Hormel Foods Corporation

Good morning and welcome to the Hormel Foods first quarter 2022 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 touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2022. 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 Jacinthe Smiley, Executive Vice President and Chief Financial Officer. Jim Snee will provide a review of the company's first quarter results, strategic initiatives, and a perspective on the rest of 2022. Jacinthe Smiley will provide detailed financial results and further commentary on the first quarter and our outlook. The line will be open for questions following Jacinthe'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 390-5859. It will also be posted to 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 10 in the company's Form 10-K for the fiscal year ended October 31, 2021. It can be accessed on our website. Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance. These non-GAAP measures include organic volume and organic sales. Discussion on non-GAAP information is detailed in our press release located on our corporate website. We've also posted supplemental information on the first quarter and outlook. This can be found on our investor website. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. I want to start off by thanking our dedicated team members around the world for for once again achieving strong results in a complex and dynamic environment. The combination of our execution and balanced business model allowed us to deliver strong first quarter results, keeping us on track to achieve our sales and earnings guidance for the year. These results further demonstrate the importance of our strategy, the positive impact of our actions, and our team's ability to perform in challenging operating conditions. Our entire team can be proud of our accomplishments this quarter. In the first quarter, our team delivered its fifth consecutive quarter of record sales and achieved high-quality earnings growth. Net sales surpassed $3 billion for the second consecutive quarter, a 24% increase. Operating income also increased significantly, up 19%. Most importantly, demand for our products remained elevated across all our business segments and go-to-market channels. We increased advertising investments during the quarter to sustain our momentum. Our One Supply Chain team once again demonstrated their resiliency. and allowed us to deliver organic growth in our domestic value-added businesses for the quarter. From late December through January, our team experienced some of the heaviest operational impacts that we have seen since the start of the pandemic. These impacts stemmed from significant labor shortages due to the Omicron variant. Severe upstream and downstream disruptions and industry-wide operational challenges. I want to again thank our One Supply Chain team for their tireless work and their unwavering commitment to employee safety in these challenging times. Fiscal 2022 is an important year as we return to top and bottom line growth. Our path forward, which we detailed at our Virtual Investor Day in October, represents the six strategic imperatives that will guide our actions over the next few years. These include expanding our leadership in food service, protecting and growing our core brands, aggressively developing our global presence, amplifying our scale in snacking and entertaining, enhancing growth of our ethnic and food forward portfolios, and continuing to transform our company. To provide added color on the quarter, as well as our long-term views on the business, I'd like to give an update on the progress we have made since October. In the first quarter, we again demonstrated our leadership position in the food service channel. Sales were 51% ahead of last year. We continue to benefit from our direct sales force and differentiated portfolio, which is perfectly positioned to meet the needs of today's food service operators with labor and time-saving products. We saw improvement in almost every category across our portfolio of food service businesses. Consumer demand for food away from home has been very strong, and According to recently published government and economic data, conditions are improving across the food service industry to help meet this demand. Food service sales have risen at an average rate of approximately 25% over the trailing 12-month period, accelerating through the close of calendar year 2021. Operator sentiment also continues to improve from pandemic lows. and food service industry employment has made steady gains. These factors, coupled with the demand we are seeing for our products across all geographies in the US, support our positive views on the near-term and long-term health of the industry. As we look forward, we plan to further expand our leadership position in areas like restaurants, hotels, colleges and universities, and use the scale of the planters brand to grow our company's presence in emerging growth spaces, such as convenience stores. We also expect to protect and grow our core brands in fiscal 2022 and into the future. Our retail businesses grew sales 17% during the first quarter. We have leading positions in over 40 categories, with brands such as Hormel Black Label, Spam, Skippy, Holy, and Genio. Elevated demand for many of these core brands over the last two years has surpassed our ability to fully supply. And in these highly inflationary times, having leading brands that connect to consumers in meaningful ways is vital to success. we understand the importance of brand stewardship. And in the first quarter, we increased advertising investments in each business segment to ensure our brands remain well supported, collectively increasing advertising investments by 38%. The strong brand equity we have built over decades has allowed us to simultaneously increase our household penetration grow the size and our share in many of the categories in which we compete, and implement strategic pricing actions to help offset inflationary pressures. We have made excellent strides connecting with consumers in the e-commerce channel as well. During the quarter, we exceeded overall category growth with more than 12% of our IRI-tracked retail sales now coming from this particularly important and fast-growing channel. Transitioning to our third priority, we need to aggressively develop and expand our global presence. Our international business is healthy and positioned for long-term growth despite issues affecting the first quarter. Similar to the broader industry in China, we experienced some demand softness predominantly in food service due to the country's COVID-related restrictions. Additionally, limited rail car availability and U.S. port congestion negatively affected our export business. As we look ahead, our export business is expected to benefit from demand for our global brands such as Spam and Skippy. Our China business is expected to see growth from its scalable food service business as well as from retail, with momentum behind the Spam brand and innovative snacking items such as beef jerky and Skippy Funky Nuts. And we have made considerable progress growing our global presence through our partnerships in the Philippines, South Korea, Europe, and Indonesia. We have great partners in these geographies who share our growth mindset. To further support growth, we plan to continue to make many investments into our international business this year. During the first quarter, we increased brand investments in advertising. Later this year, we will open a new Asia Pacific research and development facility, which will support our operations in China and throughout Southeast Asia. and we have plans to further build out our infrastructure in the important Chinese market. We expect to bring meaningful scale to other select global markets as well, and we are making the necessary investments to succeed long-term. Our fourth priority focuses on our next growth platform, snacking and entertaining. Snacking and entertaining cuts across all segments and channels. and we are ideally positioned to leverage our powerful and complimentary portfolio of brands across salsa, guacamole, nut butters, nuts, and premium deli meats. Planters is a cornerstone to our snacking platform, and that business continues to perform at the high end of our expectations. We completed the supply chain integration of the planters and corn nuts businesses in February. As a result, we expect continued synergies and improved customer service levels going forward. As we discussed when we announced the acquisition of the planters business, we are on track to launch many new innovative items, including planters, sweet and spicy dry roasted peanuts, and introduce a refresh to the branding and packaging. We're also investing in the brand. including our newest campaign, All or One. Seeing the great work of our teams has made me even more confident about where we can take this brand in the future and further strengthens our belief in the potential for planters. Our fifth initiative is to enhance the growth of our ethnic and food-forward portfolios. Our Megamex and Applegate businesses have been growing and we are evolving our portfolio at a rapid pace to meet the changing needs of today's consumers. Our Megamex business grew volume and sales during the first quarter, led by strong demand for whole wheat products at retail. Applegate delivered another outstanding quarter, with growth across the portfolio from products such as breaded chicken, breakfast sausage, and sliced meats. Applegate has given us a clear competitive advantage in the natural and organic meat space and has provided a platform for some of our most important environmental work, such as regenerative agriculture. Finally, we need to continue to transform our company to enable future growth by modernizing our organization. Initiatives like Project Orion, One Supply Chain, and our automation efforts are all focus areas, as is the work we are doing to transform the Genio Turkey Store business. As promised from our fourth quarter call, we want to give you an update on our Genio Turkey Store transformation. Our priority has been to build a more demand-oriented and optimized turkey portfolio. that is better aligned to the changing needs of our customers, consumers, and operators that will result in long-term growth, improved profitability, and lower earnings volatility. To that end, we have taken numerous actions and will take many more actions to optimize our business model. During the first quarter, we started to see the benefits of our actions of shifting from commodity to branded value-added products. For an example, as an industry leader in Turkey, we are investing behind the Genio brand to drive greater growth in our most profitable, high-growth product lines in retail and food service. In conjunction with driving improvement in our value-added products, We are also taking aggressive actions to optimize our portfolio. Combined with increased pricing, our brand investments and skew rationalization are leading to a healthier business. From a supply chain perspective, we remain on track to close the Benson Avenue facility in Wilmer, Minnesota in the second quarter. Our Benson Avenue team members are currently transitioning to our newer and larger facility in Willmar, which will supplement our staffing levels. To date, the GENE-O supply chain has largely been run separately from the rest of our supply chain due to it being vertically integrated. By the start of fiscal 2023, we will leverage our one supply chain capabilities to integrate all facilities into the broader Hormel Foods network. As we integrate these plants into the Hormel Foods network and rationalize commodity SKUs, we will free up plant space for additional production capacity of many product lines that will service any brand in the Hormel Foods portfolio. This is a monumental step and one that will make our entire company more efficient. Similar to the integration of the supply chains, we will integrate key business functions more deeply into the Hormel Foods organization. In addition to integrating IT services, finance and accounting, and HR, we integrated the R&D organization into Hormel Foods R&D during the first quarter. Looking to the remainder of the fiscal year, we will start the process to integrate other business functions such as our selling organization and marketing teams, into the broader organization. This integration will leverage the strengths of the parent company and the knowledge of Turkey to create a better business model. Over time, we expect the Genio Turkey store business to achieve higher, more stable growth and improved profitability. We also expect other financial gains including increased asset efficiency, higher manufacturing throughputs, better labor utilization, and CapEx avoidance. We expect these changes will drive selling general and administrative cost synergies of approximately $20 to $30 million annually by fiscal 2023. In addition to the progress we have made on our 2022 path forward, we continue to invest in our people, our partners, and our communities to deliver on our ESG commitments. During the first quarter, we distributed our annual profit sharing for the 83rd consecutive year. We continued our environmental stewardship work with investments in additional wind energy projects, which strengthens our position in renewable energy. We supplied donations to many causes, responded to crises where we could help, and supported many local communities. Additionally, our Inspired Pathways Community College program continued to receive accolades and was awarded an Anthem Award for the most impactful corporate initiative in education, arts, and culture. And because of our good work, we continue to be recognized. We were recently named one of America's most responsible companies by Newsweek, one of the world's top female-friendly companies by Forbes, and as a Best for Vets employer for the ninth consecutive year by the military times. With our strong start to the year in the face of challenging operating conditions, we are reaffirming our sales and earnings guidance for fiscal 2022. We expect net sales to be between $11.7 and $12.5 billion. and for diluted earnings per share to be between $1.87 and $2.03 per share. Our outlook for the remainder of the year assumes, among other things, elevated levels of demand across our go-to-market channels, margin improvement from our efforts to combat inflation, including pricing actions and a positive shift in MIX. Strength from our high-growth brands and businesses, including Columbus, Applegate, and Food Service. Continued planters' performance at the high end of our expectations. Improved supply chain performance as labor pressures ease, and the benefit of new capacity for dry sausage, pizza toppings, bacon, and other value-added products. I believe our team has always had a keen competency to evolve and adapt as conditions change. We have certainly improved upon this competency over the last two years and we were able to leverage it again to drive growth in the first quarter. I expect our team will continue to navigate and overcome the challenging operating environment to deliver our growth goals this year. Our results-focused mentality is just another factor that makes our company and our inspired team members uncommon. At this time, I will turn the call over to Jacinthe Smiley to discuss financial information relating to the quarter and provide more color on key drivers to our outlook.