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.