In this file:

 

·         Hormel Foods continues to invest in flagship brands, anticipates $80m-$100m in supply chain disruption costs this year

·         Hormel Foods Corp (HRL) Q2 2020 Earnings Call Transcript

 

 

Hormel Foods continues to invest in flagship brands, anticipates $80m-$100m in supply chain disruption costs this year

 

By Mary Ellen Shoup, Food Navigator USA

21-May-2020

 

Hormel Foods saw organic net sales increase 20% for its grocery products (SPAM, SKIPPY, Hormel chili, and Hormel Compleats microwave meals) and registered a 12% rise in net sales for Jennie-O Turkey products offsetting a decline in foodservice sales in Q2 2020 (covering the 13 weeks to April 28).

 

Total organic net sales for the second quarter were up 6% to $2.4bn, weighed down by sales losses from its foodservice accounts, reported the company.

 

While the company saw improved performance in its refrigerated foods portfolio from products such as Hormel Black Label bacon, Applegate natural and organic meats, Columbus charcuterie, Hormel pepperoni, and Lloyd's barbeque meats, those gains were more than offset by significantly lower foodservice sales and higher operational costs.

 

"We continue to excel and gain market share in channels that are open and available to us, namely the retail channel. We know consumers are looking for trusted brands, and we will continue investing in our leading brands such as SPAM, SKIPPY, Jennie-O, Hormel Natural Choice, and Applegate,”​ stated Jim Snee, chairman of the board, president, and CEO of Hormel Foods.

 

“Even though the COVID-19 pandemic has caused a dramatic shift in consumer behavior, operational disruptions and extreme volatility in raw material markets, we remain financially strong and well-positioned to weather the pandemic,"​ said Snee.

 

COVID-19 employee safety response​

 

After several closures to a number of its food production facilities​​ in April due to COVID-19, the company has implemented enhanced safety procedures which it says “meet or exceed CDC and OSHA guidelines.”​

 

The new measures include include providing personal protective equipment for all production team members, frequent disinfecting of high-touch areas, reconfiguration of common areas and workstations, temperature and wellness screenings, revised shift scheduling, reducing production line speeds, new guidelines on carpooling, more extensive social distancing measures throughout each facility and where possible, providing remote work opportunities and facilitating access to rapid testing for employees.

 

"Employee safety has been and will continue to be our top priority, and this is why we are committed to making the necessary investments to keep our team members safe,"​ Snee said.

 

"Our industry-leading effort to enhance safety protections for our team members is complemented by our new awareness initiative, called KEEP COVID OUT!, which reinforces the importance of taking preventive measures at our production facilities and in our communities where we work and live."​

 

The company has also announced over $11m in bonuses to all full- and part-time plant production team members.

 

Supply chain disruptions​ ...

 

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Hormel Foods Corp (HRL) Q2 2020 Earnings Call Transcript

HRL earnings call for the period ending April 26, 2020.

 

Motley Fool Transcribers

May 21, 2020

 

Hormel Foods Corp (NYSE:HRL)

Q2 2020 Earnings Call

May 21, 2020, 9:00 a.m. ET

 

Contents:

 

    Prepared Remarks

    Questions and Answers

    Call Participants

 

Prepared Remarks:

 

Operator

 

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Hormel Foods Second Quarter 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded, Thursday, May 21st, 2020.

 

I would now like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead, Mr. Annis.

 

Nathan Annis -- Director of Investor Relations

 

Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2020. We released our results this morning before the market opened around 6:30 AM Eastern. If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investors section.

 

On our call today is Jim Snee, Chairman of the Board, President, and Chief Executive Officer; and Jim Sheehan, Executive Vice President and Chief Financial Officer. Jim Snee will provide an overview of the Company's response for the COVID-19 pandemic, a review the Company's current and future operating condition and commentary regarding each segment's performance for the quarter. Jim Sheehan will provide detailed financial results and commentary regarding the Company's current and future financial condition. The line will be open for questions following Jim Sheehan's remarks.

 

As a courtesy to the other analysts, please limit yourself to one question with one follow-up. If you have additional questions, you're welcome to get back in the queue. An audio replay of this call will be available beginning at 11:00 AM today, Central Standard Time. The dial-in number is 888-254-3590 and the access code is 7355932. It will also be posted to our website and archived for one year.

 

Before we get started, I need to reference the Safe Harbor statement. Some of the comments made today will be forward-looking and actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to pages 30 through 35 in the Company's Form 10-Q for the fiscal quarter ended January 26, 2020, in addition to a supplemental risk factor related to the COVID-19 pandemic included in our Form 8-K filed this morning. Both can be accessed on our website. Additionally, please note the Company uses non-GAAP results to provide investors with a better understanding of the Company's operating performance. These non-GAAP measures include organic volume, organic sales, adjusted pre-tax earnings, adjusted diluted earnings per share and operating free cash flow. Discussion on non-GAAP information is detailed in our press release located on our corporate website.

 

I will now turn the call over to Jim Snee.

 

Jim Snee -- Chairman, President and Chief Executive Officer

 

Thank you, Nathan. Good morning, everyone. First off, I want to take this opportunity to express my sincere appreciation to the essential workers showing up every day in food manufacturing facilities across the industry. They should be recognized for the heroic and purposeful work they are doing and they have my most sincere appreciation and gratitude. I also want to acknowledge the food industry employees who are showing their commitment every day with the work they do, whether it be grocery stores, food pantries, restaurants serving patrons or takeout, delivery or curbside pickup. And of course, a big thank you to the healthcare workers and first responders, who are keeping all of us safe.

 

Throughout this pandemic, our number one priority has been to keep our team members safe, especially those who are not in a position to work remotely. Our COVID leadership team including operations, quality control, communications, label, R&D and human resources have worked tirelessly to ensure we have the appropriate enhanced safety measures in place including personal protective equipment for all plant team members, temperature and wellness screenings, frequent disinfecting of high touch areas, reconfiguration of common areas and workstations, revised shift scheduling, reducing production line speeds, new guidelines on car pool, more extensive social distancing measures throughout each facility and where possible providing remote work opportunities and improved access to COVID-19 testing. I am continually amazed at our management team's ability to find innovative ways to enhance employee safety in our facilities. Throughout this crisis, we have also been transparent with our team and the public about all we are doing to put safety first. As part of our industry-leading safety measures, we have also developed an awareness campaign we call, Keep COVID Out, a program that reinforces various preventative measures at our production facilities and in the communities where we live and work.

 

As a global branded food company, we play a critical role in providing safe, high-quality food during this unprecedented time. As we all know, it has not been business as usual over the past several weeks and we will likely be in this new normal for some time. I am very proud of how all our team members have stepped up and reacted to the rapidly changing dynamics in our industry.

 

Before I get into the quarterly results, I want to take a moment to tell you a few things about our approach over the last several weeks that really stand out for me. I told our team that we were made for this and the following are examples of what really makes us the company so on the top. As we progressed into the initial stages of the pandemic, our senior leadership team agreed that we would do everything we could to protect the jobs of our thousands of team members. Each day, I heard examples of our supply chain team going above and beyond to shift production between plants or relocate where certain jobs could be done. In many cases, these changes had never been done before.

 

Balancing workloads across plants in a manner we did was not the most cost effective decision, but it was the right decision. Another example of what makes this company uncommon is our commitment to making the best long-term decisions for our team members, suppliers, customers and shareholders. Because of our stable cash flows and strong balance sheet, we will not neglect any strategic investments during this uncertain time. We have completed a comprehensive review of our capital projects, and in some cases, have slightly delayed the project completions because the additional capacity isn't needed right now. However, we continue to move forward with many investments that will enhance our long-term performance. One such investment is Project Orion. Our team's ability to effectively and efficiently work remotely has allowed us to keep Project Orion on track and we have made the decision to go live in our financial system uptake in June. I know everyone on our finance team is committed to making the important cut over success. We are confident we will see the benefit from our financial system go live just as we are seeing from our HR system upgrade completed in January.

 

I also want to take a few minutes to highlight key areas that are helping us weather the storm. First, our creation of One Supply Chain three years ago has been instrumental in helping us manage this crisis from one pivot point at an executive level. The quick decisions we made early on could not have been made in the same way if we were operating four or five different supply chains. Second, the significant investments we made several years ago in our e-commerce team, infrastructure and capabilities positioned us to quickly grow in this emerging channel. During the quarter, our tracked purchases through IRI were up over 100% and our brands are significantly outpacing category growth and capturing market share in many categories across both center store and perimeter.

 

Finally, our decision late last year to transition the entire enterprise to one IT platform made virtual co-ordination much easier than it otherwise would have been. While our decision to transition right before the pandemic was serendipitous, our IT services group deserves a lot of credit for seamlessly transitioning thousands of team members to working remotely in less than a week.

 

Now looking at our sales results for the quarter. The balance we have purposely built into our business is a competitive advantage that has allowed us to perform well in many different economic situations, including the current crisis. For the quarter, volume increased 4% and organic volume increased 7%. We delivered record sales for the quarter with an increase of 3%. Organic sales increased 6% and three of our four segments delivered increases in sales.

 

From a channel perspective, total retail sales increased 16% during the quarter. We saw multiple different waves of demand in our retail businesses as the pandemic has unfolded. In the first wave, we saw tremendous demand for nearly all of our center store brands. Our initial assessment was consumers were stocking up, but as the weeks progressed, we continue to see sustained double-digit increases. The second wave of demand took place as shelter-in-place restrictions were enacted across the country and consumers shifted from dining-in restaurants to purchasing more perishable products across the perimeter of the store. We continue to see perimeter sales increase at double-digit rates over last year.

 

Throughout the escalation in demand, we have seen a large increase in the number of new buyers and households purchasing our branded products. What I'm particularly proud about is the number of new buyers that are making repeat purchases of our brands. This is an important leading indicator as consumers are using our products, enjoying the experience and repurchasing our brands. I'm also encouraged by our team's ability to capture share in channels that were open and available, namely the retail channel.

 

From a total company perspective, we significantly outperformed the category, private label, other large brands and small brands. Our ability to capture market share is a testament to our brands and direct sales force and also to our operations and supply chain teams' ability to ensure our products are on the shelf.

 

One dynamic from the pandemic that is affecting all of us is what is happening across the foodservice industry. It's heartbreaking to see distributors, restaurants, hotels and many other foodservice venues struggle to survive. I have seen estimates of thousands of restaurants across the United States could close as a result of this crisis. Every entrepreneur behind each restaurant has a unique story of why and how they chose to open their restaurant. Many of these restauranteurs are community members trying to make their neighborhood a better place to live and work, and these closings are tragic. Our foodservice divisions have been doing their part to help the foodservice industry. Within days of the crisis, our Hormel Foodservice group offered a rebate program to help offset operators' food costs. This program was successful and exceeded our expectations. We're also working very closely with our distributor partners to support their needs and have recently received accolades for our efforts. And finally, we've talked a great deal about how our direct sales force is a distinct competitive advantage and no time, is that more true than right now. Our sales team has been on the virtual front lines, helping operators quickly adjust to takeout, delivery and curbside pickup with best-in-class guides and kits, and sometimes, being the only supplier to personally check in with the restauranteur during this difficult time.

 

Like other semi industry, we saw a sharp decline in our foodservice business starting in late March. For the quarter, our enterprise foodservice sales were down 21%. As you think about our domestic foodservice business, it is primarily sold through the Refrigerated Foods and Jennie-O Turkey Store segments. Prior to the outbreak, our foodservice business represented approximately 40% of sales in both segments and the majority of our operator customers are in key segments, such as mid-scale and casual dining, lodging, K through 12 schools, colleges and universities, and healthcare. Each foodservice segment is experiencing different dynamics during the shelter-in-place restrictions and each will have a different recovery timeline coming out of the pandemic. Even though it is early in the third quarter, we are starting to see orders picked up across our foodservice businesses.

 

From a financial perspective, we delivered earnings per share of $0.42. Jim Sheehan will provide more details of the moving pieces, but I do want to mention that our earnings fully reflect $0.05 per share in investment losses and increased supply chain costs related to COVID-19. The high-level dynamic during the quarter was similar in each segment, namely demand shifts from foodservice to retail and higher operational costs. However, each segment did experience some unique circumstances and I want to highlight those areas.

 

Grocery Products volume increased 7% and sales increased 8%. Organic volume increased 19% and organic sales increased 20%. We saw exceptional growth from nearly every brand with some products delivering very strong double-digit growth including the SPAM family of products, SKIPPY peanut butter and Hormel Chili. Two keys to Grocery Products success during the quarter was the sales and marketing teams' focus on limiting production to our priority high volume items and frequent conversations with our customers regarding assortment and product availability. We know our center store brands are perfectly suited for value consumers who need affordable, high-quality products for their families. With millions of Americans now unemployed, our shelf-stable products are as important to consumers as they've ever been. Earnings for Grocery Products increased 22% despite the divestiture of CytoSport last year. Strong volumes and improved mix were the key drivers to the double-digit increase.

 

Jennie-O Turkey Store delivered a strong quarter with volumes up 19%, sales up 12%, and segment profit up 54%. Strong retail, whole-bird and commodity sales more than offset declines in foodservice. The Jennie-O sales and marketing group made excellent progress regaining distribution prior to the pandemic, which put them in a strong position to succeed. During the quarter, Jennie-O lean ground turkey sales increased by double digits. Higher sales and operational improvements across the supply chain were the key drivers to earnings growth.

 

International volume decreased 2% and sales increased 2%. Branded exports, primarily SPAM, offset declines in our China foodservice business. Segment profit increased 62% due to higher branded export margins and increased income from affiliates. I'm pleased to report our China plant operations are now fully up and running to support our retail and foodservice businesses as the country continues on its path for reopening. Our foodservice business in China is improving off the lows we saw during the pandemic and we are seeing very strong demand for SPAM, SKIPPY and our refrigerated products at retail. The team in China is working through higher pork prices, but are taking the necessary pricing actions to offset cost increases.

 

Refrigerated Foods volume was flat and organic volume was down 1%. Sales decreased 1% and organic sales declined 3%. Retail demand was led by products such as Hormel Black Label Bacon, Applegate natural and organic products, Columbus Grab & Go charcuterie, and Hormel pepperoni.

 

We also finalized the acquisition of Sadler's Smokehouse during the quarter. The majority of Sadler's sales are into the foodservice channel. But I've been impressed by the way in which this team has quickly pivoted their production to meet the growing needs in retail. One unique trend we are seeing in the marketplace is consumers searching for products that can replace a restaurant experience. Brands like Sadler's Smokehouse and Lloyd's Barbeque fit that need perfectly. In fact, our retail lines at Sadler's and Lloyd's have been operating at capacity to meet the demand for their products.

 

Our foodservice business saw double-digit declines during the quarter. However, we are very confident that as the foodservice industry starts to open-up, our product lines featuring pre-cooked, pre-sliced and pre-marinated products will thrive as operators look to simplify preparation and reduce handling of products. Our deli business experienced consumer dynamics that were a blend between retail and foodservice. Products like Columbus Grab & Go charcuterie performed well as consumers searched for unique and flavorful products. We did see declines in the behind-the-glass and prepared food businesses as many retailers closed these areas to redeploy labor to other sections of the store.

 

Earnings were down 17% due to lower foodservice sales and higher operational costs as we paused production at two plants during the quarter. Jim Sheehan will provide more details regarding the input cost volatility the Refrigerated Foods team experienced during the quarter.

 

As we look forward, we are withdrawing our full-year sales and earnings guidance. The decision to withdraw guidance reflects uncertainty created by COVID-19 in several key areas including consumer behavior at retail and foodservice, volatility in our input costs and supply chain disruptions. Our team is focused on these indicators to guide our decisions and investments in the coming weeks and months. First, we are paying close attention to consumer behavior across our entire portfolio. We are watching consumer buying patterns in the retail channel with metrics such as household penetration and repeat rates. We're also watching how consumers emerge from shelter-in-place restrictions across the country and reengage the foodservice industry. In addition to monitoring restaurant traffic, we're observing how other segments in the foodservice industry such as lodging, colleges, and universities and K through 12 education reopen.

 

We are also actively managing through the volatility we're seeing in raw material markets. As I mentioned, Jim Sheehan will provide a detailed assessment of the hog and pork industry, but the recent periods of operational pause and start-up in processing facilities across the industry are creating dramatic swings in input costs. I have the highest confidence in our ability to pass along the necessary pricing, but we may experience short-term margin compression or expansion as raw material markets adjust to the rapid changes in supply and demand.

 

Finally, while we have implemented industry-leading safety measures, we have experienced operational challenges at some of our facilities due to COVID-19 and we are strategically managing through operational disruptions on a daily basis. These operational disruptions have led to incremental supply chain costs. During the second quarter, our costs increased by approximately $20 million, primarily related to team member bonuses, enhanced safety measures and lower production volumes. In the second half, we expect to incur another $60 million to $80 million of incremental costs that are temporary and these costs will be weighted to the third quarter.

 

In closing, I want to emphasize three points. First, our Company was built for this. We have the right strategy, sound business fundamentals, best-in-class management and the financial strength to thrive in this dynamic marketplace. Second, we will not do anything to jeopardize our strong financial position. We are well equipped to weather this storm and will be stronger because of it. Third, we have said from the very beginning of this pandemic that our goal was to do our best to do everything right from people safety to supporting our partners and customers, to ensuring America has food on its shelves, to donating millions of dollars and millions of meals to hunger-related causes. Everything we are doing is in perfect alignment with our purpose of Inspired People, inspired Food.

 

At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter, provide commentary regarding key input cost markets and an update on our financial position.

 

Jim Sheehan -- Executive Vice President and Chief Financial Officer ...

 

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