the primary reason for a $13 million decline in pre-tax earnings. Net earnings and diluted earnings per share declined 9% due primarily to incremental supply chain costs and higher tax expense. As in prior quarters, we continue to strike a balance between the consumer demand we are seeing and our supply chain's ability to meet that demand. We increased production levels this quarter through a combination of improving efficiencies, bringing on new capacity, and further leveraging our strategic supply chain partners. We expect this steady improvement to continue throughout the year. We have been successful in a number of critical categories, and we will continue to make progress across the portfolio. Our retail business continued to perform extremely well, with sales increasing 13% for the quarter. Brands such as Spam, Skippy, Hormel Chili, Hormel Black Label, Applegate, Hormel Pepperoni, Lloyd's, Hormel Fully Cooked Entrees, and Justin's all delivered very strong growth. Most encouraging was the sales growth we saw from the Genio brand. Every major retail category, including Genio lean ground, turkey burgers, oven-ready items, bacon, and marinated meats grew. The Genio brand continues to resonate with consumers, and the efforts we have made on gaining back customer distribution are paying off. Our e-commerce business continues to be a bright spot, as it almost doubled in the last 12 weeks, according to IRI. We grew share in several key categories and have a high level of momentum in online grocery pickup, delivery, and direct-to-consumer. Our deli channel sales increased 7% this quarter. Columbus-branded products led the way with exceptional growth from grab-and-go items. The opening of our new plant in Omaha this quarter, which produces Columbus charcuterie products, will provide much-needed capacity for this business. While the Columbus brand was the clear leader for us this quarter in the deli, our team generated growth in every deli segment they competed, including grab-and-go, prepared foods, behind the glass, and fresh sliced deli meats. Our party trade business also grew volume in sales over the holiday season despite fewer group gatherings, a testament to our team's ability to keep this brand relevant. We saw positive signs of recovery in food service this quarter, even as the business declined 17% compared to last year. due to the continued impacts of the pandemic on the industry. We continue to see strength in our business within important segments such as pizzerias, QSRs, and convenience stores. Our direct sales force also made excellent progress pivoting to high-growth areas such as commissaries and ghost kitchens as they secured new distribution with both distributors and operators. Turning to the segments, grocery products delivered very impressive results this quarter. We saw top-line strength across many of our brands, including Spam, Skippy, Hormel Complete, and Herdez, which led to volume increases of 4% and sales increases of 7%. We implemented a price increase for our Skippy business this quarter. once again demonstrating our ability to price in our categories. We are also encouraged with the performance of our recent innovative new items, including Skippy Squeeze, Skippy No Sugar, and Skippy with added protein spreads. Our Megamax joint venture had a strong performance this quarter as well, with equity and earnings increasing by 31%. This growth was led by our retail brands, such as Holy, Air Dez, Chi-Chi's, and La Victoria. In addition to the Megamex results, the 35% increase in segment profit was driven by higher sales and a favorable mix. Refrigerated foods volume declined 2%, and sales increased 1%. Our retail and deli teams overcame steep year-over-year declines in our food service business to deliver growth for our value-added business. Applegate had a particularly strong quarter, with growth fueled by both category momentum and share gains across four categories, such as frozen breaded chicken, breakfast sausage, bacon, and hot dogs. I continue to be optimistic about the momentum we are building in the Applegate business. We also delivered excellent results in our Hormel pepperoni business, both in food service and retail. Our teams continue to optimize the brand by focusing on our core products in the category and simultaneously leaning into our new cup and crisp innovation. We plan to maintain our advertising efforts for Hormel Pepperoni to ensure we retain the households we gained during the initial pandemic buying. Refrigerated food segment profits declined by 16% due to lower food service sales, a significant decline in commodity profitability, and increased supply chain expenses due to COVID-19. Profitability was also impacted by one-time startup expenses related to our new plant in Omaha. GENEO volume decreased 2% and sales increased 1%. We saw exceptionally strong retail and whole-bird sales, which overcame significant declines in food service and commodity. Our retail business grew double digits this quarter. with growth coming from almost every category in which we compete. We have taken price increases across our portfolio and expect those to be effective late in the second quarter. Old bird volumes increased by strong double digits due to a very positive holiday season. Our food service business was impacted by lower K-12 and college and university business. in addition to continued weakness in the food service industry. Genio Turkey store segment profit declined 30%. Lower food service sales, increased supply chain costs related to the COVID-19 pandemic, and higher freight expenses were key drivers to the lower profitability. Train prices increased significantly during the quarter, but only had a modest effect on earnings. we expect the primary impact of higher grain prices to affect the coming quarters. In addition to pricing action, we have taken additional actions to manage higher corn and soybean meal costs. International volume decreased 5 percent, sales increased 13 percent, and segment profit increased 61 percent. Once again, the strong sales and earnings performance was led by our retail and food service business in China. Spam, Skippy, and beef jerky were all key drivers to growth in China. We remain very positive about the short and long-term prospects of our China business. We also saw strong branded exports for brands like Skippy and Spam. Similar to prior quarters, Our affiliated businesses in the Philippines, South Korea, and Europe continue to show high levels of growth. Looking to the balance of the year, I am increasingly optimistic about delivering sales and earnings growth. As such, we are establishing fiscal 2021 guidance for the full year at $1.70 to $1.82 per share. As a reminder, This guidance range does not include the impact of the acquisition of planters. Similar to prior quarters, we believe there are three key drivers to our near-term and long-term performance. Retail dynamics, the recovery in the food service industry, and the performance of our supply chains. Our retail, deli, and international teams need to maintain their momentum and outperform their respective categories. Our brands continue to gain new households and our repeat rates remain very strong. The depth of repeat, those consumers purchasing our brands multiple times, is incredibly positive with almost all new buyers for our brands making two or more repeat purchases during the first quarter. As a whole, our brands continue to make household penetration gains with brands like Herdez, La Victoria, and Columbus increasing household penetration by over 20%. For the food service channel, We are optimistic about a food service recovery and confident in our ability to gain share during the recovery. During the pandemic, operators have been looking for products to simplify their food preparation, save time and minimize labor, all while preserving the flexibility to add their own unique touch to a menu item. Our direct sales force continues to meet their needs, with products like Hormel fire-braised meats, Sadler's authentic smoked barbecue, and Hormel bacon wine. The recent trends we are seeing in our food service businesses are positive. We've been able to react quickly to increased demand as cities and states have eased dining restrictions, allowing patrons to return to their favorite restaurants. We also anticipate our noncommercial business, such as K-12 schools, colleges and universities, and healthcare to recover as the pandemic subsides. The most encouraging signs we are seeing are in our supply chain. We made excellent progress on increasing capacity to meet the high levels of demand from our customers. Steady week-over-week improvements Lower levels of absenteeism, new capacity, and a continued vaccine rollout are all reasons we have a positive outlook. Our supply chain team hit two major milestones this quarter, with the opening of our new dry sausage production facility in Omaha, Nebraska, and the opening of our pizza toppings expansion at Burke. Both projects were on time and on budget. which is truly amazing considering both projects were constructed primarily during the pandemic. Our plant teams have made progress on labor availability and in almost every location our labor situation has improved. We expect that trend to continue into the second quarter and beyond as the vaccine becomes widely available for our team members. We now have a higher level of visibility into the coming quarters and remain confident in our team's ability to deliver our sales and earnings guidance this year. 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. Good morning. Record sales for the first quarter were $2.5 billion, an increase of 3%. COVID-related direct expenses of $15 million were the primary driver to pre-tax earnings declining $13 million, or 5%. Absent the COVID expenses, pre-tax earnings would have increased. Total COVID expenses have started to decline from the prior quarterly run rate of $20 million. This is driven by higher volumes through our production facilities and improved efficiencies in our logistics network. Earnings per share for the first quarter was 41 cents compared to 45 cents last year. On an after-tax basis, first quarter results reflected approximately 4 cents per share in incremental COVID-related costs and higher tax expense. SG&A. Excluding advertising was 6.6% of sales, down slightly compared to the prior year. Advertising spend for the quarter was $34 million compared to $35 million last year. We continue to invest in our leading brands, including Spam, Skippy, Corbel Pepperoni, Black Label, and Genium. Operating margins for the quarter were 10.9% compared to 11.8% last year. The decline was driven by COVID-related expenses and the continued impact from lower food service earnings. Unallocated expenses included deferred compensation expenses related to tax settlement and field fees. Our effective tax rate for the quarter was 19.7%. Last year's rate of 16.3% was affected by the large volume of stock options exercised in the quarter. Excluding the impact from the planter's acquisition, we expect the full-year tax rate to be between 20 and 21.5%. Cash from operations was $206 million during the quarter, a 9% increase. Even with record sales, inventory levels continue to gradually improve throughout the quarter due to improvements in operations, labor availability, internal capacity expansions, and increased use of strategic manufacturing partners. We expect inventories to continue to build throughout the second quarter. There is a risk for inflationary pressure on freight expense, both domestically and internationally. However, we expect improved efficiency factors to offset some of the higher freight costs. We paid our 370th consecutive quarterly dividend effective February 16th at an annual rate of 98 cents. a 5% increase over the prior year. During the quarter, the company repurchased 200,000 shares for $9 million. Capital expenditures were $40 million in the quarter. We opened the pizza topping expansion of Burke and the new dry sausage facility in Omaha. Work is also underway to expand our pepperoni capacity. The company's target for capital expenditures in 2021 is $260 million. Last Thursday, we announced the definitive agreement to acquire the planter's stacked portfolio for an effective purchase price of $2.79 billion. The transaction was structured as an asset purchase and included a $560 million tax benefit. The adjusted 2020 EBITDA multiple on the effective purchase price of $2.79 billion was 12.5 times. This acquisition is financially attractive. Our disciplined approach to valuation allowed us to secure a leading brand at a multiple below the industry average, take advantage of historically low rates, increase our company sales by 10%, improve the profitability of the portfolio with accretive margins, and responsibly leverage our balance sheet. We expect to finance the transaction with cash on hand and a combination of long-term and short-term debt. We will be able to borrow the funds at approximately 1.5% and expect to be able to significantly deleverage the debt in 18 to 24 months. We are targeting a 1.5 times leverage by 2023 and are very focused on retaining a strong investment grade rating. The cash flows from our existing business along with planters, allows us to maintain our long-term capital allocation strategy. We will continue to prioritize returning cash to shareholders in the form of annual dividend growth. Industry operating efficiencies, labor availability, and production levels continue to improve during the first quarter, driving less volatility in the hog market compared to the back half of 2020. Hog wastes are currently at historically high levels which has led to balanced market conditions. In 2021, the USDA is projecting pork production to increase 1%. With an expected recovery in the food service industry and higher grain prices for the balance of the year, we anticipate hog costs to increase. Our balanced mix of hog and pork supply contracts will help us manage the risk of higher prices. The USDA composite cutout was in line with last year during the first quarter. Recently, we have seen strength in the cut-out, supported by strong demand for pork domestically and internationally. We continue to monitor export demand and ASF in China, Southeast Asia, and Europe. ASF continues to be a risk in the pork industry. We have seen the disease could be successfully managed in areas with modern agricultural practices. We expect higher prices for pork with less volatility than last year. The strength of our brands and balanced approach to procurement continue to be a competitive advantage. Pork trim markets are expected to remain higher during the second quarter of 2021 and decline in the back half as labor availability in processing plants improves. Beef trim prices are expected to be lower in 2021. We anticipate belly prices to be volatile in the near term driven by strong demand and food service industry growth. Strong Chinese demand and drought conditions in South America continue to generate higher grain prices, which is expected to negatively impact Jenny O. Turkey Store. Like the pork industry, we are closely watching the fundamentals for grain. The primary factor we are watching are global demand, planting intentions for the coming season, and weather conditions in South America. We manage grain costs through a combination of spot buying, derivatives, and adjusting feed formulas. Additionally, we have announced pricing action across all Genio products to protect our profitability. We are prepared to take additional action as conditions change. Fundamentals in the turkey industry remain mixed. Egg sets, pole placements, and cold storage are below year-ago levels, while prices for commodity breast and thigh meat remain depressed. Whole placements have been declining recently, which will likely lead to lower levels of supply. Because the food service industry is a key outlet for breast meat, as the food service industry recovers, breast meat pricing is expected to improve. We are finalizing the implementation plans for the planter's business. We will have the HR and payroll functions integrated by the closing date. The finance and supply chain will be fully implemented within one year of closing. At this time, I'll turn the call over to the operator for the question and answer portion of the call.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. we please ask that you limit yourself to one question and one follow-up. If you have additional questions, you may reenter the question queue. At this time, we will pause momentarily to assemble our roster. And the first question will come from Ben Bienvenu with Stevens. Please go ahead.

Hey, thanks. Good morning, everybody. Morning, Ben. Morning, Ben. I want to start, you called out the comments related to grain cost pressures in GENEO, and I want to focus there, if we could, for my first question. You talked about your actions around pricing. I'm wondering, to the extent that you're able to talk about how severe or meaningful the higher costs are expected to be for you, And as you think about pricing increases, what do you think the receptivity from the market is of higher prices and how meaningful that offset could be to the higher prices?

Yeah, thanks, Ben. Obviously, this is a high priority for the Genio Turkey Store team going forward. But they've been working over really the last month or so to implement pricing and while they're not entirely done, would tell you that there's been a lot of success in terms of getting pricing through. Obviously, the rationale that we have in terms of what's happened in the grain market supports very strong underlying support. So the team's done a nice job there. And as we go forward, the idea of elasticity with pricing is something that has been difficult to measure given the pandemic. What we do know is we've continued to see exceptional demand for the Genio Turkey Store retail products. So we remain very optimistic on the success that this business can have for the balance of the year.

So, Ben, just to give you some type of scope, corn is up about 40%, while soybean meal is up about 15%. Now we have a significant position. It's less than half of our corn hedged at a lower price than the current markets. And we have the ability to change the formula. So as you can imagine, we're moving the formula to more of a soybean meal-based formula away from corn. That'll offset a portion of the cost. So really there's multiple approaches we've taken to mitigate the risk around these increases. Jim talked about a very effective approach on price increases. along with the shifting of the feed formula and the positions that we've taken. And we took these positions probably more than six months ago.

Okay. That's very helpful. Thank you. My second question is related to the supply chain. And, you know, obviously you've made a number of investments over the last several years. You've gotten a few capacity expansions stood up here in this first quarter. And Jim Sheehan, you made some comments that you expect some of the freight, higher freight headwinds to be offset by supply chain improvements. Can you talk about the, as you get through some of these enhancements that you've made with Orion, some of the capacity expansion starting to mature in terms of fixed cost absorption, the benefit that affords you on the supply chain cost equation relative to, you know, any cost inflation you might see? That'd be helpful.

I'll go ahead and start on the freight costs, and I'll let Jim finish with Project Orion. But, you know, one of the things that we have been challenged with as our supply chain has battled over last year and early this year is that we've had a number of inefficiencies in terms of how we've been able to ship trucks. And so because of that, you know, we've had some higher freight costs, and haven't had the opportunity to optimize our loads like we typically do. So we have seen some higher freight costs. And while there are expectations that freight rates will increase, we see a pretty significant opportunity for us to be able to offset a good portion of those as our supply chain continues to pick up momentum and we're able to fill trucks in a more optimized manner. So, yeah, there'll be some flip freight inflation, but again, we think there's going to be a really good opportunity for us to offset that with some internal efficiencies.

Ben, I'll talk a little bit about your second portion of your question, and that's how Project Orion will benefit us in this area. First of all, we have visibility across all of the businesses under one platform, and that's given us great insight as to where our costs are coming from and how we can manage those costs from a purchasing aspect, having all purchasing done under one platform, giving visibility into the cost. The other thing is that on freight, we're able to do some significant analysis as to where we can provide benefits on freight and how we can improve our load levels, what our load levels are actually running across our business organizations. It is providing a significant benefit as we go through and It's very timely as we're hitting probably a bit of a period of inflation going forward to understand what our actual costs are and what levers we can pull to manage those costs.

Okay. Thanks so much for all the color and best of luck this year. Thank you.

The next question will be from Rupesh Parikh with Oppenheimer. Please go ahead.

Good morning. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions.

Hi, Erica.

So first, I actually wanted to quickly follow up on last week's planter acquisition. I was just hoping maybe you could give us some more insight into the private label dynamics in planters categories and the gross margins there. And then last week, Kraft also made reference to planters as a commodity. So how do you think about its categories in terms of being a commodity?

Yeah. Good morning, Erica. I'll go ahead and I'll take that one. I think the other thing that we talked about last week was, you know, the items that you just mentioned. I mean, those were at the top of our list in the due diligence process. And our team did a phenomenal job not just identifying those risks, but really putting together an action plan for when we do own the business, how we can offset that. You know, when we think about private labels, When we cross our existing categories, private label shares can range across the board. And right now, what we're seeing is the average center store range is about 20%. And the planters' brand, as they face private label, they're seeing about the same percentage of private label. Again, that's across the board. There's different subcategories. The idea of a private label being a risk, a threat, a competitor, not new to us at all. Obviously, we're prepared to manage our business accordingly. From a gross margin perspective, I think what we had talked about last week was probably a little lower down in terms of profitability. Without giving too many specifics, it's safe to say that planners' gross margins are well above our total company average and they're also above our grocery products average. And then the other thing just in terms of the category, we know how to manage brands. We've said that multiple times. And so when we think about commodities and pricing and price elasticities, this brand is very similar to all of our other large brands. So, again, not new to us. We know how to manage it. And when you roll all those things up, you know, from our perspective, this business is not a commodity business. You know, I would go so far as to say, again, from our perspective, we know a commodity business when we see one, and this is not a commodity business. So hopefully that's helpful.

Yeah, no, that's very helpful. And then Just switching gears to grocery products, I mean, you're obviously facing some challenging comparisons here the next couple of quarters. Can you maybe again just talk a little bit more about your confidence in lapping this growth? You know, any puts and takes you can share with regards to, you know, how you're thinking about these laps I think would be really helpful.

Sure. You know, I think that there's going to be a lot of puts and takes across the entire portfolio for the balance of the year. You know, we know in the second quarter we saw the significant run-up in grocery products, but we also saw, you know, the significant collapse of our food service business. And so, you know, and then in Q4, if you recall, we talked about the difficulties we were having in our supply chain in meeting the absolute demand that we were getting from our customers. So there's a lot of give and take for the remaining three quarters. As we've laid out the business with our business units and reviewed how we think the business is going to flow, it's their optimism that obviously fuels my optimism, and then also the results that we're seeing in the supply chain. In all of this, do not discount the impact of the supply chain. in allowing us to achieve our goal this year. So, you know, as they've run so much better, it's really made a difference in our business. So all those things together, Erica, is really what has allowed us to reinstate our guidance and become increasingly optimistic about the business for the balance of the year.

Okay, great. Thank you so much. I'll pass it on.

The next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.

Hey, good morning, everyone. Morning, Tim. I wanted to take you up on the capacity side of it and kind of explore that a little bit. Can you talk about what products were capacity constrained, which products are not capacity constrained now, and which ones won't be capacity constrained in the future? And then what you think was the scope of the cost that was associated with that?

I'll take the first part and then I'll let the CFO take the numbers part again. The biggest constraints that we saw and we talked about this in Q4 is really in our grocery products business. Spam at the time was one that was capacity constrained. We knew that we had a capacity expansion that we were in the process of and we saw that capacity come online in Q1. And that's really helped our spam business. What we call our general canning business, which would be chili, stew, hash, you know, that is one where we most recently identified some co-packer opportunities. And we expect, we're still not meeting demand, but we expect that to continue to improve over the balance of the year. I think we did also talk about pepperoni in Q4. that we had a new line that was getting up to speed. And that has done just that, and that's really afforded us the opportunity to expand both our retail and food service pepperoni business. So as we look to the future, part of the optimism is we're far less capacity constrained. Clearly, we're not out of the woods. We've got to meet customer demand. But I think everything that we said we were going to do and that we knew that we needed to do in Q4 has happened. Jim, I don't know, from a cost perspective. Sure. Good morning, Ken.

The last half of 2020 was, as Jim said, tremendously impacted by supply chain challenges. So as we look at it from a financial standpoint, the first area that we should talk about is food service. We've seen some very interesting trends in the last, let's say, few weeks on food service. And we have idle capacity in food service, so we have no problem filling that food service need. So any growth in the food service category is unrestrained and a great opportunity for us as that business, we're confident, is going to continue to improve. You know, in the grocery products category, we talked about a tremendous Q2 that we had. But Q3 and Q4, I think it's safe to say we're crippled by supply chain challenges that really are not existing anymore. The availability of labor is much better than it was last year, and so that's going to be able to allow us to grow grocery products in the back half of the year. Jim talked about refrigerated foods, how we've had some constraints in the pepperoni business, and that's We have additional capacity that's come online there, and we're doing a very nice job of recovering the pepperoni business and actually seeing some very significant growth in pepperoni in the food service category. So I think it's hard to underestimate how much of an impact the constraint had in 2020 and the opportunity that we have in 2021. And one of the other things that we haven't talked a lot about is is that during this time of constraint, we've found some very significant efficiencies in our operations that have helped us produce product even in a difficult time period. Now as we increase it, we'll be able to take those efficiencies and actually drive cost issues and efficiency issues throughout the operations.

I fear I might underestimate the capacity. Can you give us some dimension to how we think of how that could actually add, not just to this year, but really to 2022 and 2023? And I'll leave it there and I appreciate it.

Well, I think as you've seen the growth in some categories, you see our ability that if we could fill that full demand, there would be some important improvements. I think As I talked about in grocery products, I think it's a good benchmark where we see growth in the back half of 2021 in grocery products strictly based on improvements in supply chains, in the supply chain.

Yeah, and Ken, I would just add, I mean, the other factor that's unknown at this point are really the channel dynamics. And so, you know, as... perhaps retail, you know, as people are looking to get away from home and eat out, as Jim mentioned, our food service capacity is ready, willing, and able to meet that demand. So I think that's going to be an even more important part of our story as we get to the back half of 21 and into 22 as we see food service recovery continue. Great. Thank you, guys.

And the next question will be from Eric Larson with Seaport Global. Please go ahead.

Thank you, everyone. Thanks for taking the question. So, Jim Sheehan, quick question for you. You talk about the financing rate for planters. And just for clarification, is that 1.5% just on the incremental debt that you're going to borrow, or is it the blended rate between you know, the percentage of cash and debt that you're going to use to finance the transaction?

It's a blended rate of the debt, including the $1 million that I took out in June of last year. For instance, we'll be retiring $250 million worth of debt in April that has a four-and-a-quarter rate. So if you think about that interest and the current interest rates – we'll be retiring some reasonably high-level interest rate debt and replacing it with some much lower interest rate.

Okay, got it. Thank you. And my second question is for Mr. Snead. Jim, you know, the pandemic has obviously impacted, you know, the food service turkey markets, you know, pretty significantly, and You know, the oversupply in that industry has been pretty significant for a while. We just haven't seen that, you know, the industry recover like I thought we would have, you know, a long time ago. Will the current pandemic, you know, maybe rationalize the industry a little bit more? Will you come out of the back end of this potentially with a stronger, maybe lower supplied, structurally supplied industry?

Yeah, Eric, I mean, I don't know and wouldn't want to comment on what some of our competitors might do. You know, from our perspective, you know, we feel really good about the work that we've done leading into the pandemic. You know, if you go back to some of the stumbles we had, but then the effort and the strategic focus on growing distribution and lean ground turkey right before the pandemic hit, You know, I believe that a lot of the success we've had on the retail side is directly attributed to that expanded distribution that the team was able to achieve. In terms of, you know, what inventories look like, I mean, clearly a lot of breast meat, turkey breast meat, is used in the food service industry. And so that collapse has had a dramatic impact, and obviously there are implications to that across the entire industry. What we've seen is continued strength in the retail business, some recent increase in our Genio food service business, and so we believe that there's a lot to be positive about with our Genio turkey store business heading forward.

Eric, the item that I would add would be that we've been looking at the fundamentals of this industry for a long time and reminding others that that's probably the best indication of where the business is going. We've seen decreases in pull placements for several months now, but in January, egg placements are down 9% and pull placements were down 12%. I think that's a strong indication of where the industry is going from a capacity standpoint.

Yeah, I agree. Thanks, guys. Appreciate the comments.

And our next question will be from Peter Galbo with Bank of America. Please go ahead.

Hey, Jim and Jim, good morning. Thank you for taking the question. Jim, just the first question I wanted to ask about, you know, the color you gave around pork inflation and maybe it's a bit of a two-parter. You know, the first part of that being, I guess, the inflation that you're seeing now would appear to be more, I guess, tangible versus 2019 when it seemed like it was more speculative around ASF and whether or not, you know, there was going to be a lot more shipment of pork out of the U.S., I just want to see if that's, A, a fair statement, or at least how you're thinking about it internally, and then, B, you mentioned a bit around consumer elasticity on turkey, but is there anything from your consumer insights team on the pork side that you're seeing any changes in consumer behavior that would make you feel more confident maybe this time around in your ability to get pricing on bacon, pepperoni, those types of items?

Well, I think the first issue, Peter, is Part of this is going to depend on the recovery in food service. So if you take the bellies, bellies are at 195 right now. They had been running in the mid-130 range. I think that's an indication that there is some recovery in the food service, that there is an expectation that that demand is going to pick up. We expect these prices for the full year to run in the mid-140s, somewhere in that range, which is above last year. above last year's levels. One of the other things that you're seeing, though, is that you're going to have some probably pressure taken off of certain markets. Trip markets are in the 90s right now, and I still think that's a component of the fact that there's not enough labor to do the boning. As labor returns into these facilities, those prices are going to go down. That's just a labor issue. So we think the bellies are going to be volatile as we go through, and demand is going to be impacted by the food service recovery.

And, Peter, we remain very confident in our ability to price. Already this year we've taken price on Skippy. We talked about the Genio Turkey Store pricing. We've had bacon pricing. Columbus and really our total deli business has taken pricing as well. So, you know, as we obviously follow the inflationary factors and see what's happening in the business, we feel very confident in our ability to price.

Okay. No, thank you both. That's very helpful. I guess just two quick clarifying questions, you know, here. One, on grocery products, just there was an acceleration, right? And some of that was the capacity unlock. But I just wanted to make sure, was there any inventory, you know, like retail or inventory rebuild in that first quarter number? And then on the investment income, the rabbi trust, just that was up quite a bit. How do we think about that maybe in 2Q and for the rest of the year? Does it reverse? Just, you know, we have to put something in the model. Thanks very much. Yep.

Yeah, Peter, I would say that, no, there really hasn't been any retailer inventory rebuild. And I say that just based on you know, the demand we're seeing and our ability to fill that demand. And so, you know, I do think it, obviously, there's still very strong consumer demand, but then it also speaks to the fact that at some point we are going to have the opportunity to fill the pipeline as well.

And thanks for the question on the interest income. That's coming from our Rabbi Trust, which backs up our deferred compensation program. Excuse me, any gain that we have in interest expense, if you look at our corporate unallocated line that's up so much this quarter, that is an expense that offsets the gain in interest expense. So when you look at the net of the additional deferred comp expense I incurred in unallocated and the gain that I've seen in the interest income, they offset each other. They appear in two different spots. on the financial statements, but there's an offset there. So there is no benefit on an EPS basis of the increase in investment income. It's offset in the above the line, unallocated line. Does that help you at all?

Yeah, I know it does. I guess just as we think about that number going forward, it can be pretty volatile from quarter to quarter. And so I guess just what's the best way to think about it?

Sure. The best way to think about it is it has no impact on the company's results because whatever gain or losses occur in interest income are offset by gains and losses in corporate unallocated. So it has no impact on my P&L.

Got it. Got it. No, thanks very much. That's helpful.

And the next question comes from Tom Palmer with J.P. Morgan. Please go ahead.

Good morning. Thanks for the question. First, I just wanted to ask on the CapEx side, you cut your outlook, I think, by $90 million this morning. Just curious what drove the reduction. Is this to free up some CapEx for planners? Are there other specific projects that maybe were halted or pushed into 2022?

Yeah, it's great. Great question, Tom, and it is. It's one one big project that we've gone ahead and pushed back later later in the year, and we expect the majority of that expense to fall into into next year. So it's it's not a cancellation. It's not a need for additional capital. It's just a delay in a project that that we will still complete.

Can you disclose what that project is?

No, we have. We haven't announced that yet. It hasn't. It hasn't been approved.

Okay. And then on the Jenny Oh side, I just wanted to make sure I understood the timing of costs versus pricing. Should we think about the second quarter as being the toughest margin quarter, just given that, you know, pricing is being instituted during the quarter and we're seeing that input cost inflation now? And then a quarter ago, you mentioned, Jim Sheen, 9% EBIT margin is maybe an outlook for this year. Do you have an updated outlook how we should maybe be thinking about that full year?

Sure. You're exactly right, Tom, that the second quarter is going to be the biggest challenge for Genio as they absorb the cost. But as you know, when you bring pricing on, there's a ramp-up period and a wait period for that pricing to be effective. So that will have an impact in Q2. And it will slightly impact what we talked about previously as far as margins, but not significantly, but it will have a minor impact on my expectations, Virginia.

Okay, thank you. I'll leave it at that. Thanks, Tyler.

The next question will come from Robert Mosko with Credit Suisse. Please go ahead.

Hey, thanks. A couple questions. Jim and Jim, you mentioned some interesting trends in food service demand over the last few weeks, and I think you mentioned pepperoni being one of them. Can you give us a little more color on what type of restaurant chains you're seeing that from, and do you think that's just a response to declining COVID rates? And then secondly, you know, there's a lot of pricing in the international division during the quarter. Can you give more specifics as to what that pricing was for? And mathematically, should we expect that level of pricing throughout the year?

Yeah. Rob, I'll go ahead and start. I mean, from a food service perspective, I mean, it is your more traditional restaurants, you know, fast, casual, pizzerias, like we mentioned, QSRs, you know, where we're seeing strength in the business. We haven't seen the pickup in some of the travel venues, you know, in terms of hotels. But, you know, as we've seen the business continue to improve towards the end of the first quarter into the second quarter, really some of our best weeks since the pandemic began. So we had also seen some increased business would have been, you know, probably end of October, early November, before the second wave begins. So we know that it's not new and that the trends are real, and we believe that we're going to be able to sustain this going forward. And then the pepperoni business has really been ongoing throughout the pandemic because that is an area that really never slowed down. Any slowdown for us was just capacity driven which now we have our new line up to speed and we're meeting those expectations.

Good morning Rob. Regarding our international business, it is a broad-based improvement in our business. There isn't an area of this business that hasn't improved and it's certainly not a result of pricing. It's better results in our operations in Brazil and in China. More profitability within our exports, both branded and fresh pork. So it's an improved mix, but it's really – I mean, pricing isn't the driver here. This is just a broad-based improvement in business internationally in all aspects of international.

And we expect our international business to remain strong for the balance of the year, Ralph.

Okay, but maybe if I could – Am I reading this wrong? I thought volume was down in international, but sales are up 13%. So is it a mix driver?

That's a mix issue.

Okay. What's driving the mix? Is it Skippy and Spam drives the mix positive?

Yes. I mean, it's the brand of products that have a high demand internationally that is driving the better mix. Yep.

Okay. Thank you.

Thanks, Rob.

And the next question is from Michael Lavery with Piper Sandler. Please go ahead.

Good morning. Thank you. Morning, Michael. I just want to make sure I understand some of the trajectory for refrigerated foods and the margins. You've called out some of the headwinds, and those are clear. But it looks like the margins might have been the lowest since around 4Q15. I know you mentioned some of the second half catalysts or benefits that should come through. Does it get worse before it gets better, or should we expect an upswing already from here? What's some of the puts and takes maybe between now and into the second half?

Yeah, I mean, the positive for refrigerated foods, obviously, are the strength in the food service recovery. And so if we expect to continue on the path we're on, that'll be a very positive impact. Refrigerated foods also get hit the hardest with COVID costs. And so as we see COVID costs hopefully mitigate over the balance of the year, that will continue to be or have a positive impact on refrigerated foods as well.

Okay, thanks. And just a follow-up on the second quarter to date, what you've seen, just any color maybe you can give. And is there, you know, it's sort of in the moment, but any maybe weather watchouts or anything any impact on Sadler's production? I know we've also seen some reports about, you know, maybe some risks to things like cattle, but it doesn't seem like maybe hogs are affected. Just, you know, any update on maybe, you know, kind of what you're watching now?

Yeah, I mean, obviously this week was a difficult week for a lot of people. You know, we saw a large spike in spot prices for natural gas. You know, we've you know, made some quick decisions to mitigate the increase. And then, you know, the other thing is not all of our locations are impacted. So, you know, any of the impact, Michael, is really short-term and nothing that's going to have a broad-based, longer-term impact on the business.

Okay, great. Thanks so much. Yep.

The next question will be from Ben Edelman. Thurber with Barclays. Please go ahead.

Good morning, Jim and Jim. Just one and a half quick ones. So first of all, could you elaborate a little bit on how organic growth was versus inorganic? Because if I remember right, still the first quarter did benefit from Sadler. You used to give those data points in past earnings releases, but I couldn't find it in this one. So just to understand, like, the underlying dynamic without Sadler, how was the performance here?

Well, without Sadler's, and obviously Sadler's is not a large sales volume business, but it's still up without Sadler's.

So on an organic basis, our sales are up. Okay. Okay, perfect. And then just following up quickly on the commentary around the international piece, I think you've mentioned earlier as well some of the headwinds on the freight side. So just to understand what your expectations are when it comes to freight on the international business, just to serve those markets because clearly international has been – a surprisingly good market in most recent quarters, but obviously there needs to be the delivery of product as well. And just to understand what you're seeing on the freight side in the international context.

Yeah, I mean, the most difficult part, Ben, is really just making sure that we secure the containers for that business. And so that's really been the focus of our team. You know, when we talk about overall freight, you know, we talked about those single digits. I mean, that's inclusive of international. So that's our total company purview of how we're thinking about freight.

Okay, perfect. Thank you very much. Thank you.

The next question will be from Adam Samuelson with Goldman Sachs. Please go ahead.

Hi, good morning. This is Sarah Davis. I'm for Adam. Just a quick question around the guidance for me. I guess thinking about the ranges, so on the sales side kind of implying, you know, between 1% and 7% growth year over year. So I guess anything you can provide just helping us think about, you know, what state of the world gets you to the high versus low end of the range would be super helpful. Appreciate it.

That's a great question, Sarah. It really is, as long as there aren't significant downturns in any of the channels, I mean, you might expect some softness as one picks up. It's going to have an offsetting impact to another. But, you know, we believe that our food service business is really going to be the key driver for us for the balance of the year. And so what that recovery actually looks like I think it's going to play a large part in where we fall in the range. We also do expect to see our retail business, whether it's grocery products or our refrigerated foods retail businesses, still provide some growth. Like I said, I think the biggest thing for us is what happens with food service. We do believe it's going to recover. It's going to improve. The rate and the scale at which that happens is really going to have a big impact on that outlook.

Super helpful. I'll go ahead and pass it on.

And the next question is a follow-up from Ken Zaslow with Bank of Montreal. Please go ahead.

Hey, guys. I appreciate the follow-up. parts. One is when you're taking the pricing increase, is it covering the current environment or is it anticipatory? And the increase in volume from Genio, was it any sort of pre-buying ahead of the price increase? And thank you.

Great question, Ken. Yeah, that pricing is to cover the current environment and then no, none of the performance at Genio would have been buy-in

Great. Thank you. Yep.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jim Snee for any closing remarks.

Well, I want to thank all of you for joining us this morning. As we discussed, there is a lot of momentum across all parts of our business. We also know there is work to do to deliver our sales and earnings guidance this year. but we also know that we have the right people, the right portfolio to deliver the results that we need. Thanks again for joining us. Stay warm and stay safe.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.