Good day, and welcome to the Hormel Foods' Second Quarter 2021 Earnings Webcast and Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2021. 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 Web site at hormelfoods.com under the Investor 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 a review of the company's current and future operating conditions, commentary regarding each segment's performance for the quarter, and a perspective on balance of fiscal 2021. Jim Sheehan will provide detailed financial results and commentary regarding the company's current and future financial conditions. The line will be opened for questions following Jim Sheehan's remarks. As a courtesy to other analysts, please limit yourself to one question with one follow-up. If you have additional questions, you are welcome to get back into the queue. An audio replay of this call will be available beginning at noon today, Central Standard Time. The dial-in number is 877-344-7529, and the access code is 10155508. It will also be posted on our Web site 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 26 through 32 in the company's Form 10-Q for the fiscal quarter ended January 24, 2021. It can be accessed on our Web site. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. Once again this quarter I want to recognize the heroic work of our production team members. This team deserves much of the credit for our record sales results this quarter as they continued working to produce safe, high-quality food for millions of consumers and customers. Our number one priority has been to keep our team members safe and our cross-functional COVID-19 leadership team is ensuring we are on the leading edge of the country's vaccination efforts. To date, we have fully vaccinated over 51% of our domestic workforce, which is well ahead of the country's vaccination rate. We are encouraged by the rapid decline in cases in our communities. From a top line perspective, our balanced business model has again proven to be a winning formula as our team delivered record sales for the second quarter and first-half. In total, sales for the quarter increased 8% compared to last year, and the sales increased over 5% for the first-half of the year. A key driver of our sales performance is the rebound in our foodservice business. As expected, our foodservice team experienced a strong recovery and took numerous actions to properly position our organization to capitalize on the industry recovery. For the quarter, foodservice sales increased 28%. This reflects an increase of 1% over 2019 pre-pandemic levels. This is a significant accomplishment especially knowing where the industry was just a few short months ago. Since the beginning of the pandemic, our foodservice teams have been doing their part to support the industry. Within days of the crisis, we worked closely with our distributor and operator partners to assist their businesses in many different ways, whether it was a rebate program to offset food costs, extending payment leniency, helping adjust to the new takeout, delivery,…

Thank you, Jim. Good morning. Record sales for the second quarter were $2.6 billion, an increase of 8%. First-half sales increased 5% to $5.1 billion, also a record. Pre-tax earnings increased 2% for the quarter, compared to last year. Diluted earnings per share for the quarter were $0.42 per share flat to last year. Second quarter results reflected approximately $0.01 per share in incremental COVID related costs and $0.01 in higher tax expense. SG&A excluding advertising was 6.5% of sales, down slightly to last year. Advertising spend for the quarter was $31 million. Operating margins for the quarter were 11.1%, compared to 12.1% last year. Higher raw material and feed costs negatively impacted margins, as pricing lagged input cost increases. We have taken numerous pricing actions across the portfolio to protect profitability. The actions will take place early in the third quarter with additional pricing actions likely. COVID related expenses were $6 million. The impact of COVID expenses continued to decline. Net unallocated expenses decreased due to higher investment income. The effective tax rates for the quarter were 22.1%, compared to 20.6% last year, excluding the impact from the Planters acquisition. We estimate the full-year tax rate to be between 20% and 21.5%. We built inventory during the quarter in preparation for higher demand and to support continued growth for the remainder of the year. Our strategic action to build inventory was the primary driver of lower operating cash flow during the quarter. We paid our 371st consecutive quarterly dividend effective May 17 at an annual rate of $0.98, a 5% increase over the prior year. Share repurchases were minimal during the quarter. Capital expenditures were $45 million in the quarter. The company's target for capital expenditures in 2021 is $260 million. During the second quarter, we saw dramatic increases…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today will come from Peter Galbo with Bank of America. Please go ahead.

Hey, guys, good morning. Thank you for taking the question.

Morning, Peter.

And Jim Sheehan, thank you for all of the commentary. Jim, I guess just thinking about the guide, and the move, and in sales relative to kind of keeping EPS flat. If we were to just take the midpoint sales guide, it kind of implies that you'll see a relatively decent acceleration in gross margins in the back-half of the year, something in the magnitude of 60 to 70 basis points kind of versus what you did in the front-half. A, I just wanted to see if that's kind of how directionally you're thinking about it. And just given all the headwinds you called out, understanding that the pricing actions are coming through, what would drive kind of that sequential improvement in gross margin?

Yes, good morning, Peter. Thanks for the question. I mean and really what we're talking about here is the timing, the volatility, the magnitude of the inflation that we're seeing. And so, that the pricing actions that we have taken didn't happen all right at the beginning of the second quarter. And quite frankly, we're not done with all the pricing actions that we need to take. So, we've got a lot of activity on that front. And so just the sequential action in our pricing is what will lead to that sequential improvement in margins. And so as you think about Q3, you'll see improvement, but probably some slightly lower margins as pricing hasn't quite caught up. Q4, really start to see more normalized margins as full pricing takes affect across the board. And I think it's important to note that we've either taken or will take price across almost all of our business.

No, that's helpful. Maybe just to clarify there, Jim, on the third quarter, is that lower margins sequentially versus last year versus normal? And then just that the second question, as we think about Jennie-O, obviously you've locked in some of the feed cost for the remainder of the year. Jim Sheehan, I think you tossed out a 9% operating margin bogey as a target maybe for this year. Is that timeline kind of pushed out to '22 or '23 at this point? Thanks very much, guys.

Well, I'll start on Q3. And I think your -- the first question, is that's relative to last year, so slightly lower margins to last year just as pricing hasn't fully caught up.

Yes, I'll touch on the JOTS issue, Peter. First of all, as we talked about there, pricing is now in place to cover that first ramp up of grain costs. And as we talked, we protected the grain cost for the rest of the year. And it with also having downside protection on that, so we're 100% covered on grain. The other thing is that we talked about, is what's happening in the markets. When you think about Jennie-O, the fundamentals which we keep pointing towards over the last few years are better. Hog sets and -- or egg sets and poult placements are both down 3% to 4%. And you're starting to see that with the cold storage levels continue to be the 26% below the five-year average. What you're starting to see now is some nice improvements in the commodity markets around turkey. For instance, yesterday you saw breast meat at $2.11. That there are a lot of watch-outs for JOTS, but there's also a fair amount of upside. And we're starting to see that upside come through. We've launched these -- the fundamentals point towards better markets for probably a year now. They really haven't taken place, but they do seem to be taking place as we go forward. As far as the 9%, yes, these -- the drastic jump up in grain costs obviously delayed that. So, we look at the full-year margin of 9%, that's really been pushed out a bit.

Got it, guys. No, that's very helpful. Thank you.

The next question today will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thanks. Good morning, everyone.

Hi, Adam.

Hi, Adam.

Hi. Jim Sheehan, maybe continuing on some of the JOTS questions there, and in your last response you referenced kind of a whole bunch of -- some positives, but a bunch of watch outs. Apart from grain cost, I'd love to hear kind of the key things that are still in your mind. Is it less reflective of demand growth and kind of your performance in retail, shelf penetration? Just what are you kind of focused on there besides the grain cost as the key watch out?

Well, I'll start with a little bit on the watch-outs, and I'll turn it over to Jim to talk about the performance. I think as you look at the inflation that we've seen recently and as you look forward, obviously you have the grain is impacting inflation. For that you've got the demand, though we know the demand is very solid. Weather conditions look pretty good; [indiscernible] seem to be maybe a little bit understated at the USDA. So, that looks okay, it looks good at this point. Obviously, in June, we'll have a better read of that. But as I would look at things, I think the other thing that's impacting inflation is labor availability. I mean getting people back into their jobs will, I think, alleviate some of the labor pressure. From a COVID standpoint we're in really good shape, but it's getting new hires, it's getting people back to the job that probably is a watch-out for me, not only of JOTS, but across the industry.

And Adam, I would say more from a business perspective, I think our retail business has performed well. Again, it's hard in a year-over-year environment, but if we go back to pre-pandemic, especially in our lean ground turkey, very, very strong performance, pleased with the distribution gains, household penetration, the velocities that we're seeing. From a foodservice perspective, they're a little bit more exposed with the K-12 business, the school business, which obviously didn't come back in full strength. We do expect to see that in the fall, and then spillover into 2022. So, as we think about it from a retail and foodservice perspective, there is optimism on the business front.

All right, that color is really helpful. And then my second question was really just thinking about trajectory of foodservice as we go into the back-half of the year, you kind of gave some color where the second quarter was up versus '19 levels. How do you think the industry performed or I guess the relevant categories for you on a similar metric? And just areas where you think you're maybe gaining some outside share that's giving you some optimism?

Yes, I mean I think it's fair to say in a really broad base, we outperformed the industry here in the second quarter. And that's not new, right. I mean as even pre-pandemic, we talked about our foodservice business typically growing at double the industry rate. And so, we're confident that we've outgrown or grown faster than the industry. For us where we see future opportunities in a number of our segments, we haven't seen lodging come back. We really haven't seen college and university fully come back, which is a big part of our Hormel Foodservice business. I referenced K-12 for the Jennie-O Foodservice business. So, there's still a lot of dynamics at play. And so even as these other segments, these other channels really start to reopen, those are going to have a favorable impact on our foodservice business as well.

I really appreciate that color. I'll pass it on, thanks.

Thank you.

The next question today will come from Rupesh Parikh with Oppenheimer. Please go ahead.

Good morning, and thanks for taking my question. So I guess just given what we saw in Q2 foodservice now above where you were in 2019, groceries still very strong. So if you exit the pandemic, I mean, do you guys think now that you'll have a much higher foodservice and grocery business going forward?

I think, Rupesh, we've always felt very confident in all of our business obviously we've talked a lot about the strength of our business in particular in the center of the store. And so we think it will continue to be strong post-pandemic, you're going to have some moving parts and some volatility in year-over-year, quarter-to-quarter. But I believe, once things settle down, we'll see our continued strength in center of the store grocery business, continued strength in our refrigerated retail business and then we've always talked about our real competitive advantage in the foodservice space. And I think that's playing out right now. It'll continue to play out this year and into the future.

Great. And then maybe one follow-up question. So as you look at grocery products, I'm curious how you guys are thinking about that segment for the balance of the year. And then as sales trends have turned negative for other players as well, how would you characterize the current promotional backdrop?

Yes, the biggest driver for us right now, Rupesh is getting some of those Tier-2 and Tier-3 items back on shelf. And that's really what retailers need as we want to provide more promotional activity in the back half of the year and into '22. You can't just have one variety and have a promotion. So as our supply chain has recovered, and we've been able to focus on those varieties, we're seeing retailers being a lot more willing to engage in promotional discussions, which will be very, very helpful for the business in the balance of '21 into '22.

The only thing I'd add to that Rupesh is that remember our fourth quarter in GT was significantly constrained by capacity issues in our operations.

Great, thank you for the color. I'll pass it on.

The next question will come from Tom Palmer with JPMorgan. Please go ahead.

Hi, thanks for the question.

Hi, Tom.

You mentioned on the earnings call that more price was expected to flow through in the second-half of the year; price mix of 11% this quarter, highest in years. I know you typically don't provide this, but just given the magnitude of the price mix figure, could you help us in detail on how much mix really contributed to that number in the second quarter? And then how much maybe pricing we should expect to really ramp as we look at the second-half of the year? I mean, you're putting up a little bit now. I mean throwing 5% on top of that or some sizable number?

Yes, I think it's a great question, Tom. As we think about our business, and that price mix, I mean, really a key driver in the second quarter was our foodservice business, which tends to track markets more closely than the retail business. We did have some impact of retail pricing in the quarter. But again, it wasn't for the entire quarter. But the big driver in the quarter was foodservice.

Okay, thank you. And then in the prepared remarks, Jim Sheehan you noted the magnitude of hog and pork price increases, last year saw some weaker hog pricing, you called out hedging losses. I know there'll be more color in the 10-Q but just any detail on hedging this quarter, such as maybe gains that flow through?

Sure, Tom. I appreciate the question. Remember our accounting method is one that we do not mark-to-market our positions, but we run them through the cost of goods at the time the product is sold. So as you look at our -- the realized gains and losses are in the quarter, the unrealized are in other comprehensive income. And those will be in $45 million range of unrealized gains and losses and that would be for hogs, grain and our interest positions.

Okay, thanks. Thanks for that detail, just to confirm not a factor this quarter it would recognize that?

It didn't give us much help this quarter. It was a pretty immaterial amount.

Okay, thank you.

And the next question will come from Robert Moskow with Credit Suisse. Please go ahead.

Hi, I guess a couple of clarity questions. Just on that Jim, the $45 million, I guess those are hedging gains. So those will flow through at a positive way to your P&L as you sell the product. But it's also -- there's also higher input costs flowing through wall. So they're kind of fighting against each other for the next couple of quarters. Is that…

Yes, I mean the unrealized gains or gains based on the market that close what would be a factor. Now we also, as I stated before, we also have our interest hedges in there, too. So those are more related to the debt that we will be issuing and have a longer tail that obviously the grain or the hog markets. So it's a mixture.

Okay, I'll follow-up on that. Regarding the 6% pricing in grocery in the quarter, can you give a little color on what kind of product lines you raise the pricing on? Is that going to accelerate as well? Or is that kind of like a new normal for a while, because of actions you took in March?

Yes, frank that the biggest driver to the pricing in the front part of the year, Rob was the SKIPPY price increase that we took earlier in the year. In GP, I mean, we still have additional pricing action to come, whether it's SPAM, or Herdez, I mean the number of different GP items. So we did have some in the first-half, but there's still more to come in the back half of the year.

Okay. That's my questions. Thanks.

Thank you.

The next question will come from Michael Lavery with Piper Sandler. Please go ahead.

Thank you. Good morning. Just wanted to go back to the share gains, kind of broadly, and maybe try to understand a little bit the landscape at a high level, I guess, just looking at ten year foodservice growth versus 2019, and the strong retail growth versus 2019. Assuming people aren't just eating more -- there's clearly some momentum there that is coming from somewhere. And I suppose there's a chance there's maybe a permanent reset of pantry inventory, but even that probably a small. So can you just give a sense of, who you're gaining share from? Are there smaller competitors that have suppliers that have gone out of business? Or just how do you kind of understand how you're sourcing your share gains?

Yes, I mean, it's a mix, again, depending on which category you're talking about. I mean, in some cases, we are in line with categories. So whether you think Bacon, or SPAM or peanut butter, I think we've seen some outpacing in some of our meal offerings, as you mentioned, I think we've seen it in our Mexican portfolio, which really is taking that net share from competitors. So I think as you go across the portfolio, Michael, it really is a mixed bag of where those share gains are coming from.

Okay, thanks. And just following-up on the foodservice piece, you called out the boosted gave, partly from the past through pricing there. Can you give us a sense of how much pricing is passed through in your portfolio versus just what requires a less increase?

Oh, I mean, the majority of the foodservice business is I'll call it off a traditional priceless. So that gets adjusted on a weekly basis and we tend to see that pricing reflected in -- we've always said within 30 days. So a significant portion of our business is still done that way. We do have some other pricing arrangements, obviously with larger national accounts. But just think about it where the majority -- more than the majority of the business is on a paster basis.

And on the retail side?

Well, I mean, we've always said that, more of a 90-day price action in terms of having the discussion with the customer getting accepted, and then getting it implemented. Really the only difference there would be retail fresh pork, which I mean, does play a role and still has a significant part of our portfolio. But it's that is priced on a weekly basis.

Okay, great. Thanks so much.

The next question will come from Eric Larson with Seaport Global Securities. Please go ahead.

Yes. Good morning, everyone. Thanks for taking my question. So the first question is, and I think, Kim Sheehan kind of refer to some of this. But can you talk a little bit about, hog supplies, we're not going to see a huge increase in production this year, these high grain prices probably are disincentive yet we have. Hog prices, live prices well over $100, 100-weight right now. Supply constraints on your biggest raw material, is that a possibility going forward here and it looks like grain prices could be high for a while. So how do you look at maybe the next couple of years, just not just this year, but maybe next in terms of hog production in the U.S.? And what are farmers doing out there?

Well, as we've talked about in the past, Eric, we do long-term contracts with our producers. And as you're aware, these producers are large operators with a high level of capital and tend to keep their barns filled. We also get a large portion of our production from a contracted facility, the three-month facility, which is made up of producers; they tend to like to keep their own plants full. So, I'm very confident that we'll have the supply that we need both short-term and long-term. When we go through these cycles all the time, it hard prices have increased rapidly. The prices have gone up a lot. You're right; grain prices are high right now. We'll see other growing season what results are from the growing season to see what impact it has on prices. But these are long-term agreements, and we're not having anybody get into negotiations about taking down their volume. So I'm highly confident.

Okay, then my follow-up question is on your supply chain conversion, and all your efforts that you've done on that it was to Ben, quite remarkable. And I think we even alluded to the benefits of your improved supply chain in your -- in the press release. But I believe if we go back, I think, at one point, you said that supply chain was going to have this number incorrect. So, correct me if I'm wrong, but about $75 million of supply chain cost benefits. But that was a while back? Can you give us a quick update on how the supply chain is helping you here? And it's got to be helping your cost structure. And then obviously, it keeps you from having to price too aggressively as well. So can you share that dynamic with us? And give us a little update there?

Sure. It's a great question, Eric. And we have spent a lot of time and effort over the last three plus years, putting together our one supply chain. And it's really been our initiative to take this fragmented approach throughout the supply chain and really capitalize on the efficiencies and take cost out. And so, we've done a lot of great work in our operations. In our logistics, as we mentioned are some of the warehousing initiatives that we still had going on. And you're right, probably the first two years of supply chain and even going into the pre-pandemic we talked about our ability to have cost savings of $75 million. Last year, obviously, was a bit of a disruption. But that didn't stop the good work that was happening behind the scenes. And I think you'll see that play through when we talk about our ability to open up new warehouses to help mitigate some of the cost pressure on GP and now on our refrigerated portfolio. And the other thing is for me personally I can't imagine us having gone through the pandemic with a fragmented supply chain. Having one voice from the top setting directions and making sure that the entire team was aligned was very, very powerful and necessary for the organization. So, I mean the benefits to the organization has far weighted the financial returns. And, we are in a significantly better place today as a result of our efforts on one supply chain.

Okay, great. Thanks. And have a great Memorial holiday.

Yes, thank you. You too, Eric.

The next question will come from Ben Bienvenu with Stephens. Please go ahead.

Hi, good morning. This is Pooran on for Ben. I just had a one quick question. What has the ramp in food service sales and corresponding capacity utilization improvement contributed to margin?

Oh, yes, I mean I think obviously they go hand in hand. And we've talked about some -- coming out of or I should say in the midst of the pandemic the underutilized capacity which of course led to some of our increased COVID cost. So, there has been a benefit. But really the big driver and the way you should think about the food service business is the volume that we have been able to drive in the marketplace. And really it's the really reopening, the re-engagement with distributors and operators. And then I mentioned earlier with a number of different segments that really haven't open yet or hit their stride. So, not only we feel good about where we are today but the opportunities that are yet to come.

Great, great. And may be if I could just squeeze one more in?

Yes, go ahead.

Just regarding your price increases, do you think that you will be able to hang on to some of these increases after this period of cost inflation abates? And maybe you can just help us think through what will be easier versus harder to achieve?

Yes, that's a great question. And it's something that we talk about a lot because nobody likes to be in the midst of the inflationary period with all the market volatility. But it's not new to us, right? I mean we've managed through multiple inflationary periods over the course of our business. And our management team, our leadership has a well-established plan for how we take pricing, how we appropriately promote, and really to your point about how we work hard to maintain that pricing over time. So, yes, we do believe that we'll be able to do that as we've demonstrated in the past.

Great, thank you for clearing the questions. That's it from me.

Yes, thank you.

The next question will come from Antonio Hernandez with Barclays. Please go ahead.

Hi, good morning. Thanks for taking my questions. [Indiscernible] international segment sales were very good with margins [indiscernible] could you give us a little more guidance in what you see there [indiscernible] from expenses and cost point of view in the international segment and your domestic segment? Thanks.

Yes, I would say the big issue -- the big difference between the international and domestic right now is the whole ocean freight issue including containers that's creating some additional cost in the system. Freight, we have been able -- freight is up a little bit. Domestically, we have been able to manage that as we've improved our supply chain. But ocean containers freight availability goes back to this issue around labor that's created some not only higher cost but also some shipping interruption. And I think that's probably going to last for the rest of the year.

Yes. The optimism that we have in our international segment I mean it is broad based. But certainly with the high level of focus on the continued growth and the continued success that we are seeing in China from both our retail and food service businesses and I mentioned it in my remarks, but we are really excited about the performance of SPAM, how we've been able to really gain distribution and the acceptance of that brand, and how we are launching innovative new flavors. The SKIPPY business continues to be very, very strong, non-traditional innovation with our Hormel Beef Jerky. And so, we continue to expect growth coming out of that business and across all areas, other multinational exports and partnerships.

Okay, thank you very much. Have a great day.

This will conclude today's question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Yes. Well, thank you all for joining us today. Our strong performance this quarter once again demonstrates the resilience of our entire team and the strength of our balance portfolio. We know that we still have work to do for the balance of the year, but we remain very optimistic about the future, and we look forward to bringing the Planters business, and the Planters team on Board in June. Thanks again for joining us.

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.