Hormel Foods Corporation

Good morning and welcome to the Hormel Foods first quarter 2023 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the star then the number two. Thank you. 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, sir.

Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2023. 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 Investors section. On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer, Jacinth Smiley, Executive Vice President and Chief Financial Officer, and Deanna Brady, Executive Vice President of the Retail Segment. Jim will review the company's first quarter results and give a perspective on the rest of fiscal 2023. Jacinth will provide detailed financial results and further commentary on our outlook, and Deanna will join for the Q&A portion of the call. The line will be open for questions following Jacinth'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. At the conclusion of this morning's call, a webcast replay will be posted to our investor website and archived for one year. Additionally, earlier this week, we filed a Form 8K with the U.S. Securities and Exchange Commission that included supplemental segment financial information for fiscal years 2021 and 2022 related to the Go Forward initiative. We have posted a copy of the Form 8K to our investor website investor.hormelfoods.com. 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 on Form 10-K and quarterly reports on Form 10-Q, which can be accessed at Hormelfoods.com under the Investor section. I will now turn the call over to Jim Snee.

Thank you, David. Good morning, everyone. With the release of our recast financial information earlier this week, our transition from a structural and reporting perspective is now complete for the Go Forward initiative. I want to take time to acknowledge the immense amount of work the entire team has put in to transition the business to our new strategic operating model. We have spent time discussing the strategic rationale and how our actions over the past decade have positioned us for Go Forward, but there has been a lot of blocking and tackling that had to take place first to get us to where we are today. Over the past six months, we stood up three new business segments and consolidated the Genio Turkey Store segment. This included organizing the retail segment into six distinct verticals, and combining the food service businesses across the enterprise. We invested in new centers of excellence, including Brandfuel and a dedicated FP&A team. And we made changes to the administrative side of the business to recast the financial statements, align and structure our entities and duties, maintain controls across the business, and of course, operate our business without interruption. We have learned a lot about our people, processes, and technology going through this transition. While we have work to do in all of these areas, I am encouraged by the conversations that are taking place across the organization. The operating environment remains challenging, and while many areas of the business performed ahead of last year during the first quarter, our results were disappointing and below our expectations. From a top-line perspective, demand from consumers and operators generally remained elevated in key categories, and we delivered balanced growth between volume and price across many parts of our portfolio. We continued to see elevated demand for many of our center store, refrigerated, Mexican, and premium items at retail, including Black Label bacon, Columbus charcuterie, Hormel Chili, Hormel Pepperoni, Applegate Breaded Chicken, Herdez Products, Square Table Entrees, and Merry Kitchen Hash. Likewise, solutions-based items in our food service segment had another strong quarter, with volume growth in sliced meats and from brands such as Cafe H, Firebraze, Bacon One, and Austin Blue's. For the quarter, sales declined 2%. As a reminder, there continues to be volatility in our overall volume and net sales results given the planned volume declines in commodity pork and the volume impacts across the turkey supply chain due to highly pathogenic avian influenza or HPAI. Diluted net earnings per share for the quarter was 40 cents, a four cent decline compared to last year. Our results reflect the persistent impact from inflationary pressures, supply chain inefficiencies, and lower sales volumes across each of the business segments. Now turning to our segments. Results in the retail segment declined compared to last year. Net sales growth from the bacon, global flavors, convenient meals and proteins, and emerging brands verticals was offset by lower sales in the value added meats and snacking and entertaining verticals. Segment profit declined as the benefit from pricing actions across the portfolio, higher equity and earnings from Megamex, and improved results for the bacon business were more than offset by the impact from lower net sales unfavorable mix and higher operating costs the bacon vertical delivered outstanding results in the quarter due to elevated demand for our black label items there was also a benefit from commodity relief and pork bellies throughout the quarter as we work through higher cost inventory this is a category where we have made significant investments and one we expect to show growth for the year Similarly, the global flavors vertical made up of our Megamex business had an excellent start to the year. The pricing actions that we have taken across this business to combat inflationary pressures, coupled with commodity relief on avocado inputs, led to revenue and equity and earnings gains for the quarter. The emerging brands vertical delivered volume and sales growth for the Applegate brand. led by frozen breaded chicken and wall deli items. The convenient meals and proteins vertical achieved another quarter of net sales growth, led by Hormel chili, square table refrigerated entrees, and Merry Kitchen hash, in addition to a benefit from pricing actions we implemented last year. We will have new capacity for spam items beginning in the second quarter. In addition to supporting our highest-selling products in the category, this new capacity allows us to restore assortments, introduce new flavors such as maple, and relaunch our 7-ounce Spam item after a three-year hiatus. This provides excellent value for consumers seeking a more affordable option in the category. Skippy peanut butter sales for the quarter were significantly behind last year. Last May, when we made the decision to relentlessly support our customers and the peanut butter category, we knew it would pressure inventory levels and have lingering impacts into fiscal 2023. This was the right decision for all stakeholders, and our team deserves credit for growing the peanut butter category and making the product readily available for our customers and consumers when they needed it. Demand remains robust for the Skippy brand and the category, and we are working diligently to maximize capacity and return inventories and fill rates to normalized levels. Net sales declined for the snacking and entertaining vertical. as growth for the Columbus and Hormel pepperoni brands was more than offset by a year-over-year decline in the snack nuts business. The final vertical, value-added meats, was most heavily impacted by lower commodity pork and turkey availability, leading to net sales declines. In the food service segment, products in the sliced meats, pepperoni, premium prepared proteins and premium bacon and breakfast sausage categories grew volume and net sales for the quarter. Like retail, the overall decline in volume was driven primarily by limited turkey and fresh pork availability. Segment profit increased for the quarter due to improved mix across the portfolio. Results for the segment were below our expectations reflecting industry softness from mid-December into January. However, we have seen a sharp rebound in orders to begin the second quarter and are confident in our ability to grow the business this year. Finally, the international segment was heavily impacted by external factors during the first quarter. From a top-line perspective, our branded export business had a strong quarter led by the Spam and Skippy brands. We also saw another quarter of improved results in Brazil as the team continues to focus on its premium products and food service strategy. Commodity turkey volumes declined almost 80% compared to last year due to restrictions on turkey exports and limited supply as we strategically diverted raw material to support the domestic business. Our team in China faced incredibly difficult operating conditions throughout the quarter, as the impact of COVID-related policy changes had dramatic short-term effects on the business as well as our employees, customers, and operators. Taken together, the impact from lower turkey exports and disruption in China represented a more than one cent earnings per share impact on the quarter compared to last year. We are seeing improvement in China to begin the second quarter, especially in our food service business. As conditions normalize, we expect our China business to resume delivering accelerated growth. During the quarter, we purchased a minority stake in Garuda Foods. one of the largest food and beverage companies in Indonesia. This investment supports our international growth ambitions and the global execution of our snacking and entertaining strategy. Garuda Food is a market leader with strong and reputable brands, local expertise, and a best-in-class distribution network. We have been partnering with the Garuda Food team for several years and this strategic investment enhances that partnership. Jacinthe will provide the financial details of the transaction later in the call. As we disclosed earlier this morning, we are reaffirming our top line expectations and reducing our diluted net earnings per share outlook for fiscal 2023. Our top line remains healthy, and despite softness in the first quarter, we are on track to deliver growth for the year. Demand for our leading center store and refrigerated retail brands remains favorable. The food service segment expects strong growth for remainder of the year, and we anticipate the near-term challenges impacting the international segment to abate over the coming months. Compared to our expectations heading into the year, Earnings are being pressured by inefficiencies across the supply chain, persistent inflationary pressures, and softness in the snack nuts category. I want to detail how we plan to address each of these challenges for the balance of the year. First, I would like to discuss the state of our supply chain. It is important to note that we have made progress over the last year staffing our facilities, expanding production capacity, and improving fill rates for each of our businesses. This has allowed us to catch up to demand in most categories and further supports the confidence we have in our revenue outlook for this year and longer term. Since the fall, we have been operating with elevated inventories due to our efforts to increase production optimize plant performance and return fill rates to historical levels. We expected this inventory to clear during the normal course of business. This has not happened. And in fact, we have seen inventories continue to grow in a number of areas. This has resulted in inefficiencies across the supply chain and higher operating costs. We are taking immediate action to combat these inefficiencies by focusing on selling excess inventories and reducing the reliance on third-party warehouses and co-packers. These actions are expected to cause short-term margin compression, but they are necessary as we look to restore profitability to normalized levels and reduce complexity. Simply said, after almost three years of chasing unprecedented demands, Our ability to supply our customers, consumers and operators caught up to and in some cases began to exceed demand and we needed to react sooner. Rectifying the inefficiencies caused by elevated inventory levels is the top priority in the company. Second, we continue to operate in a volatile, complex and high cost environment and cost pressures remain high. Our retail businesses, especially in the center store, continue to be disproportionately impacted by high inflationary pressures. And the pricing actions we have taken over the last 18 months still lag inflation. To help mitigate some of this pressure, we have announced additional inflationary justified pricing actions in certain retail categories effective late in the second quarter. We are evaluating further pricing actions, but as we've said, our teams remain highly focused on the long-term needs of the business and protecting the equity of our brand. For the remainder of the year, we believe we can stabilize these margin pressures through a combination of pricing actions, operational cost management, and supply chain cost savings initiatives. Third, after meeting expectations last year, our planters business is off to a slower than expected start in 2023. There are numerous factors at play, including general category softness, a consumer shift away from certain higher priced items, production challenges and timing issues. We are taking immediate action to address the current challenges, stabilize the top line, and grow the consumer base. Beginning in the second quarter, we are shifting resources to drive consumption. This includes increasing promotional support and prioritizing peanut items and pack sizes aimed at value-seeking consumers. We are bringing much-needed innovation to the category. with flavored cashews and several new corn nuts flavors. We're expanding assortments as we continue to gain distribution for the brand, and we are investing in capital for higher growth items that are relevant for today's consumer. Long-term, we remain fully committed to the Planters brand and the snack nuts category. This business is at the center of our snacking and entertaining strategy, our ambitions to grow in the convenience store channel, and as we look to become even more balanced as a company. We know what we need to do to change the trajectory of this business, and our teams are focused on accelerating the pace of that change. Considering these factors, we expect full-year net sales growth of 1% to 3% and diluted net earnings per share of $1.70 to $1.82 per share. While we have work to do the rest of this fiscal year, we cannot lose sight of the progress we have made over the last two years. We are a significantly larger company today, 30% bigger, in fact. We are a more balanced company through the products we sell and in the ways we reach our customers, consumers, and operators. We have transformed our company not only through the Go Forward initiative, but with the investments we have continued to make in technology, capacity, and capabilities. And we have made all of this progress while simultaneously navigating a dynamic and volatile environment and managing through the impacts of HPAI. Our brands remain vibrant and relevant, our strategies remain effective, and our business is positioned for long-term growth. At this time, I will turn the call over to Jacinthe Smiley to discuss detailed financial information related to the first quarter and additional color on key drivers to our outlook.