Hormel Foods Corporation

Good day and welcome to the Hormel Foods third 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 a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Nathan Ennis, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the third 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 on 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 on 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 this call will be available beginning at noon today, Central Daylight Savings Time. The dial-in number is 877-344-7529 and the access code is 101-594-36. It will 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 28 through 35 in the company's Form 10-Q for the fiscal quarter ended April 25, 2021. It can be accessed on our website. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. In the third quarter, our team delivered the highest quarterly sales in the company's 130-year history. while operating in an environment which included inflationary pressures and industry-wide supply chain challenges. Our ability to deliver this performance demonstrates the strength of our balanced business model and strong consumer demand as we grew sales in all four segments and all four sales channels on an organic basis. Also in the third quarter, we completed the acquisition of the Planters Snack Nuts business. This brand fits perfectly into our vision for Hormel Foods and is another step in our strategic evolution. The integration has been smooth, which has allowed us to effectively operate the business with no disruptions. These accomplishments were achieved by our team members who never lost sight of our long-term growth strategy in the face of unprecedented industry-wide challenges. To all our team members around the world, including our new planters team members, thank you for your accomplishments and thank you for staying safe. Now more than ever, our investments across all areas of our business are paying off and have allowed us to reach even more consumers when and where they are eating. Whether it is cooking a meal at home, snacking at work, eating at a local restaurant, hosting a gathering with family and friends, or ordering food online, a Hormel Foods branded product will likely be an option. The proof is in our performance this quarter. Sales increased 20% on a volume increase of 1%. Compared to the third quarter of 2019, sales increased 25%. This all-time record performance was led by an acceleration in our food service business, sustained demand for our retail and deli products, continued growth from our international business, and pricing actions taken across the portfolio. Excluding a partial quarter of the planter's business, organic sales increased 14% and volume declined 2%. For the quarter, we saw an acceleration in our food service business as sales grew 45% compared to last year. What is even more impressive is sales increased 17%, compared to 2019 pre-pandemic levels. Our enterprise food service portfolio remains perfectly positioned to meet the most pressing need of today's food service operators, which is labor. Our products minimize labor, simplify food preparation, and save time, all while preserving the flexibility to add their own unique touch to their menus. Hormel Bacon One fully cooked bacon, Holy Guacamole, Fontanini authentic Italian sausages, and Hormel fire braised meats are all excellent examples of products that are succeeding in today's environment. Our retail business also showed 9% growth compared to 2020. Compared to pre-pandemic levels in 2019, this business delivered outstanding growth of 31%. Brands such as Spam, Hormel Black Label, Applegate, Genio, and AirDes continue to resonate with consumers. Sales in the deli channel increased 12% this quarter and are up 16% compared to pre-pandemic levels. Hormel gatherings, party trays, and Columbus charcuterie items showed another quarter of growth as consumers returned to entertaining and spending time with family and friends. An important component of our growth in retail and deli is our e-commerce performance. We continue to invest in the digital space, and we are seeing strong results compared to pre-pandemic levels. Our international channel delivered impressive growth of 36% compared to 2020 and is 33% above 2019 levels. Improvement was led by branded exports and strength from the multinational businesses in China and Brazil. Again, I cannot stress enough how proud I am of our entire team for delivering these impressive results in the midst of an incredibly difficult operating environment marked by significant inflation, labor challenges, and supply chain disruptions. This not only demonstrates the team's ability to execute our long-term growth strategy, but also reinforces the power of our brands. On a consolidated basis, Diluted earnings per share were $0.32, a 14% decline compared to 2020. The decrease was due to one-time transaction costs and accounting adjustments related to the acquisition of the planter's business. Adjusted earnings per share were $0.39, a 5% increase. our team did an excellent job actively managing through inflationary pressures and supply chain challenges. During the quarter, we continued to see inflation in labor rates, freight, supplies, raw materials, and many other inputs, with an acceleration compared to the second quarter. Of note, we saw a very high level of inflation in pork input costs. To mitigate this inflationary pressure, we have taken pricing on almost every brand and product across our company. This is a testament to our successful pricing strategy, the power of our brands, and the hard work of our entire team, especially our direct sales force. As a reminder, there is a difference in how quickly pricing flows through by channel, and this can shift profits to later quarters. We have a track record of improving profitability through a market cycle, and we expect margins to improve in the coming quarters. We also saw a drastic step up in industry-wide operational challenges caused by labor shortages. This has impacted both our facilities and the operations of supplier and logistic partners. This has created a very complex operating environment, which led to an inability to fully meet customer demand. To address labor availability in our facilities, we are taking swift actions to hire and retain team members, implement automation, across manufacturing facilities and simplify the portfolio. Our entire team, from operations to our direct sales force, has done an excellent job adjusting, prioritizing, and managing through this dynamic environment. Turning to the segments, refrigerated foods volume decreased 2%. Sales increased 19%. and segment profit was flat. Organic volume decreased 3% and organic sales increased 18%. Volume was lower due to lower harvest levels and commodity sales compared to last year. Our food service business accelerated compared to the second quarter with elevated levels of demand for all our branded products. nearly every category grew volume and sales compared to last year, with standout performances from products like Hormel Bacon One, pizza toppings, and sliced meats. Bacon One, Fire Braised, Fontanini, Applegate, and pizza toppings were just some of the items that also grew volume and sales compared to 2019. Similar to prior quarters, we saw excellent growth from premium prepared proteins, which are the cornerstone of our pre-strategy, offering versatile and flavorful items that come pre-marinated, pre-sliced, or pre-cooked. These items solve for the most pressing issues facing operators today, labor shortages. Brands like Bacon One, Austin Blues, Fire Braised, and Cafe H are designed to solve for this challenge and have never been as important or in higher demand than they are today. We saw momentum continue for our retail and deli brands in refrigerated foods as well. Products showing exceptional sales growth include Hormel Gatherings Party Trays, Hormel Black Label Bacon, Hormel Fully Cooked Entrees, and Lloyd's Barbecue. The Columbus brand has shown no signs of slowing down as consumers look for premium, authentic charcuterie. I'm pleased with the performance of our new charcuterie plant in Omaha as the team is quickly filling up the new production lines. We are excited about the upcoming holiday season and expect a high level of demand for our innovative and premium Columbus product lines. International delivered its sixth consecutive quarter of record earnings growth, with volume up 2%, sales up 26%, and segment profit up 18%. Organic volume increased 1%, and organic sales increased 24%. Total branded and fresh pork exports grew during the quarter. We continue to see strong growth from Spam, Skippy, and many food service brands around the world. Our business in China continues to perform well, led by food service and from retail brands such as Spam and Skippy. Our new item launches of beef jerky and Skippy snacking items have also been very successful. Grocery products volume increased 4%, sales increased 20%, and segment profit increased 1%. Brands including Spam, Hormel Complete, and Holy showed excellent growth during the quarter. We continue to see strong growth relative to 2019 pre-pandemic levels for brands such as Spam, Hormel Completes, Dinty Moore, Merry Kitchen, and Herdez. Organic volume decreased 6% and organic sales were flat. Organic volumes faced difficult comparisons due to the extremely high levels of demand during the early parts of the pandemic. Additionally, we have rationalized capacity on numerous contract manufacturing items to support growth of our branded business. Our Megamex joint venture delivered excellent results as equity and earnings increased 30%. The growth from the ERDES and HOLI brands are being driven by the tremendous level of innovation from Megamix with products such as Erde's cremosas, Erde's guacamole salsa, and wholly smashed avocado. We are also extremely encouraged by our entry into the hot sauce space with Erde's avocado hot sauce. Genio volume increased 9% and sales increased 22%. A combination of a food service recovery and higher whole bird and commodity volumes drove the volume increase. Increased sales is due to higher volumes and pricing actions across the portfolio. Virginia turkey store segment profit declined 17% driven by the impact from significantly higher feed and freight costs. While spot grain markets remained elevated during the quarter, the hedging actions we took stabilized the cost increases. Looking to the balance of the year, we issued our full-year net sales and earnings guidance to reflect the planter's acquisition. We expect net sales to be between $11 to $11.2 billion and for diluted earnings per share to be between $1.65 to $1.69. This guidance reflects the addition of the planter's business and includes the associated one-time transaction costs and accounting adjustments in addition to the impact from inflationary pressures on our business. We expect a strong finish to the year. As pricing actions continue to take effect, the food service industry continues to recover, and from the addition of planters. Looking beyond the fourth quarter, I feel very optimistic about the future. Our balanced portfolio with diversification across raw materials, channels, and categories will allow us to perform well in many economic environments. Further, We never wavered on our commitment to employee safety and on making disciplined and strategic investments to ensure we are positioned to deliver long-term, sustainable growth. Since the onset of the pandemic, we have made the following strategic investments. We opened a new Columbus charcuterie plant in Omaha, and we immediately invested in Phase II, representing a major expansion of our pepperoni capacity. We completed the pizza toppings expansion at our Burke plant in Iowa, which significantly increased our capacity for pizza toppings. We have invested in R&D for plant-based products and launched our plant-based pepperoni and sausage crumble items at the Pizza Expo in mid-August. Additionally, We bolstered our innovation efforts by investing in new R&D centers, both domestically and in China. We expanded our distribution network for both the shelf-stable and refrigerated businesses. We made further progress on building out our one supply chain by investing in systems, people, and processes. We acquired Sadler Smokehouse, which added capacity to support growth during the recovery in the food service industry. We completed the HR and finance portions of Project Orion and continue to work toward the multi-phase implementation of our supply chain. We continue to make investments in advertising for our leading brands. And finally, we made the company's largest investment ever. the acquisition of planters. We are already seeing the benefits that a large, iconic, and well-known brand can have on our business. These are just some of the many investments we've made to further enhance our business and set us up for growth into the future. At this time, I will turn the call over to Jim Sheehan to discuss financial information relating to the quarter and give an update on our financial position, and provide commentary regarding key input cost markets.