Hormel Foods Corporation

Good morning, everyone, and welcome to the Hormel Foods third quarter 2022 earnings webcast and conference call. All participants will be in a 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 and then one. To remove yourself from the question queue, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to David Dahlstrom, Director of Investor Relations. Sir, please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the third 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 will provide a review of the company's third 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 third 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 187-4087. 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 our most recent annual report and 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, organic net sales, adjusted operating income, adjusted operating margin, adjusted diluted earnings per share, and net debt to EBITDA. Discussion on non-GAAP information is detailed in our press release and third quarter earnings supplement, which can be accessed from our corporate website or located on our investor website, investor.hormelfoods.com. I will now turn the call over to Jim Snee.

Thank you, David. Good morning, everyone. With the results we announced this morning, we have successfully achieved seven straight quarters of record sales and four consecutive quarters of earnings growth. In the current environment, this is an especially notable achievement. Over the last 12 months, we have delivered four consecutive quarters of record sales in excess of $3 billion. We've grown diluted earnings per share 15% compared to the trailing 12-month period. We've made considerable progress across our supply chain, including investments in capacity to support high growth categories and improvements in staffing levels, production volumes, inventories, and fill rates. We've integrated our largest acquisition to date with the planter's snack nuts business, We began transformational work on the Genio Turkey Store segment while simultaneously managing through the impacts of HPAI. We further de-risked commodity profitability with a new pork supply agreement. We've generated over $1 billion in operating cash flow. And we've increased the dividend for the 56th consecutive year. Our experience management team has again proven their ability to navigate and grow the business in volatile market conditions. And these results demonstrate that our business is built for growth, our brands remain vibrant and relevant, our strategies remain effective, and our inspired team members around the world truly embody our results matter mentality. In the third quarter, we delivered another quarter of record sales and double-digit operating income growth. Our team's execution again played a pivotal role in growth this quarter, as together we overcame significant challenges, including continued broad-based inflationary pressures, persistent upstream and downstream supply chain disruptions, limited turkey supply, and impacts in China from COVID-related restrictions and temporary plant shutdowns. Double-digit operating income growth this quarter was led by outstanding contributions from Genio Turkey Store and refrigerated foods. The Genio Turkey Store team significantly outperformed our profit expectations for the as the team effectively managed limited turkey supply and maximized operational performance, all while working to restore the impacted turkey farms across the supply chain. Refrigerated foods delivered double digit value added earnings growth on retail and food service items, more than offsetting lower commodity profitability. Similar to prior quarters, Our balanced business model was able to offset inflationary pressures and supply chain disruptions, which were both significant headwinds during the quarter. Most importantly, our performance indicates our brands remain healthy and are generating growth. Consumers and operators have continued to engage with our brands due to their value, convenience, and versatility. The team drove volume, sales, and change at retail for brands such as Skippy, Hormel Gatherings, Hormel Chili, Dinty Moore, and Merry Kitchen. I would like to acknowledge the tremendous work and coordinated efforts of the Skippy team, who supported our customers and the category this past quarter. We continue to drive growth across our premium retail brands for products such as Applegate natural and organic meats and Columbus charcuterie. We also experienced an acceleration across our center store portfolio, which is firmly aligned with the value shopper. The grocery product segment delivered strong organic volume and sales growth during the quarter and is well positioned to grow as consumers seek flexibility, versatility, and yield at lower price points. Demand for food service products remained elevated as well as operators again turned to our items to help mitigate labor pressures and diversify menu offerings. Value-added products such as our premium bacon and sausage, sliced meats, and line of premium prepared proteins performed exceptionally well this quarter. We saw great demand for brands including Austin Blues, Natural Choice, Bacon One, Cafe H, and Old Smokehouse. Regardless of channel, our brands have responded well to the pricing actions we have taken over the past 18 months. Even as current macroeconomic conditions pressure some of our customers, consumers, and operators. The demand environment has remained favorable. especially for food and convenient meal solutions. We have seen this in the positive syndicated data for many of our grocery and refrigerated products and in the memento behind our branded food service items. In some cases, demand is still outpacing our ability to fully supply. Our broad portfolio of products spanning value tiers, eating occasions, and channels positions as well. We anticipate some additional impact from elasticities as new pricing actions are reflected in the marketplace, and we have accounted for this in our outlook. To date, the impact of price elasticities has been and as we have increased production to drive improved fill rates. Our teams remain keenly focused on the long-term needs of the business, our strategic priorities, and protecting the equity of our brands. Hormel Foods has a history of continuously evolving to become a better, more agile, and more balanced global branded food company. In early August, we announced the next step in our strategic evolution, our Go Forward initiative. Effective October 31st of this year, the beginning of fiscal 2023, we will be organizing the business into three empowered segments, retail, food service, and international. As a result of this initiative, we expect to Elevate our clear strategic growth priorities. Better align the business to the needs of our customers, consumers, and operators. Deepen our sales capabilities. Simplify our approach to customers and operators. And enable faster decision making. The three new segments will continue to be supported by the company's One Supply Chain team, and corporate functions. We are a much different company today than we were even a decade ago. Since the acquisition of Skippy in 2013, we have shifted to becoming a global branded food company with a food forward mentality and a growing set of leading brands across channels. This shift has involved a series of intentional and strategic actions, including numerous strategic acquisitions focused on snacking and entertaining, growing our branded leadership positions in retail and food service, and expanding our geographic footprint. It includes regular evaluations of the portfolio, which in some cases led to divestitures of businesses where we identified a better long-term owner. It includes a right-sizing of our pork supply chain, including the divestiture of two hog harvest facilities and the entry into long-term pork supply agreements. It includes the creation of one supply chain, which centralized operations, logistics, and sourcing decisions to drive efficiencies for the total company. The modernization of our technology and e-commerce capabilities, including Project Orion and the creation of the Digital Experience Group, and most recently, the transformational efforts at Genio Turkey Store. This next step, a new operating model, is a culmination of these recent strategic actions. As part of the Go Forward initiative, we will be folding in the important work we've been doing to transform the Genio Turkey Store segment. As we said when we announced the transformational efforts, turkey will continue to play an important role in our company and will contribute to growth in both retail and food service. We remain on track to integrate all business functions, combine the Gen EO turkey store supply chain into the broader Hormel Foods One supply chain, and drive SG&A cost synergies of approximately $20 million to $30 million annually by fiscal 2023. Our successful transition to the new strategic operating model is dependent on strong leadership and execution from our teams. As previously disclosed, Deanna Brady, Mark Arata, and Sven Neufeld will be leading the retail, food service, and international segments, respectively. Each of these leaders has over 25 years of experience with the company and reputations for delivering results. Under their leadership, we expect to drive sustainable growth in line with our long-term growth goals of 2 to 3 percent top-line growth and 5 to 7 percent bottom-line growth. There has been a tremendous amount of work done on this initiative and more work to do in the coming months as we create the Hormel Foods of the future. We will provide more information on Go Forward next week at the Barclays Global Consumer Staple Conference. We will also be releasing recast financial information during the first quarter of fiscal 2023 to aid in comparability to historical financial data. Earlier this week, we released our 2021 Global Impact Report, which details how we are advancing corporate responsibility, ESG, and our food journey at Hormel Foods. This is the 16th year we have published a report of this kind. Thanks to the incredible work and dedication of our team members, partners, and suppliers, Hormel Foods is making a difference. We remain committed to our mission to be one of the top corporate citizens in the world and encourage you to review the report and the progress we have made to advance efforts through our 20 by 30 challenge. Our business remains healthy. Even as we continue to navigate some of the most difficult operating conditions in the company's 130-year history, our revised full-year guidance reflects both the continued top-line strength we expect to see across our business and escalated cost pressures which are impacting the back half of the year. For the full year, we are increasing our net sales expectations to $12.2 to $12.8 billion, and we are lowering our diluted earnings per share guidance range to $1.78 to $1.85 per share. There are two key takeaways from our guidance revision. One, we expect top line strength across our businesses to continue as our portfolio is well positioned for the current macroeconomic climate. And two, an escalation in certain operational, logistical, and inflationary costs, which began impacting results in the third quarter, has lowered our earnings expectations for the back half of the year. However, we believe the majority of these cost pressures to be transient in nature and to subside over time. First, from a top-line perspective, momentum remains very strong. We are confident in our ability to exceed our previous sales guidance due to strong demand for our food service and center store grocery brands, higher turkey markets, and the pricing actions we have taken across the portfolio. Our long-term strategy to meet consumers where they want to eat with a broad portfolio of products has been a key differentiator in the current environment. Second, we expect to absorb incremental costs in the fourth quarter related to certain operational, logistical, and inflationary headwinds, similar to what we experienced in the third quarter. In terms of magnitude, we view each of these cost buckets similarly. Starting with operational costs, we have made progress across our supply chain over the past year as a recovery in staffing levels has contributed to higher production volumes, inventories, and fill rates. As we said last quarter, inefficiencies related to new team members and turnover have impacted operations leading to higher costs. We continue to see this pressure in the third quarter and do not expect meaningful improvement for the balance of the year. We are also experiencing higher than expected freight and warehousing costs, both domestically and for our international business. Freight rates have moderated recently, but this benefit has been more than offset by elevated fuel surcharges and significantly higher warehousing costs. Protein prices on key inputs have remained elevated compared to our expectations and historical averages. While we have mechanisms in place to manage the impact of elevated and volatile protein costs, markets have generally sustained higher price levels for longer than we anticipated in our previous outlook. We believe these cost pressures are transient and likely to subside over the coming quarters. We fully expect our one supply chain team to continue to improve over time as our teams effectively onboard, train, and retain our new team members while striving to provide a best-in-class workplace experience. This is in addition to the investments we are making in automation and supply chain optimization. and capture the benefits from our recently expanded logistics network. Finally, we are starting to see relief across key input cost markets that are better aligned to our expectations, which should present the opportunity for margin expansion in the coming quarters. The revision to guidance for the year is disappointing, but we will continue to manage the business for the long term. as we navigate these difficult business conditions, leveraging our balanced business model and experienced management team. As I look beyond the fourth quarter, I have a high level of optimism regarding our future. We expect our brands to continue to perform well and plan to introduce an exciting slate of innovation in 2023. We anticipate improvements in our supply chain and the industry-wide supply chain as the broader markets stabilize. We expect turkey supply to normalize, allowing our teams to continue their work to create a demand-oriented and optimized turkey portfolio. We fully expect our international business to be a significant growth driver for the company and to benefit from the investments we have made during the year. including the new Asia Pacific Innovation Center. And once implemented, our new strategic operating model will better align the businesses to the needs of our customers, consumers, and operators to drive sustainable long-term growth. For all of these reasons, and from the inspired work of our 20,000 team members around the world, I could not be more excited for the future of our 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 the outlook.