Hormel Foods Corporation (HRL) Earnings Call Transcript & Summary

All right. First, thank you very much. Welcome back. Next on stage, Hormel Foods, a global branded food company with over $12 billion in annual revenues, across 80 countries worldwide. Brands include Skippy, SPAM, Hormel Natural Choice, Applegate, Justin's, Wholly Guacamole, Columbus Craft Meats, Hormel Black Label and Planters, which -- also thank you very much, we got a little bit of the presentation outside in the hospitality room. Today, joining us from Hormel, we have Jacinth Smiley, Executive Vice President and CFO; and Mark Ourada, Group Vice President for the food service operation. Jacinth joined Hormel just in April of 2021. She currently leads all financial areas of Hormel, including strategy, performance, reporting and long-range business planning as well as Investor Relations, treasury, tax accounting and internal controls and IT. Mark is Group Vice President of Food Service at Hormel Foods. In this position, he is actually responsible for the sales and marketing of all food service products within the U.S. He began his career at Hormel in 1988 and has spent the majority in foodservice. As part of the new organizational structure, as part of Go Forward, Mark oversees all of the company's domestic foodservice business, legacy Hormel foodservice, Jennie-O foodservice and all the affiliated businesses, which he will provide some more color on later. The company just reported third quarter results last week. Given there were certain challenges on a year-to-date basis as well as a wide range of outcomes expected in the near term, near to medium term, ask what are the most pressing questions from investors and to kick it off with you here. But first of all, thank you very much for joining us, Jacinth, Mark.

Yes. Thanks for having us.

All right. So Jacinth, to maybe start it off, during the most recent earnings call, you clearly provided a fairly wide range of issues that have been affecting current results. One of them being the softer retail environment. Could you elaborate on what those issues are and how you're tackling those? And then I'll just have a follow-up on that.

Yes, certainly. So our Q3 results, just a reminder, was definitely in line, generally with expectations. And one of the good news, certainly for the quarter is that we improved wallet. So even when we pulled out our turkey business, volume was strong across the entire business, overall. Now if we take a step back to Q1, when we talked about the dynamics that were affecting us then, it was very different than now. So then we talked about a couple of internal dynamics, which included where we were from an inventory perspective. Planters was an area that we wanted to ensure we get that back on track. And then from a margin perspective, interest cost, that was an area that we were focused on. The good news is, all those 3 areas have improved and we've done what we said we're going to do. So our nonworking inventory is down, Planters, we're seeing the momentum there. We have a better performance. We have better performance on shelves. We have innovation in the marketplace. You can see that from the different flavors in the cashews that we now have in market. And I can see that the folks here are really loving that because the shelves that are there in the snacks room is completely out. So the Planters innovation is working well. And then we've spent a lot of time from a cost-out perspective from our supply chain and getting that healthy. We're working on in those areas. Those areas are working well. As we think about this quarter and going into the rest of the year, it really is a very different dynamic and it's more around what's happening with the market itself the consumer dynamic, which is different. And also just the competitive landscape that has changed as the consumer base and industry has gotten more healthy from a supply chain perspective so that you're seeing the competition being very different. So foodservice or foodservice business continue to perform very strongly and Mark will talk about that. And the areas overall from a category perspective that we are very strong for us, if we think about pepperoni, bacon, SPAM, Planters, as well continues to be a [ strength ] for the company and that's where we're very focused. The areas where we are working on, on international, our international business, that has definitely been challenged and will continue to be challenged for the rest of the year, less weaker than expected for sure. And then when we think about our retail business, that's a little bit more complex and that's where we're seeing the competition. Back to my comment about the industry getting stronger and healthier from a supply chain perspective, that competition on shelf and in market has been more. And so we're really focused on getting with -- the lift from a volume standpoint where we can, whether it's be hitting it with promotions were necessary but also being focused on innovation and really getting out into the market and driving top line and bottom line. So we're absolutely focused in the areas that we need to. Turkey has been a headwind for us that has certainly brought on new supply as we came out of HPAI last year, gotten supply back into the marketplace. But that's also an area for us that's been uncertain. And as we have gotten healthier as well from a yield perspective our [ birds ] are performing better, we have a lot more meat in the market but their market -- the prices in the market has also come down tremendously. So we have -- now have excess meat and we're anticipating and that's an area that we're also navigating that has caused a bit of pressure for us for the Q3 and then also going into the back half of the year. But we're focused in the right areas, focused on ensuring that we're driving volume. Hopefully, turkey continues to recover. Our expectation, hopefully that the customers are perhaps waiting for markets to come down even further and will hopefully drive more volume there. But we're also controlling what we can and working on projects to capture cost savings and continuing the margin expansion. So a long response there but we're focused on what we can control. And as I said, Q1 was a different dynamic where it was more around the internal dynamics for the company and then now it's really navigating the external market from a consumer perspective as well.

I'd like to combine the next 2 questions, like you touched on retail and you touched on the foods and the international piece of that but also on everything on like, the internal efficiencies you've been working on. So as you think this through and you clearly managed to improve efficiencies internally, over the last couple of quarters within the domestic market. So is there anything you would say there is a lessons learned opportunity and how we should just think about international go forward? Is it like a playbook that you kind of apply in the U.S., is that something you can take on into the international side? How should we think about the time line here as well, just given there was a relatively fast turnaround in the U.S., could international be as fast? Or is there just an intrinsic slower process?

Certainly. So as we think about our international business in 3 pillars, we have the export piece of the business, the multinational, which is more around in-country for a country like China, Brazil and then we have our partnerships, where it's particularly the Philippines, Indonesia. And so when we think about the expertise, where it's primarily commodity driven, in some cases that created some challenges for us year-to-date as we see the markets recover from a [indiscernible] perspective domestically, then we will see improvement for the international piece as well when we think about exports. . And then China certainly is off to a very slow recovery, the foodservice piece. And we could -- Mark can expand more on that, that foodservice piece is strong in China today. It's really the retail side of the house that we're seeing the challenges. And one of the things we're seeing in the market, certainly our products is more discretionary in that market and customers have to make a decision or consumers need to make a decision about what do they buy, if there is a questionnaire, certainly they're going to buy what's considered staple. And so that's part of the challenge. And then we also took pricing on SPAM in one of our markets. And we're seeing the elasticities show up there and that we are also managing with promo and expect that, that will recover first half or first quarter of next year. So the dynamic there, for sure, we feel good and we are confident about the model that we have in the U.S. and elsewhere, that's the for the right model for us, for the international business. And just a reminder, I mean, prior to this, our international business was really growing and had consistent sequential quarterly growth. And we expect that, that will return as trying to recover and as turkey itself recovers as well. And we have made really good investments in international that we know will really pay off in the long term.

Let's switch gears and talk a little bit about foodservice, Mark. It's really very positive results. On a year-to-date basis, quarter was really good, very good margin contribution here. So what's been driving this? And what -- how should we think about the segment's profitability just beyond this fiscal year, just medium term because it's been so strong recently? And what's the normal level?

Thanks again for having us today, really appreciate that. So really, I'd like to think about it as kind of our approach, kind of a unique approach, basically a balanced model, it's about mix and it's about our people. So when we talk about the balanced approach, first of all, our portfolio, the restaurant industry that needs to change constantly. And what we really do is, we try to develop a portfolio of products that's very value-added, that really addresses the areas that our operators need. So think of today, the labor concerns out there, how important it is to provide products that are, I'd say, presliced, preportioned to help customers buy products that are going to be consistent, that are not going to require as much labor and prep time. You think about a restaurant, a busy restaurant, I mean, time is money, seconds are money. So if we can help take a process and cut that time in half for them to prepare -- work on other areas, that's a big advantage to us. So I think we've continued to evolve and innovate in the areas that make sense for our customers. We listen to them. The second piece is really the segmentation of the industry. So we are very well positioned across the industry in the different segments like commercial restaurants, think of noncommercial, your health care, college, university, think of convenience stores, commissaries, all those different types of segments. We're very well positioned in those markets. So at times in the industry, one area may be struggling a little bit and another area may be doing better. And so our balance allows us to do that. If you think of coming through COVID and how the lodging industry was just decimated. And we were impacted by that because we do lost margin but we also had opportunities in other areas to start accelerating growth like convenience stores. So the balanced portfolio along with our balance within the industry allows us to weather a lot of them and continue to drive higher-margin value-added products. And the last piece is really our go-to-market strategy. So a majority of our portfolio, not all but a majority is supported by a direct sales force. And over the years, I mean, that has allowed us to develop deep relationships that we continue to nurture over the years. So as you're going through some recent more difficult times in the industry and the economy, it helps us stay grounded with our customers and really continue to work closely with them. And so our entire team is committed to that. Our culture is one of bringing out solutions, how do we make this work, including efforts. So I think that combination of things really has set us up to continue to drive profitable growth.

We'll come back to that in a bit. But just on the short term to wrap it up, Jacinth. The updated guidance for the last 3 months is still fairly wide range of outcomes. You already said on the call last week that you expected to update the market, actually at your Investor Day upcoming in about 5 weeks. Just remind us maybe about the puts and takes, the higher as well the lower end and why, in particular, the sales piece is still somewhat vague, just in order of outcomes in aggregate?

Certainly. So going back to the conversation we had on the call, we certainly have a lot more visibility to the bottom line and the top line, just given the volatility of the market that drives the top line. So for example, deli markets have been pretty versatile. And it -- we saw an unseasonably low market going into Memorial Day, for example. And then it really has been going up and down. And so when you think about that, it's harder to then predict where the markets will run because if the market is high, then you can have a higher top line and so that range is really -- could really improve quite a bit versus the bottom line, we have a more tighter hold on what that can look like. And so that's really the dynamic that we're facing. So it really depends on where markets are, how the [indiscernible] recover? And then our focus is on our ability to just really capture savings to help then drive the bottom line, also from a margin and segment profit perspective.

Okay. Got it. Now shifting a little bit more in the interim, about -- looking back 2 years ago, you introduced a new operating model and it was all about supply chain improvement, et cetera. If you think about it, everything that's been implemented over the last couple of years and now as we came out of COVID, how do you think the new model has helped you to actually mitigate the more recent pressure? And if we hopefully get a more normal year fiscal '24, what are the real strengths of this model as it relates to the opportunity to excel in the different segments?

Yes. So just a reminder, it was a year ago here that we introduced that new model. And so we're currently focused on just continuing to stand up that model so that we can be effective to drive the outcome that we know is there to capture the value and also to continue to evolve the company. And as we sit here today, we have done a few different things. As a reminder, one of them is having this Center of Excellence called Brand Fuel. And it's all around just really focused on innovations. Using insight, external insights, consumer insights to drive those innovations and also then to fuel the decisions that we made for the company as we look forward to what should we be doing, what should we be bringing to market? How should we think about pricing and performance on shelfs and all of that. So that's really working well across the company. Now the people, we're also integrating the [indiscernible] into the rest of the legacy format that we didn't have before. So I mean it's really bringing the power, in my mind and harnessing the value of the entire portfolio that we have and bringing that to bear on the market in a way that we didn't do before. So with that as Mark mentioned, Mark has [indiscernible] tremendous value and so we did so well, when a toolkit of an entire portfolio of products that we have to offer the customer and the consumer. So that's really working. The other piece is when we look across the enterprise, being able to make decisions in a way that we didn't before because we're using enterprise [ lens ] versus doing it in a siloed fashion. And so a part of that [indiscernible] is we talk about our people but our people also in my mind, have a [indiscernible] selling role to play in this model because then, of course, I think about finance and being a strategic partner to the business. Now finance is really focused on truly helping the business, drive divisions with retail and our -- the marketing team that needs to be doing some of that analysis on their own, with focus on driving brand value and protecting the brands in a way that they didn't before because their peers were, like in finance, is truly [indiscernible] them with the information to do that in a different way. And so we're obviously seeing the value from them in that future growth from a long-term perspective as new ways of working become the likely thing. So we're super excited about and really focused on the long term. And then the other piece of that then is around our supply chain and operations and being and getting more effective in taking cost out of the system. And we have a few different projects that's underway, that we'll spend more time on during Investor Day to tell you about what those projects are about, that are helping us return to normalized margin structure for the company and taking cost out of the system because we know we can't price our way through everything. And how do we get more efficient in order to be able to drive from a shareholder and for the customer and consumer.

Okay.

And I can just add a little color too on the foodservice side. So as Jacinth mentioned, we had an opportunity in this new Go Forward structure to really start to align the different pieces of the business. So on foodservice, we had our legacy team but then we had our affiliated businesses. We had Jennie-O foods. We had Hormel Health Labs. We brought those all together under one roof. Now they are all very unique in how they go to market. Some are very customized in what they provide and different things like that. But what this allowed us to do is collaborate much more internally. In customer-facing, we were able to go in with a much broader perspective what they might need, our broader breadth of product. And for example, if you think of a chain account, maybe somebody in our team was calling on that account and another part of our business wasn't -- had no relationship, we have found that coming together, we can bring those folks into the picture, expand the products available and really start to do exactly what the customers need and provide more solutions. So it's really been good for us to bring things under, get a little bit better idea of what everybody is doing. And now going forward into '24 and beyond, we're doing that and even tighter as we continue to expand. So it's been very good.

If you -- just within foodservice, if you compare to how it works today and you've mentioned like you get the product portfolio, you go to your customers, you maybe have more solutions, maybe someone didn't know whom talk to, now you do, that's obviously something that's been a material shift in the customer experience. But if you think about it, how is it for you on the execution side? Are there any challenges to overcome? And how does that compare to like maybe prepandemic, the old system, then by the end of the pandemic, introducing the new one and how you can now actually deliver these strong results? It seems foodservice is like kind of a success story. So really would like to understand what's particularly behind in foodservice to be so successful.

Sure. So I think you brought up an interesting time for all of us, it's pre-COVID and after COVID, right and what was going on before. So heading into COVID, I'd say the industry was facing many of the same challenges around like, things like that. But clearly, COVID decimated the industry, lost thousands of restaurants. But as we've learned over the years, whether it's recession or a worldwide pandemic, it's a very resilient industry. So we kind of knew it was going to come back, just weren't sure all the different spaces. So as we came out of COVID, parts of the industry, like pickup, delivery, drive through, parts of the business that a lot of operators didn't do, that became very, very big, those kitchens, commissaries, different parts of the business. And -- so as we came through that, we realized that we had a lot of options for all those different things. We just didn't have them collected in 1 spot. So we found ourselves possibly going down 2 paths to get to the same conclusion. As we brought the businesses together, we've gotten much better and much more efficient at saying, here's a customer channel, how do we best go after it and how do we pursue it. So I think we're going to be much more incise in what we bring to the operators and the distributors in a much more clean and what they're looking for. So I think it's helped us for sure as we move forward.

Now Jacinth, one of the other things and you brought it up multiple times already in the conversations. Just the commodity piece with turkey and the ups and downs on what's happening on pricing. We all know HPAI, it's still like lingering and there's still issues. So if we think about the more recent impact from it on operations and also, what are your assumptions for the next couple of quarters and into the next year as it relates to potential outbreaks, issues coming back or not? How comfortable are you on the situation right now?

Certainly. The -- I'll start with, we're super happy that we have turkey back. We were sitting here at a different place as we thought about where we were last year with HPAI and having turkey in the portfolio and having certainty of supply is huge for us. And so as we think about the uncertainty, that it's certainly uncertain as to what happened each year with turkey but it's a space that we're absolutely committed to for the long term for this company, which is part of why we integrated into the legacy part of the business. That means that we now have a lot of meat. We have a lot of supplies. The products have been doing extremely well. And so we're looking for turkey to recover and that's our hope going into the rest of the year and into next year that we will actually continue to have that supply. And as we think about the rest of our business and having that really going to value add, that's really where we want the meat to go so that we can continue to have higher margins and looking for the markets itself to also recover because it's well below its level for a very long time. So as you think about where breast meat sits today and whole birds and the [indiscernible] have been down and volume has been down. So when we think about our guidance and we don't give guidance for the guidance, by any means. But when we think about the guidance that we gave and coming down for the fourth quarter, we're contemplating, right? We're contemplating all of that because we don't have the certainty about what can happen with turkey. And so we're also thinking about the cost structure for the business and continuing to drive volume in retail and across all the different categories and paying attention to where we need to really apply any kind of promotion to continue to drive that volume as well. And so all of that is really in the guidance that we have given for the company. But we really feel strongly about where we sit on that. We do have the uncertainty in some of the competitiveness I talked about in retail.

Volume, pricing, obviously, sensitivity, as you talked about it in the international markets, there's certain elasticities coming in. So if we look into that and we think about normal consumption patterns, clearly, cost pressure is easing. But if we think about the future growth algorithm and I know in the past you always talked about like this 2% to 3% top line growth. How should we think about business going to turn out price versus volume? And where -- are issues maybe in the short term from an elasticity point of view, if you still remain maybe too aggressive on pricing or even not coming back. So what's the right balance? And how should we think about the growth top line in the medium term?

Yes. Certainly, again, it goes back to the top line has a bit of -- where it's a bit more nuanced based on the commodity market. But I would say, we continue to drive the top line and bottom line, the margin piece of it. We're really focused on the transformation work that we're doing from a supply chain perspective, getting cost out around the margins. The other piece of our algorithm that's not -- that we don't talk about as much and what we still have as a focus as a company, is on the innovation side. So as we came out of COVID -- during COVID, we weren't that focused on it because we were just focused on just getting products on shelves to the customers and then now coming out of COVID, we are now back to accelerating innovation. And so we're still focused on that 15% innovation number that we have put out there and that's a scenario that we think will drive long-term value for our customers and for the consumer and that will really help us when we're thinking about how do we really accelerate the massive margin structure that we're looking for. So I mean, it really is a combination of really focusing on where we can drive value for the customer through promotions, through innovations and then also focus on the long term from the transformation of our operations and our supply chain.

Got it. Mark, if you think about the long term expectation for your business, where do you see Hormel foodservice, the rest of the industry going in the next, say, 3 to 5 years?

Okay. So I think as I talked about kind of our model and how we're going to market, I see that continuing. So we're going to continue to innovate, produce high-quality value-added products that our consumers demand in the foodservice line and continue with the segmentation and skate to where the puck is going to be, so to speak and understand what new parts of the business are coming forward that we need to put more resources against. So that piece of it, I believe we're going to continue to do things in that space. It's going to help us deliver results. What changed though is there's [indiscernible]. So as we've looked over the last couple of years, it has become much more important. So that, I think the number is between 70% and 75% of operators and restaurants are purchasing their products from their distributor partners online. Okay. That's really, it hasn't been that high in years past. So when we think about digital space, we've got to be better. We've got to show up really, really well with our distributors on their websites. We've got to be able to show up to our operators through digital advertising and marketing and things like that. So we're working really hard on that space. And then finally, the other thing that's relatively new to foodservice, unlike retail but over the last, I'll say, 5 or 6 years, the data and analytics that have come our way is getting much, much larger. So we're putting resources against understanding that data and then executing strategy against it. So that's going to be a big piece, as we move forward, is really understanding the digital piece and moving into that. And then just culinary, just being a food forward company. We've stood up, what we call our culinary collective. So we continue to add chefs and building on this business because we want to give our operators the experience, bring them into our corporate office, our new innovation center and really show them what we can do for them. So we're going to continue to lean into those areas a little bit heavier as we move forward.

Okay. If we think about capital allocation and just if you could share maybe a few examples of some of the investments on growth initiatives or just innovation initiatives from a CapEx perspective. But also how we should think about the need to spend money or to reinvest money in the business in the medium term and the balance versus dividend also in light of the somewhat softer earnings growth? So the dividend growth, where is that going to shake out?

Certainly. So as I come into this seat, the focus in our capital allocation strategy hasn't changed. And well, now that I'm fully supportive of what -- how the company has focused in the past and I'm aligned with this strategy. And just a reminder, it's really in this order, it's what's required and what's strategic and what's opportunistic. And from a requirement standpoint, dividend is at the top and that continues to be a focus for us, maintaining the dividend. And then when we ask about the -- just maintenance of the business and what do we need to actually continue to run our plans and support our assets, that's next. We certainly support the business from the standpoint of the expansions we have done for bacon, pepperoni. Those are critical areas that we continue to see expansion but we've put in about $300 million of CapEx each year and that continues to be around what we feel is good to sustain the business. And whatever comes before that we feel from a strategic standpoint then we have strong cash flow to be able to support that. And so we will continue to do that as we see fit and definitely paying down any debt that we have, pensions, those are areas of that we consider to be required. And from a strategic standpoint, certainly M&A, when we find something that's compelling that we think fits into our strategic priorities and then opportunistically does share repurchases for sure. So that capital allocation strategy will continue to be how we run the business. And then I feel really good about that in terms of from being able to be financially sound and have investors feel good about the fact that we are still, in my mind, a fairly conservative company that really doesn't go out [indiscernible] huge risk and is very balanced in terms of driving shareholder return.

Perfect. Jacinth, Mark, thank you very much. We're just about a minute out. So -- and let's close it. Thank you very much for coming and joining us. We're going to be over in the breakout room in case there are questions from the audience. Thank you very much.

Thank you.