Hormel Foods Corporation (HRL) Earnings Call Transcript & Summary

Good to go. Awesome. First of all, good afternoon, and thank you very much for joining us. Next on stage, we're pleased to introduce Hormel Foods, which is a global branded food company with over $12 billion in annual revenues across 80 countries. And joining us today are Jeff Ettinger, Interim CEO; as well as John Ghingo, the company's President and incoming CEO. So maybe, let's get started.

And when you look at just the priorities for fiscal 2026, Jeff, what were the key ones that you laid at the beginning of the year? And how would you assess the progress against those priorities where we stand today almost at fiscal year-end?

So heading into fiscal 2026, we had had a year in 2025, where we had driven top line sales, and so we wanted to maintain that momentum. But we weren't driving commensurate earnings growth, and that became really priority 1 as we had in the last part of the planning cycle and heading into the year. We focused on a few different levers that we thought could help improve that profitability. First was pricing. We have been hit with a lot of raw material cost increases during the latter half of -- and sometimes it takes a little time to get the pricing through. But by early in the second quarter, we were done with that in both the retail and food service arenas. We wanted to improve mix. We wanted to improve productivity, and we are seeing enhanced margins as the year goes forward. And then 1 of the things we had looked at was our SG&A trend was -- it was just, frankly, growing too fast compared to what the company was growing, and we needed to remedy that. And so we took a number of steps late in the year and executed them early in the calendar year. And indeed, as we sit here right now, we're seeing a 20 basis point improvement on the percentage of SG&A, not counting advertising against organic net sales. So that was the game plan. How are we doing against the game plan? I mean it is a dynamic environment out there. So we -- everybody is, I'm sure, have been hearing about the consumer. -- at all these different presentations, and John will talk a lot about the consumer here today as well. So that's been a challenge. We've seen challenges in the freight and logistics area and with the Iran are and the spike in diesel costs, that's been something we've had to confront. And then, Ben, as I was chatting with you, I mean, even this morning, as we get questions in our breakout sessions, people were asking, hey, a couple of the companies in your coverage universe are talking about, say, the pork cutout and Hormel does still have on pork processing plant. We used 3. So we're not a particularly large player in that. So our exposure is quite a bit lower. We have seen some negative margins in pork cutout, but we sell a lot of value-added products in both retail and food service and frankly, the lower cost of goods is a benefit in those areas. So that's not really having a deleterious effect on us right now. So where do we sit? We've actually been able to grow earnings this year by 6% through 3 quarters. Based on our guidance we provided for the full year, we're looking at a 6% to 10% range. So we expect to grow it again in the fourth quarter. On the top line, we did grow first and second quarter. Third quarter, we had a miss. And so we're looking to restore that kind of growth, but we think we'll be comfortably within the 1% to 2% growth range organically for the year. So overall, I mean, our priorities were to enhance collaboration, so we reacted more quickly to different circumstances such as some of the ones I've outlined. -- to increase our productivity and efficiency. And I think we've been able to do that mostly this year.

Okay. Perfect. Thank -- and then just picking up on that, and you said third quarter was a little tough and obviously, recent earnings are still fairly fresh just late August. So what we're actually within the quarter, like the biggest positives but also the bigger negatives that kind of like resulted in then maybe slight or weaker soft line than at the beginning of the year. And what are your expectations as it relates to top line and bottom line for Q4?

So I'll take that one, Ben. Thank you. Yes, Q3 certainly had some moving parts. So I think it's worth walking through some of the critical ones that I'll touch on -- so starting with the positives in Q3, we continue to see very good momentum on our food service business. Our Foodservice business posted its 12th consecutive quarter of top line growth. Our foodservice business now accounts for approximately 1/3 of our company sales and approximately half of our company segment profit. So growth on that business is particularly meaningful to the total company. We also like some of the momentum we saw in critical priority retail brands. If you look at our more poultry-based franchises and Jennie-O and Applegate, we saw nice consumption growth there. We saw growth on our Hormel Chili business and our canned center store portfolio. We saw growth in our refrigerated entrees. We had growth on our res brand. And importantly, we saw growth in the quarter in our Planters brand. So we really like some of the momentum in retail. Additionally, from a profitability standpoint in Q3, we made progress -- we expanded our adjusted operating margins. We expanded and grew our adjusted EPS in the quarter. So we felt good about that progress on profitability. On the other hand, I would say top line results were more mixed in total. And if you kind of break that down, we obviously had some near-term impacts from the portfolio shaping actions that we've been deliberate with and taking. On top of that, we saw some effects that we were expecting from an elasticity impact. As you'll recall, we took 2 rounds of retail pricing late last year and early this year. And so some of the volumes we saw come out were expected as a result of elasticity -- and then we did see a bit of softness on some of the other retail pieces beyond that as well. So in total, if I kind of look at the quarter and then look forward to Q4. In Q4, we're going to continue to have some of that noise around the top line as a result of the portfolio shaping. But as Jeff mentioned, we are expecting to see some benefits of lower pork input costs in Q4. And I think if you just look overall, we're being appropriately cautious with how we're walking into Q4 given the consumer and operating environment I also think if you kind of take my big takeaway from the Q3 call and the reaction to the call, was, I think if you look at the underlying performance of the business, the progress on the business, some of the momentum, I think it's stronger than some of the headlines and reactions to the earnings might suggest.

Now as said, Jeff is still Interim CEO, but he will be the incoming CEO. So as you prepare to become a CEO, John, where do you see the greatest opportunities for the company for the next several years just with the backdrop of having been President for a while, coming in? What are your priorities?

Well, let me start with where I think we are, and I would say from a formal perspective, we are coming from a position of strength, and I'd say that for a couple of reasons. One, I do think the protein-centric nature of our portfolio gives us a unique opportunity to really catch consumer tailwinds. And they're not short-term tailwinds. These are long-term tailwinds with some additional short-term momentum, but I think we have a real opportunity as consumers are seeking more convenient forms of protein seeking more affordable proteins, willing to pay a premium for certain proteins, looking for flavor forward protein solutions. We are that partner that can provide that. All of that opportunity sits upon a foundation, which has been built over many years, strong branded portfolio, we are a leading position in 40 categories. We have away-from-home channel coverage through our food service business that allows us to be that partner for the consumer whenever and wherever they're looking for that next protein occasion, whether it be in the morning, afternoon, dinner snacking anywhere in between wherever they are, we can be there. So that's a great foundation with this protein-centric opportunity sitting on the topic. Now from my focus going forward, is how do we unlock more value from that opportunity. So a couple of things I'll call out that will continue to be really important focus areas for me and for the company. One will be innovation and renovation. We need to continue to enhance our portfolio to work really closely listening to consumers about how their protein needs are evolving, working with our operator partners in the foodservice space to make sure we're understanding how do we uniquely solve problems for both consumers and operators. That's one. Two, we need to continue to invest in data, analytics, technology and strengthen our capabilities as a company, modernize ourselves, so we'll continue to do that work. And third is just a relentless focus on strengthening execution we need to continue to execute, execute, execute and execute well. So those are some of my focus areas. But if I pull back from all of that, I think we do have a unique plot I think it is about investing in those areas to continue to get the growth out of the business. And I do feel like we have a good runway to consistent growth.

Okay. Perfect. Jeff, maybe if you could help us in contrast the current environment we're in with the industry dynamics when you were CEO previously a couple of years ago.

I'll be happy to. I see -- this is your 19th conference. I think I was here at the beginning. So I was the CEO of Hormel Foods from 2006 to 2016. And clearly, that was an era where growth was more readily accessible for a lot of the players in the industry. we did feel like we had the team and the strategy and the portfolio and the execution chops to do better than many companies during that time frame. So as I look at the environment now, clearly, okay, it's not -- there isn't growth everywhere at this stage in the food industry. But I guess I don't really have a wait my attitude toward that. I mean we are in food it's like people still eat 3 meals a day at least if you throw in snacks that are more and more prevalent. I was recently down at 1 of our major customers' headquarters and hearing about their goals,and their goal is to double the meals they're involved with. And to me, that's the right focus. It's really less about calories or pounds. It's more about being relevant to people in those kind of forms. And so I think the portfolio going forward is really well positioned to take advantage of that. We have the protein centricity that John referenced. We have the solutions-based heritage at our food service group, which has grown 12 quarters in a row now, even in environments where the total industry is not necessarily growing at that clip. They've been able to do that. And I think as John and the team get the retail brands focused and the international markets focus, you're going to see that throughout the portfolio. So I think you have the opportunity as investors to invest in John and his team going forward as an entity that I think is going to do better than most in the marketplace going forward.

Okay. You mentioned food service and the strength there. Clearly, it's been very consistent source of growth, and you set the share of it, half of profits -- what does that performance actually say about the strength of the business? And where do you see incremental opportunities within foodservice?

Yes. So I think if you step back and look at our foodservice performance over time, we have proven the business model we have to be very unique and durable to grow even in down markets when industry challenges persist. -- what's underneath that to get to that part of it. I think 3 things that I'd point to. One is our value-added portfolio and the innovation we continue to bring to that portfolio. We need to continue to create more value. And as we do that, we continue to do that. We're solving more problems with the operator. So our portfolio is key to our direct sales force. Our direct sales force is truly a unique engine of culture, talent, capability and the work they do with our operator partners is critical. And then third is, we have a very diversified channel base across our food service. So whether you're talking commercial, noncommercial independence chains, geographic diversity, channel diversity. So that gives us the opportunity to play different channels where we see pockets of growth and pockets of opportunity. to keep the growth and you're going. Now what does that look like? If you take a moment in time where our food service operator partners are really challenged menu inflation, difficulty in obtaining labor and skilled labor in the kitchens -- you look at problems around shifting demand from their consumer base, inflation, right? All of those factors -- how can we help? And so because we have this direct sales force, I'd like to call our direct sales force more than salespeople. They're gathering insights. They're building relationships. They're being creative and solving problems in the kitchen with the operator partners and then bringing back solutions. And so when you're doing that even in a challenged environment, you can grow the top line because those operators will gravitate to the partner who's solving the problems they're dealing with. And so an example of that would be our Flash 180 chicken platform. If you look at the demand space in food service around breaded chicken, it's 1 of the fastest-growing areas. Consumers, diners want more breaded chicken whether it be chicken tenders, whether it be fried chicken sandwiches, but if you're an operator in your kitchen, you want to sell more chicken, it gets difficult. You're bringing raw chicken, he's time, you have to handle it. You have to batter bread in the fryer, 10, 12 minutes. So we're bringing through our Flash 180 chicken platform, 180 seconds. -- from package to plate, pre prepped. So it's super simple to execute, saves time, save space in the prior. So that's an example of a solution. Another quick 1 I'll give you, Ben, is because this is such an important part of our business. is our branded Pepperoni business. Pizza operators are struggling right now, competing for traffic, also dealing with inflation. Our branded Pepperoni business has grown really nicely this year as part of our foodservice growth. One of the reasons is we're bringing those pizza operators menu news through our RosaGrande premium Pepperoni line. We're bringing it through our new calabrian which are spicy pizza toppings, news, a way for them to differentiate, bring something to their diners, compete for some of that traffic, sell some more pizza. So that's the mindset we bring is how do we help -- and through that help, we actually continue to drive consistent growth, and we're confident we can continue to drive growth in our food service business. There's a world of opportunities in terms of channels and product platforms.

Maybe leaving food service behind and talking a little bit about retail, which obviously is large in sales, but not as large Clearly, you've mentioned the dynamic environment. But there are some areas of better growth. So what's maybe first working particularly well. And then second, were more challenges.

So I would say from a retail perspective, we've done a lot of work over the past year on reframing our portfolio and our opportunity really around the consumer. So what does the consumer want? Where is the consumer headed? So I start with that headline because I think that headline is working for us in total, and I'll give you a few examples. Consumers continue to seek better-for-you versions of proteins. So if you look at our business in the third quarter, Apple gating Jennie-O or more poultry driven franchises, both performed well. both posted growth in the quarter, meeting those needs for convenient forms of lean protein that consumers are looking for. Second example is, in this moment, consumers continue to look for value and versatility -- what are the things I can put in my pantry and my refrigerator that will stretch a meal that I can use in different ways that I'm going to get value from. There, we saw our canned portfolio, including Chile, Hormel Chili, but also intimate Mary Kitchen hash, that portfolio grew in the third quarter as consumers reach for those options. We also our refrigerated entrees business. That's sort of the Ultra easy plug-in. We call that heat and eat, I mean you bring it home, you pop it in the microwave you heat it up and it's ready to go. That business grew because it was meeting that need for time saving and convenience and value. And then you go beyond that and consumers continue to want great quality food, but they want the prep in the kitchen to be really easy. So another example of that is bacon. So we had growth on our bacon business through convenience bacon, -- our convenient bacon formats are microwave-ready bacon preportion bacon, oven ready bacon that's sold on a disposable trade. Those formats are working for the consumer. They're driving growth in the category. They're helping us gain share of the overall baking category but they're meeting that need for convenience for consumers. And the last 1 I'll bring up is just the behavior around snacking is changing. Consumers continue to migrate towards snacks that are more substantial that are more satiating where you have a mini meal, fuel dose and you move on as opposed to what I would refer to as mindless munching or typical grazing behavior. And so with that, we're positioning our brands, notably planters into that big substantial snacking space. And we actually saw a great proof point of what's working on our planners business in the third quarter where we grew sales, volume, market share, household penetration and really started to penetrate this bigger world of substantial snacking behind planters. So we have a lot of spots that really support that overall consumer story. That's the common thread that runs through there. It's where we're getting that consumer equation right. We're accelerating our efforts and our growth.

Okay. I'm following up on the challenges.

So what I would say about the challenge is, let me call them opportunities.Okay. I'm following up on the challenges. So what I would say about the challenge is, let me call them opportunities, not to be cute, but I genuinely do think our priority retail businesses are all opportunities. I'll tell you why. We are not sitting on a portfolio of products where we're trying to find a consumer problem to solve to have them be relevant. We actually have plenty of consumer solutions, opportunities to go after with our portfolio. And so when we think about consumers looking for shortcuts in the kitchen for breakfast, lunch, dinner for portable protein snacks for portable protein fuel in the more we have a portfolio that meets those needs, right? We can -- we have that opportunity. Now that being said, we are doing some very important work right now. We're doing the important work of positioning, reframing our brands, modernizing our brands. Some of the brands are further along than others. And so where you see some of the momentum, generally, it's where we're further along in that journey. The second piece of important work that we're doing on our business is investing in capabilities that are critical to win in the marketplace. So here, think about things like revenue growth management, including price pack architecture, e-commerce digital communications, innovation under the leadership of our new Chief Marketing Officer, we are building those capabilities aggressively. That's going to help lift all of the brands over time. in some of the lead priority brands, we've leaned in more. We're starting to see some of the success come from that. So that is important. And that's why I say when I step back from all of it, I truly do think of our priority brands in retail as a series of opportunities and we're going after them aggressively.