Hormel Foods Corporation

Good day, and welcome to the Hormel Foods second quarter 2021 earnings webcast and conference call. All participants will be in a listen-only mode. Should you need assistance from an operator, please signal your conference specialist by pressing star, then 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 touchtone phone. 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 Anis, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the second 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, 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 conditions. 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 the call will be available beginning at noon today Central Standard Time. The dialing number is 877- and the access code is 105508. 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 26 through 32 in the company's Form 10-Q for the fiscal quarter ended January 24th, 2021. It can be accessed on our website. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. Once again this quarter, I want to recognize the heroic work of our production team members. This team deserves much of the credit for our record sales results this quarter as they continued working to produce safe, high-quality food for millions of consumers and customers. Our number one priority has been to keep our team members safe, and our cross-functional COVID-19 leadership team is ensuring we are on the leading edge of the country's vaccination efforts. To date, we have fully vaccinated over 51% of our domestic workforce, which is well ahead of the country's vaccination rate. We are encouraged by the rapid decline in cases in our communities. From a top line perspective, our balanced business model has again proven to be a winning formula as our team delivered record sales for the second quarter and first half. In total, Sales for the quarter increased 8 percent compared to last year, and sales increased over 5 percent for the first half of the year. A key driver of our sales performance is the rebound in our food service business. As expected, our food service team experienced a strong recovery and took numerous actions to properly position our organization to capitalize on the industry recovery. For the quarter, food service sales increased 28 percent. This reflects an increase of 1 percent over 2019 pre-pandemic levels. This is a significant accomplishment, especially knowing where the industry was just a few short months ago. Since the beginning of the pandemic, our food service teams have been doing their part to support the industry. Within days of the crisis, we worked closely with our distributor and operator partners to assist their businesses in many different ways, whether it was a rebate program to offset food costs, extending payment leniency, helping adjust to the new takeout, delivery, and pickup environment, or simply being available to personally check in with a restaurateur to see how they were doing. Our confidence in the industry recovery never wavered. We know these actions benefited our distributor and operator partners and are playing a part in our outperformance of the broader industry trends. During this difficult labor environment, our experienced and tenured direct sales force is helping operators meet their accelerating demand with products that simplify their food preparation, save time, and minimize labor. all while preserving the flexibility to add their own unique touch to a menu item. Products like Hormel Fire Braised Meats, Sadler's Authentic Smoked Barbecue, Fontanini Authentic Italian Meats, Hormel Bacon One Fully Cooked Bacon, Holy Guacamole, and Ginny O' Turkey are uniquely positioned to meet this need. The brightest spot in our food service portfolio has been our pizza toppings business. Prior to the pandemic, we capitalized on the continued growth in this category, especially for premium products and invested heavily in capacity to meet future demand. We've also been investing in plant-based offerings and are seeing growth from our plant-based pepperoni and crumbles products. We're excited to leverage our expertise in the pizza toppings category to drive growth in plant-based toppings. With our new capacity expansion at Burke and with additional pepperoni capacity set to open at the beginning of fiscal 2022, we are set up nicely to meet the consistent growth we have seen in this space. With the food service industry recovery well underway, We will continue to strengthen our relationships with our valued partners, invest in our direct sales team, and support the industry's return to growth with innovative, convenient, and flavorful product solutions. In addition to food service growth, our retail and deli businesses also remain healthy with demand elevated compared to pre-pandemic levels. Total retail sales this quarter were flat to last year as we lapped the months when consumers were stocking their pantries in anticipation of the pandemic. Sales finished up 16% compared to the second quarter of 2019. And we continue to see strength from our leading brands such as Spam, Applegate, Genio, Black Label, Air Dez, and Holy. As a reminder, we experienced an immediate and sustained demand surge for our shelf-stable products in the grocery products segment at the onset of the pandemic. The second wave of demand that impacted our perishable and refrigerated items happened weeks later in the third fiscal quarter. Sales in the deli channel increased 4 percent this quarter, and are up 9% over pre-pandemic levels. Hormel Gathering's party trays delivered strong growth as consumers started to spend more time with family and friends and consequently are purchasing more products to entertain their guests. The Columbus brand remains a cornerstone for our deli business and is now benefiting from the opening of our new plant in Omaha. which is providing much needed capacity. Columbus is a leader in charcuterie, and we now have the capacity to continue expanding distribution. Across the retail and deli space, our consumer takeaway metrics continue to be positive according to IRI. Many of our brands have made large gains in household penetration, overall buy rates are improving, and we are seeing an expansion in cross-purchasing across our brands. E-commerce sales grew double digits in the last 12 weeks, according to IRI, and we are gaining share in important categories. We will continue to increase our investment in this important channel. Throughout the quarter, our supply chain continued to improve as we were able to increase production levels through a combination of gaining efficiencies, increasing capacities, and leveraging our strategic supply chain partners. Another area we have made great strides is in our distribution network. Over the last year, we have opened a new grocery product distribution center and, in recent weeks, have opened a refrigerated distribution center serving the West Coast. These strategic investments will reduce overall freight miles and cost, improve our customer service levels, support growth for our value-added businesses, and reduce greenhouse emissions. From a bottom-line perspective, operating income showed a slight decline. We saw raw material and feed prices rapidly increase throughout the quarter. We have taken pricing actions in many categories, but did not see the full benefit of these actions during the quarter. As we have previously discussed, in volatile market conditions, pricing will lag the markets, which will shift profits to subsequent quarters. Net earnings and diluted earnings per share were flat till last year. A higher tax rate negatively impact earnings by one cent per share compared to last year. Turning to the segments, refrigerated food volume increased 3 percent and sales increased 17 percent, with growth coming from almost every division. Value-added sales increased 18 percent, driven by a significant recovery in the food service businesses. As anticipated, We saw a rapid increase in food service demand as the quarter progressed. Almost all categories within food service grew sales, led by our pizza toppings portfolio and brands such as Fontanini and Bacon One. In fact, pepperoni, pizza toppings, Bacon One, and Fontanini authentic Italian meats all showed growth compared to the second quarter of 2019. We also experienced a recovery in the premium breakfast portfolio with growth from our Old Smokehouse brand. Additionally, we saw excellent growth from our premium prepared proteins, which include brands such as Austin Blues, Fire Braze, Cafe H, and Saddler's. These items are key to our pre-strategy, items that are pre-marinated, pre-cooked, pre-sliced, and fully prepared. As the industry recovery accelerates into the summer and labor remains the predominant challenge for most operators, our line of products offer convenient, safe, versatile, and flavorful solutions. Our retail and deli teams delivered a strong quarter on the top line, with growth coming from products such as Black Label Bacon, Hormel Gatherings, Applegate, Lloyd's Barbecue, Hormel Pepperoni, and Columbus Prepared Foods items. Refrigerated food segment profit increased 32% due to higher food service sales, higher retail fresh pork profitability, and decreased operational expenses due to abating COVID-19 cost pressures. International delivered its fifth consecutive quarter of record earnings growth, with sales increasing 17% and segment profit increasing 6%. The performance of the team in China remains impressive. Food service volumes have recovered to pre-pandemic levels, driven by growth from Skippy, pizza toppings, and bacon items. Retail demand for the Spam and Skippy brands has also been outstanding. The company's innovative offerings, including beef jerky, Skippy snacking items, and two new Spam varieties are providing additional avenues for growth, and we remain confident in the long-term prospects for our China business. Branded exports also grew, with growth coming from the Skippy and Spam brands, higher food service sales, and improved margins on fresh pork items. In addition, our partners in the Philippines, South Korea, and Europe continued to experience elevated demand for shelf-stable products. Grocery products results were strong given the difficult comparison to last year due to the extremely high levels of demand experienced at the onset of the pandemic. Even though volume declined 14%, sales declined 8 percent, and segment profit declined 23 percent, we are encouraged by the segment's performance as we have seen sustained consumer demand for many of our brands compared to pre-pandemic levels. Sales for center store brands such as Spam, Hormel Chili, Complete, and Merry Kitchen Hash were all over 20 percent higher compared to our second quarter of 2019. We will continue to support our leading brands, including Skippy, Spam, Complete, Herdez, Holy, Justin's, and Hormel Chili, and we're resuming promotional activity as inventory levels normalize. Our Megamex joint venture performed well, as equity and earnings increased 26%. Both the Herdez and Holy brands grew as consumers looked for authentic and convenient Mexican products to enhance their at-home eating occasions. The Herdez brand continues to outperform the salsa category. This brand has grown households by 3 million since the start of the pandemic and has introduced industry-leading innovation to the marketplace in recent years. Following the highly successful performance of Herdez Guacamole Salsa, we continue to expand distribution and grow share with two new product lines, Herdez Taqueria Street Sauces and Herdez Salsa Cremosas. Recently, Herdez also entered the hot sauce market with the introduction of Herdez Avocado Hot Sauce. another versatile offering that can enhance any meal. The Holy brand had a strong quarter as well, as it continues to target consumers looking for convenient solutions to enjoy avocado offerings. Our recent innovations, including Holy Smashed and Holy Diced avocado products, solve for that consumer need. As we saw across many of our refrigerated food service businesses, demand for avocado products in the channel started to return during the quarter. Genio volume decreased 3% and sales increased 2%. A recovery in the food service business and higher whole bird sales drove the sales increase. Food service volumes were up double digits compared to last year. Demand for Genio retail products, such as lean ground turkey, remained above pre-pandemic levels. Genio turkey store segment profit declined 54% due to the impact from higher feed costs. Grain prices continued to increase significantly during the quarter, while pricing action had yet to be fully reflected in the marketplace. Jim Sheehan will provide further commentary on the actions we have taken to manage higher corn and soybean meal costs. Looking to the balance of the year, we are increasing our full-year sales guidance range to $10.2 to $10.8 billion and reaffirming our earnings per share guidance range of $1.70 to $1.82 per share. As a reminder, This guidance range does not include the estimated impact of the pending acquisition of the planter's snacks nut business. Our diversified and balanced business model gives us confidence we can perform well in many different economic scenarios and market conditions. We have a very positive outlook on the food service business as we head into the second half of the year. We are well positioned from an inventory and capacity standpoint to meet the demand from our distributor partners and operators, and are confident in our ability to gain share throughout the recovery. Additionally, we are increasingly confident that K-12 schools and colleges and universities will open and operate in a more traditional manner this fall. This should benefit both refrigerated foods and Jenny O. Turkey Store. We continue to see elevated demand in the retail, deli, and international channels. We expect to further benefit from pricing actions, increased capacities on key product lines, and continued improvements in our supply chain. This year, we have seen rapid increases in key input costs across our businesses, and we expect to operate in a high-cost environment for the remainder of the year. Our experienced management team has a proven ability to navigate and grow our business in volatile and inflationary market conditions. And once again, we will be leveraging our direct sales force to partner with our customers to mutually grow our businesses. As a reminder, our operations were heavily impacted by plant shutdowns, supply shortages, and lower production throughput caused by the effects of the pandemic in the back half of fiscal 2020. This ultimately led to lower levels of inventory, which negatively affected the third and fourth quarters. Through the strategic actions we have taken to improve all facets of our operations and based on our record first half performance, we expect to benefit from more normalized operations in the back half of fiscal 2021. I am confident in our ability to continue growing, and I'm looking forward to closing the acquisition of planters next month. 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.