Hormel Foods Corporation (HRL) Earnings Call Transcript & Summary

Good afternoon. I'm Ben Theurer, and I'm pleased to introduce now Hormel Foods, which is a global branded food company with over $9 billion in annual revenues across 80 countries worldwide. Its brands include SKIPPY, SPAM, Hormel, Natural Choice, Applegate, Justin's, Wholly Guacamole, Columbus Craft Meats, Hormel Black Label and its most recent addition, Planters. Joining us today from Hormel are Jim Snee, Chairman of the Board, President and CEO; Jim Sheehan, Executive Vice President and CFO; as well as Jeff Frank, Vice President of Grocery Products. Jim Snee is the tenth President and Chief Executive Officer in the company's 130-year history. He joined Hormel Foods in 1989 in the meat products division, and Jim was named President and Chief Operating Officer in October of 2015, Chief Executive Officer in October '16 and elected Chairman of the Board in October 2017. Jim Sheehan oversees all financial areas of Hormel Foods and joined Hormel back in 1978 and assumed his current role in 2016. Jeff Frank is currently leading strategic integration of the Planters and Corn Nuts brands into Hormel. Jeff began his career with Hormel Foods in 1998 in sales and has held various leadership roles, including at the company's MegaMex Foods joint venture and as a Vice President in the company's foodservice division. Given the most recent closure of the Planters transaction, we'll focus a lot on Hormel's prospects here but won't overlook impacting industry dynamics affecting the other businesses.

So with that, Jim, maybe to begin with, you recently reported third fiscal quarter results and gave an update and a narrowed guidance, now still a range of roughly 8% just for the final quarter implied. Could you elaborate what your assumptions for the final quarter are and what could go right or wrong within that new guidance reach?

Sure, we can do that. First off, Ben, thanks for having us. It's always great to be part of the Barclays conference, so thank you. We did report our third quarter earnings, and we're very pleased with the top line sales results that we were able to report. We talked about how it's the highest quarterly sales that we've ever reported in our company's 130-year history. So really quite an accomplishment, especially in this very complex dynamic operating environment that we're in. And so while we are very pleased with the top line results, clearly, we had some bottom line implications as we continue to battle inflationary pressure, supply chain disruptions within our business but also within our suppliers' business, and that's largely driven by the labor challenges that really are so widespread across the industry. As we've looked at the fourth quarter, and you're right, we still have a little bit of a range there. And the biggest reason we have that, Ben, is the volatility that still exists in the marketplace. We've seen cost pressures from the third quarter -- from the second quarter to the third quarter really accelerate. And while we took a lot of very strong pricing actions, costs continued to accelerate or move away from us. So we know that we have to take into account the potential risk there. We were able to talk about the labor issue that we and so many others are facing. That's a big deal for us. And so as we're able to improve our labor situation, we know that our results will continue to improve, but we don't know today when that will happen. So as you think about some of those things and the volatility that still exists in the marketplace for so many of them, that's really the reason for the range. But we remain very optimistic on our ability to grow top line sales, to continue to improve margins through the pricing actions that we've taken and continued strength in many parts of the business like our foodservice business that saw incredibly strong results in the quarter.

Okay. Now one thing that just back -- still relating to your most recent earnings from last week. So one thing that really stood out was the top line growth you've just talked about, specifically the ability that you have to grow across all the channels you were essentially competing in. Now could you talk a little bit about why you were successful in the quarter and why you believe you are well positioned going forward within the different channels?

Sure. There's a couple of things that play there. The first is the consumer. And as we've been able to segment the consumer, we are seeing a number of different things. We're seeing value consumers who really still are driving the at-home consumption play, where we've seen probably more middle-tier and higher-end consumers, they're the ones that you're seeing a slight drop in the at-home consumption but they're the ones that are now returning to the foodservice industry. So it starts with the consumer. The second thing is that means the channels are holding up because you've got a segment that's driving the at-home or the retail segment, but then you've got other segments that are driving the away-from-home or the foodservice part of the business. And for us, we can't ask for a better outcome in that consumer behavior because we've got a great retail presence and we've got a great foodservice presence. So we're able to participate in all of that business. The other thing is the brand strength. And as we think about the brands that we have, so many of them are recognizable, you mentioned them in our introduction, but having those brands that are strong and that consumers recognize and trust really is important as we've undertaken so much significant pricing activity. So consumers are still going and buying the brands that they know and they trust even though we're taking pricing and that pricing is being reflected on shelf. So all of those things really figure into our ability to drive that top line number because of the pricing that we've taken, the brand strength and then, of course, the way the consumer is behaving.

Okay. Now let's transition to Planters. Obviously, that's -- the transaction has just recently closed. You're now a few weeks hands on. It was part of the results already. What have you seen? How's the brand been performing? How does that initial performance -- I know it's just a couple of weeks, but how does it compare to your assumptions when you presented the acquisition back a few months ago?

Sure. Yes. I mean this is a big deal for us. And even though it's 8 weeks in, we've had a chance to look at the business and we say, while it's early, I mean it's meeting all the assumptions that we set into place during the valuation and acquisition time frame. And we also talked about how we're seeing the benefits that a brand like that can bring to the organization. And I'll let Jeff Frank talk a little bit more about the detailed performance, but one of the examples we like to use and we talked about when we announced the acquisition was the ability for Planters to help us add scale and a presence in the C-store channel. We've never really participated in the retail portion of the C-store channel, and Planters gave us that immediate presence. And we've now been able to piggyback on that presence with other parts of our retail portfolio and have some early success. So it's those kinds of things that in addition to running the core business that we acquired, making sure that we capitalize on some of those synergies that we identified, is going to make sure that we're able to deliver on the value that we told you about and that we told our shareholders about. But Jeff has done a great job leading the integration to make sure it's as seamless as possible, and I'll maybe let him elaborate a little bit more.

Sure. Thanks, Jim. You're right, I mean it has been a smooth transition overall, and I think that's really a testament to the project teams that were working on the integration. Since we've taken ownership, we've seen consumption remain strong in the marketplace, which we were very pleased with. And I think a couple of other things that have been going on since we took ownership are really around customer collaboration, making sure that we finish this fiscal year strongly but set the stage for a strong fiscal '22. And I also think another area that we've really been diligent around is culture. We're bringing together a team to focus on this business, and we want to make sure that we're really leveraging the strengths of everyone who's coming into that team to really drive the business into the future.

So back in February, you laid out the $0.07 to $0.20 accretion for next year. Are you still confident to reach that level? And how much actually do you think it can already contribute in the current and the last quarter?

So I'm going to start, and then I'll turn it over to our financial wizard here, Mr. Sheehan. Yes, we are confident in that number for 2022, Ben. And the biggest reason is, clearly, the business is off to a good start, not only running the core business but then being able to execute on some of those synergistic plays that we identified as well. But it all had to start with a smooth and seamless transition and integration that Jeff described. So we've been able to check those boxes all the way along, which is really what gives us that confidence for 2022. I'll let Jim provide a little more clarity on the rest of the year.

Ben, we're very confident about the accretion model that we gave in future years. That smooth start and that ability to start with minimal problems and minimum amount of disruption in the marketplace really gets us off to a fast start. As far as this year and the remainder of this year, obviously, we have transactional costs that are in the model, and we also have some transitional costs, those costs that you have with any company as you bring on to the -- into the organization. Those are being handled in the third and the fourth quarter. We saw most of it in the third quarter. We'll see a little bit more in the fourth quarter, but we're very confident of our accretion model.

Perfect. Now I remember like, in the past, you've laid out a couple of like pillars, and one of that was always around topic of snacking. And clearly, the nuts business, I mean, it fits within snacking, but at the same time, it's a pretty tough business. And private label is obviously something you have to compete against, and I think it's been raised a lot back when you announced the deal. So maybe that one is for Frank. But can you give us a few examples of what you think you can be doing with the brand, how you can position the brand going forward particularly in the context of your broader snacking portfolio?

Yes, absolutely. I think first of all, we're no stranger to categories where private label plays a role. And I think that ultimately, we've got a great track record of brand stewardship in those categories, and I see Planters and Corn Nuts really as no different. So just a few examples. First of all, I think you're going to see us really invest in marketing to continue to rejuvenate the equity of the brand. The Planters brand in particular has near universal awareness among U.S. consumers. And so for us, it's really around just staying connected with that consumer and keeping the messaging relevant for them. So you're going to see certainly some rejuvenation of the brand through that aspect. I think another way that we're approaching that is through thinking about the product portfolio. So you're going to see some innovation. You're also going to see some renovation of... [Technical Difficulty] Clearly, the Planters brand brings us some scale that we didn't have before, particularly in certain channels like convenience, as Jim mentioned. And so we've got strategy work underway right now to really determine how we can leverage that strength for the broader Hormel portfolio in the snacking space.

I think Ben, the other thing to consider is we're thinking about this entire business as more than -- and I've said it before, more than just peanuts in a jar, right? So the watchout for us is to make sure that the commoditization of the Planters brand or the portfolio doesn't happen. And so that, again, is one of our top priorities right out of the gate, and Jeff and the team are working in that. So as you start to think how do you battle private label in some of these categories, you can't allow your brand and your portfolio to be commoditized, right? You can't go down that rabbit hole. And so I think being able to rejuvenate the brand, the portfolio through innovation with new products but then also that rejuvenation of the core and the collaboration with retail, right? I mean let's not forget Planters is the #1 brand. And so there's a value that we bring to the retail community that we're going to continue to leverage and collaborate with them as well. So we know how to run these types of businesses, and that's what's really made us so confident about acquiring the business and the success we expect in the future.

Just coming back to the topic of innovation, which was one of the questions I wanted to ask you. So clearly, in the past, frequently, you've acquired brands, invested in those and then started working around innovation. And we've seen it with SKIPPY. We've seen it with Columbus Craft Meats. I mean even with like staples like SPAM, you continue to be on the innovation front. So where do you actually see the potential with Planters? I mean could this -- I'm pretty sure it's going to be a similar success story that we saw in the past with others, but could you maybe give us a couple of examples of what could be done on the innovation side, where you can kind of run through and get like kind of home run with that brand just because of the equity of the brand value?

Yes. I'll let -- I mean Jeff and his team are already hard at work. They were hard at work before the acquisition even closed. So Jeff, why don't you share some of the work that you're doing?

Sure. Yes. So the exciting part about this brand is that there's a long pipeline of products that are in the development product -- process right now. And so I think when we talk about fiscal '22, in particular, there's a couple of angles that we're really interested in. The first is around some packaging innovation. And so we've got an eye toward environmental sustainability, and you're going to see some work in that space as we move forward. We've also got some packaging form change that's coming. And then I think you'll also see some innovation in the flavor space. And when we look at the snack nuts category, flavor seem to be an area where consumers are really reentering the category. And so we've got some things that we're doing there as well. So that's sort of the short-term plan. And then longer term, there's really some exciting things coming into the pipeline.

And as you think about flavors, right, and think about what the category has looked like historically, it's looked like salted, lightly salted and honey roasted. And so we've got an eye to that space because we know that the consumer profile has changed over time. We see that in our Hormel core portfolio. You mentioned some of the work we've done with SPAM. So really accelerating that work around flavors is something I think consumers are going to appreciate and recognize.

And you're just going to have to do pumpkin spice peanuts or something like that. Now let's shift gears a little bit and talk about the more broader strategy for Hormel and the outlook. Maybe for you, Jim. Just -- I mean it's a complex operating environment. And you spoke about it last week, about the complex business environment in general you're in. Could you just give us a few examples to help us better understand what is actually causing issues and how you've actively been working in order to overcome those issues in the near term?

Yes. I mean really, there's 2 big issues and then there are some subsets within them. So as we talk about inflation, I mean, that exists in so many places. So we know what's happened with raw material markets, seeing a run-up in bellies and pork trim and beef prices. All have been a headwind. We've talked about labor as a separate item. But when you think about the inflationary impact of labor and what has happened with existing wage rates for our team members, that's been a significant inflationary headwind. But that's okay because those are the people that we're keeping and are running our facilities. And then, supply chain. And supply chain, again, has so many different parts because there's our supply chain and then there's our suppliers' supply chain as well. And we're all facing the same headwinds, if you will, but as Jim Sheehan said on the call last week, we've got great visibility into our supply chain. What we don't have is that same level of visibility into our suppliers' supply chain. And that's packaging, that's ingredients, that's freight, that's logistics, right? That's a very complex supply chain, and we're having to be able to pivot and adjust on the fly sometimes, where we've got a product scheduled, only to find out that the supplier doesn't have what we need available. And we don't find out up to the last minute and then we have to react. And in many cases, we're able to solve the issue, but when you solve it, it comes with even added costs. So that's the complexity. That's the world that we're living in. And as we think about 2022, the thing that we don't know is what happens to the inflationary pressure, what happens with packaging, what happens with raw material, what happens with freight and warehousing. And then the other side, of course, is the labor pool. And when does that labor pool return? Does it return? So those are some of the things that we don't know. But as we said, what we do know and what we can do to fix it is we can price, right, because you've got the added cost. And I think we've demonstrated that we're able to do that successfully. We have to be cognizant of categories and elasticities and all those things, and we will be very diligent about that. But then on the labor front, we have to be more creative in terms of how we attract talent, how we train them, how we retain them, how we simplify, how we automate. Those are all things that on an enterprise level, we're working on. And I also said it's really our #1 priority because that's a game changer. If we're able to perform better with our labor force, our business immediately responds to that improvement. Jim, I don't know if there's anything that you would add.

No, I think the fact that we've had the pricing power, we've made the -- taken the pricing action that we took and there's still a strong demand for our products. Many of the products were capacity constrained, and that is the real issue. Inflation, we've managed well. We've always managed inflation well. The real wildcard in this structure is what is going to happen with labor because labor is the issue that is affecting the entire supply chain, as Jim said, from the animal production to the packaging, supplies, our production and finally, in freight.

I've got one for you, Jim Sheehan. You always like to talk about the Project Orion, so I have to squeeze that one in. If you would have not done the investments in your One Supply Chain and Project Orion, how bad would it be?

I think it would be much worse. One of the things that has paid a significant dividend is the implementation of Project Orion within Planters. The Planters transition was really almost seamless, and that was done because of Project Orion. That was the big win that Project Orion has provided us. Plus the amount of data that we've been able to attain and that we have been able to use and expand our analytics around the business has been very helpful during this very difficult economic cycle.

Ben, I would add. I can't imagine -- I've said this publicly in our offices. I don't -- I can't imagine where we would have been without the creation of One Supply Chain and the work that they've done. Going back 18 months, at the onset of the pandemic, with COVID and having that messaging and that structure the entire enterprise and now as you fast forward and enter this next phase of the pandemic that's been marked by the inflationary pressures and the labor pressure, I can't imagine not having One Supply Chain. And then to Jim's point, can't imagine not having Project Orion to support those efforts.

Perfect. Now coming back to the pricing piece, and you've just said it around one of the things you were successful in implementing across the different areas of your portfolio. So you've done already a big part in Q3. You announced last week that there is more planned for Q4. Can you talk us a little bit about the actual strategy behind how you pinpoint down where and when and how to do those price increases to remain successful?

Sure. And it does vary across the portfolio. We've got some businesses that are just closer to the market conditions, so if you think about some of our foodservice business and even some of our retail refrigerated businesses. So as those raw material markets fluctuate, we're right on top of those. We're always ready to move pricing. And so in this scenario, pricing has run up drastically, and we've moved drastically in refrigerated retail and foodservice. The issue always is the lag, right? I mean you're never out in front of it. You're still always -- you're always playing catch-up. And that's okay because we know that on the other side, we're going to lag as well. And that is what we talked about last week also, is that we have a history of being able to expand our margins through these inflationary cycles. And we don't expect anything different in this cycle. On the Grocery Products portfolio, which really does act, a large portion of it, more like a consumer packaged good franchise, you're probably just a little slower to move. And the reason is because when those prices go, they stay and they stick. And so we are very cognizant of that. But as we've seen, again, cost of raw materials, we've seen packaging costs, we've seen labor costs, we have had multiple rounds of pricing where we thought the first round of pricing would take care of it and it did. And so now we've come back with the second round of pricing and in some cases, a third round of pricing that is poised and ready to go that will be reflected at the end of the fourth quarter into the first quarter. So I mean as you would expect, right, we're watching all of the leading indicators and then just trying to make sure we balance that against the category performance and the elasticities that we expect. And we also said that the elasticities that we've historically seen, our businesses have all performed much better. And I think again, it goes back to the consumer and the way the consumer is behaving across all the different segmentations of the consumer.

Okay. So within that profitability context, maybe just to quickly follow up. So you said definitely, there should be some sequential improvement into what it was the last quarter. But thinking of like the first half of 2022, is that just continuously as well going up? Is that a fair assumption as those price increases come through, particularly the one you're planning for the end of 4Q? I mean obviously, we don't know what -- the cost side. I mean that's not something in our control. But just assuming it stays where it is, it's like fair to assume that there's that sequential improvement, correct?

Yes. That's a very, very fair assumption. And I mean that's how we'll plan our business, is assuming that we don't have the same type of cost acceleration that we saw from Q2 to Q3, that we would see benefit in Q4 and then certainly into the first half of 2022. And again, going back to our portfolio and how the consumer behaves is -- regardless of what you see, whether it's -- if something happens and you have that home consumption escalate, we're prepared for that. If the other -- if the inverse happens and we do see more of the foodservice industry or food away from home take off, I mean, we obviously are prepared for that as well. So that -- I mean it speaks to the balance in our portfolio and the balance across channels that we've worked so long and so hard to build. And we think that's what sets us up for success for the balance of this year and into 2022.

Okay. Then my last question for you, and that is, a few years ago, you presented the 5% top line, 10% bottom line growth target. And you, back then, said you need M&A to get to the 5% top line. Now you did the M&A. And here's the good news, I did the math. Over the last 5 years, if we take Planters to be closed, we actually get to 5% top line growth. Now at the same time, we also come only to 5% bottom line growth. So what needs to be changed or what needs to be implemented to actually get that bottom line growth at a higher level than top line growth?

Yes. I think there's 2 parts to that, Ben. And you're right, we've said 5% and 10% with M&A. And I mean clearly, we've been able to achieve that here this year. You mentioned in our introduction $9 billion. We've gone past $10 billion, and we're forecasting $11 billion for this year. I would expect, obviously, with the full year impact of Planters next year to have very strong growth. But it's the successful integration and execution of Planters, right? We still have a number of recent acquisitions that we're innovating against and that we're continuing to invest in capacity. So when you think about Columbus, something like that that's on trend, where we've invested in our Omaha facility to support the growth in that gathering occasion to support our charcuterie business, I mean those are the businesses that we need to continue to grow at the rates that we've had. The other investments that we've made in capacity, so we think about the Burke business to support our pizza topping growth. We -- after we announced the Columbus expansion, we quickly announced phase 2 of that facility with our pepperoni business that will support both retail and foodservice. And so we need all of those on-trend businesses to continue to perform. And the nice thing is we're building that capacity around them to support that growth, to support both the top line and bottom line growth. So -- and the other thing is you think about a business like SPAM. And obviously, we're going to have another record year of sales growth from SPAM. And as we think about the capacity needs for that business, we're going to have to make some additional decisions in the not-too-distant future to support the amazing growth that we've seen. So it's not just the acquisition portfolio. We're actually seeing some really, really strong continued growth from great iconic legacy brands well. So you're right, I mean we said with acquisition, but we still feel really, really confident that we're going to be able to achieve both the organic growth rates and the acquisition growth rates that we put forth.

Okay. Perfect. Well, we're right at the 30-minute mark. Jim, Jim, Jeff, thank you very much for being with us and participating. Hopefully, next year, we're going to do this in person, fingers crossed. Wish you all a nice rest of the day, and thank you very much again.

Yes. Thanks for having us, Ben. And yes, next year, we hope to be doing this in person. Have a great conference.

Thank you.