Hormel Foods Corporation (HRL) Earnings Call Transcript & Summary

[Audio Gap] and joining us today from Hormel, Jim Snee, Chairman of the Board, President and CEO; Jim Sheehan, Executive Vice President and CFO; Glenn Leitch, Executive Vice President, Supply Chain. Jim Snee is the 10th President and Chief Executive Officer in the company's 129-year history. He joined Hormel Foods in 1989 in the Meat Products division. Jim was named President and Chief Operating Officer in October 2015, Chief Executive Officer in October 2016 and elected Chairman of the Board in October 2017. Jim Sheehan oversees all financial areas of Hormel and joined the company in 1978 and assumed his current role in 2016. Glenn Leitch became EVP of Supply Chain in 2017 and joined Jennie-O in 1996, which he continues to oversee. The team prepared a video to share their current initiatives around supply chain, Project Orion, among others. After the video, we will dig deeper and go into questions. Nathan, over to you.

Good afternoon. Before we begin today, I want to remind you that we will be sharing some forward-looking statements, and those may differ from actual results. You can see a detailed list of our risk factors in our recently filed 10-Q available at hormelfoods.com under the Investors section. And now I'd like to introduce Jim Snee, Chairman of the Board, President and Chief Executive Officer.

Good afternoon. Thank you for joining us to learn more about Hormel Foods, truly an uncommon company. I am Jim Snee, Chairman of the Board, President and Chief Executive Officer of Hormel Foods, and it's an honor to represent our nearly 20,000 Inspired team members around the globe. Led by an experienced and tenured management team and a workforce of heroic team members, it has been remarkable to see this team work together since the beginning of the pandemic. This team embodied our cultural belief of safety first to ensure team member safety at work and at home while providing safe, high-quality food for millions of consumers impacted by this crisis. I'm very proud of how all our team members rose to the challenge with a sense of responsibility, pride and purpose. For those of you who may be unfamiliar with Hormel Foods, we are a global branded food company with approximately $10 billion in annual revenue, and we're headquartered in Austin, Minnesota. I mentioned earlier that Hormel Foods is an uncommon company, and we truly believe that. For years, we've been recognized for our efforts, including being named to the Global 2000 World's Best Employers list by Forbes Magazine for 3 straight years, Fortune Magazine's Most Admired Companies and Corporate Responsibility Magazine's 100 Best Corporate Citizens list for the 12th year in a row. Additionally, since the start of the pandemic, our company has donated millions of dollars and millions of meals to those in need. And we've also pledged up to $300,000 to help support education and equality as part of our newly created Inspired Giving program. But perhaps most notable is our recent announcement of a college assurance program for the children of our team members. And we know that this program, along with all of our efforts throughout the pandemic, clearly demonstrate that we are a company that puts people first. Another example of what makes this company uncommon is our balanced business model. Our goal has been to create intentional balance to limit sales and earnings volatility by diversifying our raw material inputs, the categories in which we compete and the consumers and operators we serve. Now more specifically, our business is made up of 4 reporting segments. Our largest segment, Refrigerated Foods, is approximately 50% of our company and consists primarily of the marketing and sales of branded pork, beef and poultry products for foodservice, retail and deli customers. Our next largest segment at about 25% of our business, Grocery Products, and that's focused on the sale of shelf-stable and Mexican food products for the retail channel. Jennie-O Turkey Store, our vertically integrated turkey operation, represents about 15% of our business. Jennie-O Turkey Store is one of the leading turkey companies in the U.S. with a strong value-added presence in the retail and foodservice channels with the Jennie-O brand. And lastly, our International segment with less than 10% of sales continues to represent a long-term growth opportunity for our company. And together, this intentionally balanced and resilient business model has a proven track record of performing in many market conditions to deliver uncommon results. We've grown earnings 29 out of the last 34 years. We've increased our dividend for 54 consecutive years, and we've maintained one of the strongest and most flexible balance sheets, not just in our industry but across the Fortune 500 companies. All in, we've continued to generate uncommon and industry-leading shareholder returns. Our third quarter is just another example of how our balanced business model has proven to be a winning formula. We achieved record third quarter net sales as 3 of our 4 segments delivered sales growth, a testament to the strength of our brands and the dedication of our supply chain teams. The business overcame $40 million in increased supply chain costs related to COVID-19 to deliver diluted earnings per share in line with last year. And once again, the company generated strong and stable cash flows, giving us the flexibility to fund our capital needs while continuing to invest in long-term growth opportunities. At our Investor Day in October of 2019, which now seems like a lifetime ago, I outlined our 2020 path forward, which is simply the continued evolution of Hormel Foods. Now a lot has changed since last October. And as with most global industries, the impact of COVID-19 pandemic on the food industry was abrupt and immense. But as I look at our business almost a year later, I remain extremely confident in our strategy. Our long-term strategies of building strong brands that customers, consumers and operators trust, relentlessly pursuing innovations that are relevant in the marketplace, making strategic and disciplined acquisitions and creating intentional balance in our business model have not and will not change. Now I'd like to walk you through our 2020 path forward and provide an update on the specific actions our teams are taking to execute on each of these priorities. First, grow our deli and foodservice brands. No part of our industry and company has been more impacted by COVID-19 than foodservice. Personally, as a past member of our Hormel foodservice team, it's been heartbreaking to see distributors, restaurants, hotels and many other foodservice venues struggle to survive. Though many patrons have returned to their favorite establishments, it's clear the industry will be in recovery mode for quite some time. We continue to hold deep competitive advantages in the foodservice industry, including our relationships with operators and distributors that span decades, a large direct sales force and a balanced product portfolio. We also have the advantage of being able to turn insights from our sales force who are on the front lines in kitchens each day into solutions that solve for the challenges and concerns of operators. And nowhere is that more apparent than in our pre strategy, a strategy built on premarinated, precooked, presliced and fully prepared options. As operators continue to shift their focus to alternative selling and kitchen formats, streamlined menus and safe, convenient food options, our portfolio is well positioned to adapt and grow through the industry recovery. It's also important to note that this isn't the first time our foodservice business has had to recover and emerge from an economic downturn. During the recession in 2008 and 2009, our direct sales force expanded their reach to the emerging channels of lodging, health care and colleges and universities. This intentional pivot provided significant growth for the next decade. And today, we are leveraging many of those same strategies with an increased focus on some of the newer emerging opportunities. The Hormel Deli Solutions team has also seen impacts from COVID-19 as consumers shift from behind-the-glass meats and prepared offerings to prepackaged and presliced options. In our most recent quarter, the overall strength in our grab-and-go offerings more than offset declines in our prepared foods and behind-the-glass businesses. We expect this trend to continue as our Hormel party trays and Columbus-branded items provide differentiated at-home experience. Second, accelerate growth in ethnic cuisines. I've talked before about our excitement for our on-trend Mexican Foods portfolio. Brands like Herdez and Wholly are well-known for their flavor profiles and authenticity. The Herdez brand has been a disruptor to the salsa category in the U.S., and not only with classic offerings like Salsa Casera and Salsa Verde, but with guacamole salsa, which continues to be one of the fastest-growing salsas in the category. The brand recently introduced another new line of offerings, Salsa Cremosas. These innovations and Herdez traditional guacamole, which was introduced last fall, are sure to keep the brand growing and vibrant as consumers look to add more variety to their at-home eating occasions. We've also had tremendous success with our latest Wholly campaign, all real, no drama, inspired by the difficulties of preparing and consuming the perfectly ripe avocado. Our latest innovations, Wholly Diced and Wholly Smashed, capitalized further on that trend and consumer need. These products are real food, 100% Hass avocado with no preservatives added, ready whenever you are. As we grow this business past the $700 million threshold, we have the necessary scale to help consumers as they reimagine Mexican flavor with our brands. Third, pursue bold, new innovation. Now innovation is truly part of our DNA, which was proven again earlier this year when we achieved our goal of having 15% of sales come from products introduced in the last 5 years. We've continued to place a priority on innovation even with the challenges caused by the pandemic. The company has introduced a number of products across multiple brands and categories, including SKIPPY Squeeze Peanut Butter; SKIPPY No Sugar Added Peanut Butter; SKIPPY Protein Peanut Butter Blended with Plant Protein; Hormel Cup N' Crisp Pepperoni, and it was recently recognized as the most brilliant new pizza topping by Food Network Magazine; Lloyd's hardwood smoked pulled meats made with 2-time world barbecue champion Pig Beach Mustard Barbecue Sauce; Natural Choice hardwood smoked meats; and our first entry into the foodservice plant-based pizza toppings category with HAPPY LITTLE PLANTS Pepperoni. I continue to encourage our teams to be bolder and think bigger with respect to innovation, and I am fully confident we will deliver on this initiative. Fourth, expand our global presence. The impacts of the pandemic have touched all parts of our business, including our International division. Our first experience managing through the current uncertainty was back in January with our in-country China operation. As the country took steps to quarantine and our foodservice business declined, our team in China immediately stepped up their efforts in the retail channel, leveraging our SPAM and SKIPPY assets in the marketplace. As the foodservice industry has begun to recover in China, our retail business continues to grow at an accelerated rate. Sales of SPAM continue to surpass all expectations, growing both households and share at a very rapid rate. Additionally, we've seen the popularity of the SPAM brand explode globally due to our strong partnerships in Europe, South Korea, the Philippines and Japan. SPAM truly is a global brand. As a global branded food company, we aspire to create global brands and take our highly successful business model to other parts of the world. Through our multinational platforms, worldwide partnerships, global brands and legacy export business, we know there is a distinct opportunity to grow faster internationally and believe this business provides a runway for growth. Fifth, protect our core brands. Brands still matter, and never have consumers relied on established and trusted brands to feed their families like they have during these uncertain times. It is a responsibility we take very seriously. Brands like SPAM, SKIPPY, Dinty Moore and Mary Kitchen are just some of the shelf-stable brands that have all witnessed extraordinary growth since the start of the pandemic. Similarly, our legacy retail meat products brands have also done extraordinarily well, including brands such as Hormel Black Label, Hormel Pepperoni, Hormel Cure 81 and Hormel Natural Choice. One brand that has emerged stronger from the pandemic has been the Jennie-O brand. Demand has been extraordinary for all of our retail turkey items, and we've increased distribution on many of our key lean ground items. We will be further supporting the brand this fall with advertising campaigns in key markets. Having the #1 or #2 position in over 40 categories provides competitive advantage, and the stark and dramatic shift in consumer behavior since March has further supported this belief. We can attribute much of our sales growth, share gains, increases in new buyers, repeat rates and household penetration gains to our trusted long-standing brands and our company-wide commitment to brand stewardship. Sixth, continue to transform our company. I've talked in the past about the importance of transforming and modernizing our company and have discussed in detail the importance of the One Supply Chain and Project Orion initiatives for our long-term growth. These efforts were both critical for us as we strategically responded to COVID. Our progress since March has been truly remarkable. And I'd like you to hear firsthand from Jim Sheehan, Executive Vice President and Chief Financial Officer; and Glenn Leitch, Executive Vice President, Supply Chain, about our team's great work managing through these uncertain times.

We're moving at a pace that we haven't ever seen. We thought we were moving at a fast pace a year ago, and that's nothing compared to how the business is changing and the circumstances are changing. And we're in a great position to keep up and move forward and be an industry leader in that type of environment.

One Supply Chain for Hormel Foods means that we've got everyone in the company with a single vision of what we're trying to get done for our customers. The first piece of that was understanding what our customers are really looking for and then trying to build a system and a process around that to be able to make sure we could deliver on that promise.

Project Orion is setting the future for our company, both from a technical standpoint and an information standpoint. We looked at our systems and where we were, and we knew that we needed to make a generational shift in our technology, in our IT group and how we looked at data, how we analyzed data. And that's what Project Orion is really about. It's about attaining information and using the information to guide us into the future.

When we built the model for One Supply Chain, we looked to a future where we would need a single template, which is Project Orion, to be able to have a single order management structure, to be able to have procurement under one wing through the company.

Think about getting information from all areas of the business, all formatted in the same manner, all being used under the same basis and available immediately. And then think about how you can take information from all these different businesses, merge it together, utilize data science, analytics and provide where you're going. So Project Orion takes us from running the business in the rearview mirror to take that information and have us look forward.

When COVID-19 reared its ugly head, we did several things immediately, which really helped us through the rest of the process. One is that we were quick to open up our checkbook. And so there were a lot of things that we weren't sure we would need, but we went ahead and made sure we had them available to us. So we were buying the thermal temperature units well before we knew how well they worked if we needed them. We were buying hundreds of thermometers before we knew we needed them. We bought 7 million masks from 6 different vendors, knowing that if 3 of them didn't deliver, we would still have 3 that could deliver. And so we did some of those very practical things, but we also did some strategic things. We've got a committee we call the e-committee. It's really made up of executives from the company, different areas of responsibility, and they look and understand and try and manage through some of our biggest issues that we have in the company. And the goal from that group was to make sure that any learning that we had anywhere in the company, we could broadcast in a very short period of time through other areas of the company as well, so that one plant dealing with certain issues on the front end of COVID-19 would benefit another plant who hadn't even seen their very first case. And that has proven to be extremely valuable to us. And it's also actually expanded itself where it's valuable to the outside world because we've got a program called KEEP COVID OUT! And the KEEP COVID OUT! program is for our employees. It is so they have a resource page to be able to go to with great information, but it's also for the employees in their home community wherever that may be, for the chamber of commerce in that same community, for the children of the employees and to be able to have discussions at home as to how we want to be able to operate in a COVID-19 environment so that all employees can be safe, whether they're at work or at home.

And as other companies, for very good reasons, moved back their ERP projects and some of these big commitments, we decided to move forward. To make this kind of move all at once, this is a bold move. And we never missed a deadline. That's what's the shocking part of it, is that not only we got it implemented, but we hit every deadline that we had set early on in this process. So now we've accomplished what was already a monumental task in the middle of a pandemic, and we couldn't be prouder of our staff.

When I think about the events of COVID-19, what surprised me maybe the most out of everything was the strength of the company to simply look forward.

Our ability to change, our ability to be nimble to make the kind of decisions that we made and stay focused on the business is the success. It's not where you end up. It's that process that's been the success.

So there is the juxtaposition of being really pleased with the work we've done but still knowing our customers want more.

How we managed this time frame is probably the most important point in history that this company has seen in decades.