Hormel Foods Corporation

Good morning and welcome to the Hormel Foods second 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. We ask that you limit yourself to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to David Dahlstrom, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2022. We released our results this morning before the market opened around 630 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 will provide a review of the company's second quarter results, an update on business initiatives, and a perspective on the remainder of fiscal 2022. Jacinthe will provide detailed financial results and further commentary on the second 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're welcome to get back into the queue. An audio replay of this call will be available beginning at noon today, Central Time. The dial-in number is 877-344-7529, and the access code is 806-1295. It will also be posted to our website and archived for one year. Before we get started, I need to reference a 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 our most recent annual report on Form 10-K and quarterly reports on Form 10-Q, which can be accessed at HormelFoods.com under the Investors section. 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 net sales. Discussion on non-GAAP information is detailed in our press release and located on our corporate website. We have also posted supplemental information on the second quarter and our outlook. This can be found on our investor website, investor.hormelfoods.com. I will now turn the call over to Jim Snee. Thank you, David. Good morning, everyone.

Our team continues to successfully navigate some of the most difficult operating conditions in the company's 130-year history as we again deliver strong top and bottom line growth this quarter. I want to express my gratitude to the entire team for their commitment and ability to drive results. There are many examples across our company of our results matter focus. And I would like to specifically acknowledge two teams who showed incredible dedication and determination during the last quarter. First, I want to recognize our Genio Turkey Store team. In March, highly pathogenic avian influenza, or HPAI, was confirmed in our supply chain. and our team quickly and effectively mobilized into crisis mode. This involved working long hours over the course of many weeks to protect the safety of the turkey flocks, provide transparent communication to customers and operators, and plan for future business interruptions, all while operating the day-to-day business. This was compounded by severe weather in early May, which also impacted several facilities within the supply chain. Our GENEO team went through a lot this quarter, showing unwavering commitment and resolve in the face of some exceedingly demanding situations. I thank them for the work they've accomplished and for the work yet to come. I would like to applaud our team in China for their incredible execution during truly unprecedented times. Strict lockdowns forced the partial closure of two of our manufacturing facilities. Some of our team members volunteered to sleep and live inside the facilities for 10 days to ensure the plants remained operational until normal production could resume. Simultaneously, our sales and marketing teams drove outstanding retail sales gains in anticipation of widespread lockdowns. The ingenuity, resourcefulness, and grit displayed by our entire team in China was truly commendable and another example of what makes our company uncommon. In the second quarter, our team delivered its sixth consecutive quarter of record sales, and third consecutive quarter of earnings growth. Operating margin also improved compared to the first quarter, an indication that our balanced business model and efforts to mitigate inflationary pressures are working. Customer and operator demand for our leading brands remained robust as we continue to realize the benefits of investments in our direct sales force, diversified product portfolios, increased advertising, brand building, and innovation. Across all channels, our brands have responded well to pricing actions, and we are actively managing pricing and promotional levers to ensure the long-term health of our brands and the categories in which they compete. We also made meaningful progress across our supply chain during the quarter, where our investments in capacity, and recovery and staffing levels contributed to improved fill rates, inventories, and production volumes. One of our most important strategies has been to create a balanced, flexible, and diversified business model able to withstand market volatility, business fluctuations, and other unforeseen events. As our second quarter and first half results clearly demonstrate, our strategy to bring balance into our business continues to differentiate Hormel Foods from others in the industry. One of the ways we do this is through our channel diversification. In the initial stages of the pandemic, we leaned heavily on our retail businesses, both domestically and internationally, to drive growth. In the current environment, we are growing with the food service industry through its recovery and continuing to meet elevated demand at retail. From a top-line perspective, we drove 15% growth from our retail businesses in the second quarter and continue to see elevated demand for our leading brands, including Holy, Skippy, Hormel Square Table Refrigerated Entrees, SPAM, Hormel Gatherings, Genio, Columbus, and AppleGeek. We are also seeing our investments in the e-commerce channel pay dividends with solid above-category sales growth and share gains. As measured by IRI, sales increased 5% for the quarter, ending with a strong April. E-commerce constitutes around 12 percent of our tracked retail sales and is an important part of our future growth. We demonstrated our leadership position in the food service channel again during the second quarter, driving sales growth of 32 percent compared to last year. Growth was extremely balanced with strength in both refrigerated foods and Genio Turkey Store. We have made substantial gains in the fast-growing convenience store channel, in large part due to the scale the Planters brand brings to our company. Growth from the Planters and Corn Nuts businesses in this channel is enabling expanded placements of other products. Recent wins in the retail and snacking space include Spam, Chili, Skippy Peanut Butter, Complete, Black Label Bacon and Egg Bite, Columbus Snack Trays, Justin's Items, and Hormel Gatherings Party Trays. Additionally, we've placed premium food service items such as Austin Blues BBQ, Fire Braised Meats, and Bacon One Precooked Bacon to be used in prepared items in this channel. Like e-commerce in the retail channel, convenience stores provide an important part of our future growth in food service. Internationally, we are continuing to make progress to bring even more balance to the company. Our business in China is a great example of this. This quarter, we again experienced demand softness in food service due to the country's COVID-related restrictions. Our team quickly pivoted its resources from food service to the retail channel. Sales of Spam and Skippy surged. and our team was also able to effectively redirect food service items to food security programs to help supply those experiencing lockdowns. Our strategy to meet consumers where they want to eat with a broad portfolio of products from mainstream to premium, both domestically and internationally, is a strategy that has served us well and will continue to serve us well into the future. From an earnings perspective, our Genio Turkey Store segment had an outstanding quarter, as its ability to adjust to current market conditions and meet strong food service demand drove higher results. Likewise, our food service businesses in refrigerated foods were able to price for inflation and deliver excellent volume growth. These businesses more than offset higher freight expenses for all segments and the earnings decline in grocery products, which absorbs significantly higher costs for certain inputs, such as avocados, protein, and packaging. We have announced another round of pricing actions across our grocery portfolio to help mitigate these inflationary pressures, but will, in the meantime, lean into our balanced model as we did this past quarter. The balanced business model has been a key driver behind our recent success and our long-term growth. We remain confident in our ability to withstand volatile economic conditions, and market cycles through our continued focus on balance. We successfully completed the integration of all aspects of the planter's snack nuts business during the second quarter, and the business continues to perform at the high end of our expectations. During the cutover period in February, we experienced lower fill rates as we fully transitioned inventory into our logistics network and assumed control of the entire supply chain. While this did have a short-term impact on sales and consumption, we have seen improvements in customer service levels and expect consumption data to show continued improvement in the coming months. As we celebrate one year of owning the planters business, I am proud of the excellent progress we have made on our commitments from last June. We have invested heavily behind the planters and corn nuts brands. We are on track to capture the synergies identified during diligence, and we have leveraged this business to amplify our scale in snacking and entertaining. After an excellent first quarter and significant profit growth in the second quarter, Our Genio Turkey Store team is facing an uncertain period ahead due to the impacts and risks to its supply chain from HPAI. Similar to what we experienced in 2015, HPAI is expected to have a meaningful impact on industry poultry supplies over the coming months. including large supply gaps in the Genio Turkey Store vertically integrated supply chain beginning in the third quarter. On a positive note, it appears that the biosecurity measures the company has implemented since 2015 have provided additional protection against the virus. as the number of company-managed turkeys impacted to date is 25 percent lower than during the previous event. Breast meat prices have already risen to levels higher than any point in 2015, currently trading above $6 compared to the previous all-time high of $5.85. We have seen increases in other turkey markets as well. From a cost perspective, feed prices are significantly higher with corn and soybean meal up more than 125% and 40% respectively as of early May. Additionally, there is further upside risk to feed prices with later plantings due to cold and wet weather across the Midwest this spring. The cost of production labor at company manufacturing facilities has also increased more than 50% on average compared to 2015. Our team is taking the appropriate actions to protect the health of the turkeys across our supply chain, managing through operational challenges caused by the outbreaks and adapting to changing business conditions. While simultaneously managing through the impacts of HPAI, our team made progress on the Jenny O. Turkey Store business transformation. During the second quarter, we closed the Benson Avenue facility and successfully transferred approximately 200 employees to the newer and larger manufacturing facility in Willmar. We remain on track to integrate business functions consolidate the J&AO Turkey Store supply chain into the broader Hormel Foods One supply chain, and drive SG&A cost synergies of approximately $20 to $30 million annually by fiscal 2023. Above all, the team is focused on creating a business model that is better aligned to the changing needs of our customers, consumers, and operators to drive long-term sustainable growth. I also want to provide an update on the great work our team is doing to fulfill our ESG commitment and achieve our 20 by 30 goals. During the second quarter, We announced we are on track to match 100% of domestic energy use with renewable sourcing by the end of 2022. We announced that our Justin's brand is transitioning to jars that use 30% less plastic. We were ranked number 57 on the U.S. Environmental Protection Agency's Fortune 500 list of the largest green power users. We were named one of America's most trustworthy companies by Newsweek. And in May, for the 13th time, we were named one of the 100 best corporate citizens by 3BL Media. This ranking recognizes outstanding environmental, social, and governance transparency and performance. We are proud and honored to continue to be named a top corporate citizen. Lastly, I want to share a recent success story from our Inspired Pathways free community college program. This week, we hired the first individuals from the program to participate in paid summer internships. This marks yet another example of why we believe this program can be generational for our employees, their dependents, and for the future of the company. We are reaffirming our sales guidance range of net sales between $11.7 and $12.5 billion and narrowing the earnings range of $1.87 to $1.97 per share. We are confident in our ability to deliver our sales guidance given robust demand for our brands across the retail, food service, and international channels. improvements in our supply chain, investments in capacity, and from strategic pricing actions. From an earnings perspective, we expect a strong finish to the year from our refrigerated foods business. We anticipate a fourth quarter improvement from pricing actions taken across our grocery products portfolio. We are navigating the impact of HPAI on the Genio Turkey Store supply chain and external factors affecting the international and other segment, including current export logistics challenges and COVID-related lockdowns in China. Our teams have actions in place to manage through these challenges and drive results for the company. 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.