Hormel Foods Corporation

Good morning and welcome to the Hormel Foods Corporation Third Quarter Earnings Conference Call. All participants will be in the lesson-only mode. After today's presentation, there will be an opportunity to ask questions. At that time, if you have a question, please press star 1 on your telephone keypad. To withdraw a question, press star 2. Please note this event is being recorded. I would now like to turn the conference over to David Dahlstrom. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the third quarter of fiscal 2023. We released our results this morning before the market opened around 6 30 a.m eastern time. If you do 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, Jacinne Smiley, Executive Vice President and Chief Financial Officer, and Deanna Brady, Executive Vice President of the Retail Segment. Jim will review the company's third quarter results and give a perspective on our outlook for the balance of fiscal year 2023. Jacint will then provide detailed financial results and further commentary on our outlook. Deanna will join Jim and Jacint for the Q&A portion of the call. The line will be open for questions following Jacint'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. At the conclusion of this morning's call, a webcast replay will be posted to our investor website and archived for one year. Before we get started this morning, 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. Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance. Non-GAAP figures adjust for the impact of an adverse arbitration ruling of approximately $70 million reflected in operating expense. These non-GAAP measures include adjusted operating income, adjusted operating margin, adjusted selling general and administrative expenses, and adjusted diluted net earnings per share. Discussion on non-GAAP information is detailed in our press release, which can be accessed from our corporate or investor website. I will now turn the call over to Jim Snee. Thank you, David.

Good morning, everyone. In an increasingly dynamic and competitive environment, We grew volume across all our segments, delivered adjusted diluted net earnings per share in line with last year, and made further progress addressing the near-term challenges impacting the business during the quarter. This progress included reducing inventory, continuing to build momentum in the planter's snack nuts business, and driving adjusted operating margin improvement compared to last year. Reducing inventory to more historical levels remains a top priority for the company. Our actions to rectify the inefficiencies caused by elevated inventory are working, demonstrated by a sequential reduction in dollars of both finished goods and total inventory. The value of finished goods inventory ended the quarter at its lowest level since this same time last year, representing meaningful improvement. We expect further declines in the fourth quarter and also plan to achieve our day sales and inventory target by the end of the year. We also drove improvement in our planters business, supported by another quarter of higher shipments and positive results in consumption data. For the quarter, retail shipments of planters snack nuts and corn nuts varieties were up 5% and 24% respectively. Retail data shows dollar consumption and share improving sequentially for the last 52, 26, and 13 week periods. Volume trends remain encouraging as well, with above category performance over the last six months. And more recent data shows planters volume and dollar shares have inflected into positive territory. The launch of our innovative flavored cashews is meeting expectations and we are seeing strong acceptance from our customers. While early, our flavored cashews are over indexing with younger consumers as we see the benefits of leveraging our brand equity to drive excitement for the category. We are supporting the launch with social and digital activities as well as a national TV ad campaign. And, We recently launched an LTO for the fall season, apple cider donut flavored cashews, which we expect to drive incremental volume and attention for the category. Momentum continues to build in our snack nuts business as we benefit from regained distribution, investments and innovation, and effective promotional support. We continue to do our part as the category leader to support the planters and corn nuts brands to drive growth for our business, the snack nuts category, and for our customers. Lastly, we continue to make progress in improving our margin structure with adjusted operating margins slightly ahead of last year. Margins benefited from demand for our premium items in food service and growth from the retail spam and black label bacon portfolios, areas we have invested in heavily over the past three years. We also more than overcame the positive mix impact from strong Skippy sales and turkey markets last year, as well as a 15% increase in advertising investments to support our brands during the third quarter. We expect our highest operating margins of the year in the fourth quarter, aided by a seasonally strong sales mix and savings from a series of projects aimed at reducing costs and complexity throughout our system. Our third quarter results reflect the strength of our leading brands and the value of our balanced business model. Investments into our brands and continued improvement across our supply chain have generated positive performance in the marketplace. Volume growth for the quarter was broad-based, driven by a recovery in turkey, elevated demand for many of our food service items, and growth from leading retail brands, including Spam, Black Label, Planters, and Hormel Pepperoni. On an adjusted basis, diluted net earnings per share for the quarter was 40 cents, even to last year. Compared to our outlook heading into the quarter, we absorbed unexpected earnings headwinds of two to three cents, resulting from much weaker results in our international segment and supply chain disruption caused by a third-party logistics provider shutdown. Looking to our segments, our food service segment delivered balanced volume gains and another quarter of segment profit growth. Volume for the quarter increased, driven by growth in our affiliated businesses and strong demand in many branded categories, including pizza toppings, premium bacon and breakfast sausage, and premium prepared proteins. Brands such as Cafe H, Fire Braised, Fontanini, Old Smokehouse, and Bacon One delivered volume gains compared to the prior year. Net sales declined 3% due to lower market-driven pricing. For context, the average selling price per pound decreased 5% compared to last year, resulting from input cost deflation. As anticipated, our food service business leveraged its differentiated capabilities to drive double-digit segment profit growth, led by better volumes and improved mix. Our team continues to successfully manage pricing and cost dynamics. They continue to actively engage with operators through our direct selling model. And they continue to innovate to address key operational issues such as labor, prep time and complexity. Industry data from Technomic is also supportive of growth for our business. With operator sentiment steady, industry employment improving, and dollar sales increasing. Inflation in the channel has also slowed for the fourth consecutive month. We expect a strong finish to the year from this team, driven by growth from premium items, further recovery in Turkey, and as the team leverages its capabilities in the K through 12 and college and university channels this fall. In our retail segment, We grew volume in key categories and saw a recovery across the turkey portfolio. For the quarter, we delivered volume growth in four of our six retail verticals. And those verticals were value-added meats, bacon, snacking and entertaining, and emerging brands. Volume and net sales improved for the value-added meats vertical, primarily due to higher turkey volumes. The team is heavily focused on regaining distribution of our value added Genio products and managing turkey supply through the current recovery period and upcoming holiday season. The bacon vertical again delivered excellent results due to elevated demand for black label items and favorable input costs for most of the quarter. Over the last 52 weeks, Black Label Bacon has grown share and household penetration by one point each. Our strategy to offer a wide variety of both raw and precooked items in the marketplace has been successful as we grow our business in the large and highly relevant bacon category. Our team is executing our brand strategy while maneuvering through the market volatility we are currently experiencing. Volume gains for the snacking and entertaining vertical were led by planter snack nuts, corn nuts corn kernels, Hormel pepperoni, and Hormel gatherings party trays. In addition to improvement for the planter snack nuts business, our pepperoni and Hormel gatherings businesses are healthy, demonstrated by household penetration gains for these brands during the quarter. We expect holiday demand and promotional support to drive a strong end of the year for the planters, Hormel gatherings, and Columbus brands. Our Applegate business posted another quarter of volume in net sales growth, led by our frozen line of breaded chicken and breakfast sausage. Many products also outpaced category dollar sales growth during the quarter, including breaded chicken, breakfast sausage, bacon, and hot dogs. The team also introduced Applegate Naturals frittata bites, the industry's first and only certified humane frozen egg bites. In the fourth quarter, we expect to benefit from expanded distribution for the Applegate brand and from new capacity to support our popular line of frozen breakfast sausage. Net sales of global flavors items were comparable to last year. while pricing actions, operational gains, and favorable input costs on avocados drove equity and earnings improvement for our Megamex business. The ARDES brand remains relevant with consumers, outpacing category growth for dollar and volume sales in the salsa, taco sauce, hot sauce, refrigerated guacamole, and refrigerated salsa categories. Convenient meals and proteins net sales declined as higher sales of Spam varieties and Hormel chili were more than offset by the difficult comparison from high levels of demand for Skippy spreads last year. We continued to gain distribution on both innovative and core items during the quarter, which helped alleviate some of this pressure. In the fourth quarter, We have numerous programs in place to engage consumers at the store level and online with reminders of the value offered by our products. These efforts are expected to help offset the impact of elasticities and as consumers utilize their pantry supplies. We also secured additional capacity for Skippy peanut butter, which should help meet the elevated levels of demand we continue to see. Segment profit for the retail segment declined due to unfavorable mix and increased brand investments, partially offset by the impact from pricing actions across the portfolio, improved bake-in volumes, and higher equity and earnings from Megamix. Our retail business is benefiting from market share gains, innovation, new distribution, higher fill rates in key categories, and effective advertising and brand support. However, there remains volume pressure in many categories across the store. Strong execution this fall and holiday season will be key to delivering our outlook. Our international segment remained challenged during the third quarter, and the inflection we expected in this business did not materialize. Segment profit declined significantly due to unfavorable pork and turkey commodity markets, softness in China, and lower branded export demand. Commodity fresh pork and turkey volumes were strong during the quarter, though depressed pricing led to weaker mix, especially on turkey items. The commodity environment is expected to remain unfavorable for the balance of the year due to high inventories of freezer stocks in key export markets. In China, food service sales improved sequentially throughout the quarter, growing 14% compared to last year. However, retail sales remained soft as we lapped difficult comparisons to last year and as consumer demand in the retail channel slowed considerably. Near term, We expect our food service business in China to grow, which should help to offset continued softness in the retail channel. Lower retail sales are anticipated to have a negative impact on China's profitability for the remainder of the year. As we've reiterated over the past few quarters, our strategies to grow our global brands, multinational businesses in China and Brazil, and partnerships around the world are sound. Our international team is confident that these situational dynamics will abate, allowing for our teams to resume delivering accelerated growth. Turning to our outlook, we remain focused on driving volume and earnings growth, as well as delivering on our commitments to improve our business. The operating environment domestically and abroad continues to be dynamic, and we anticipate consumers and operators to remain highly intentional in their spending. Our broad portfolio of products and diversified channel exposure position us well in this regard. As we close the year, we expect a strong finish from our food service segment, incremental savings from a series of projects aimed at reducing costs and complexity throughout our system, and further synergies from our implementation of Go Forward. Additionally, we expect continued softness in our international segment and earnings pressure from heightened competition at retail. We are assuming increased promotional activity this fall in the retail channel as consumer demand moderates to more historical levels and as industry-wide supply chains continue to improve. We also expect an impact from resumed student loan payments, which could pressure overall consumer spending in the U.S. Taking these factors and our performance to date into account, we are providing fourth quarter guidance and an updated outlook for fiscal 2023. For the fourth quarter, we expect modest volume growth, which assumes growth from the food service segment, continued recovery in turkey, and improved fill rates in key categories. Fourth quarter NIF sales are expected to be between $3.1 billion and $3.6 billion, reflecting our current assumptions for raw material input costs in the fourth quarter. Full year net sales are expected to be down 4% to flat. We expect fourth quarter diluted net earnings per share to be down from last year, which accounts for continued weakness in the international segment and lower retail segment results. Full year diluted net earnings per share are expected to be $1.51 to $1.57 and adjusted diluted net earnings per share are expected to be $1.61 to $1.67. We believe our continued investments into our brands, disciplined financial strategy, and balanced approach across our businesses position us well for future growth as we close a challenging 2023. At our upcoming Investor Day, we plan to provide an update on our fourth quarter assumptions and outlook and further detail on how our investments and transformational efforts as a global branded food company are expected to drive earnings growth in the future. We look forward to hosting many of you in person at our mid-October event. At this time, I will turn the call over to Jacinthe Smiley to discuss detailed financial information related to the third quarter and additional color on key drivers to our outlook.