Good morning everyone and welcome to the Hormel Foods fourth quarter 2021 earnings webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. Please also note today’s event is being recorded. At this time, I’d like to turn the conference call over to Nathan Annis, Director of Investor Relations. Sir, please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the fourth 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 website at hormelfoods.com under the Investor section. On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; Jim Sheehan, Executive Vice President and Chief Financial Officer, and Jacinth Smiley, Group Vice President of Corporate Strategy. Jacinth becomes Executive Vice President and Chief Financial Officer on January 1. Jim Snee will provide a review of the company’s current and future operating conditions and a perspective on fiscal 2022. Jim Sheehan will provide detailed financial results and commentary on the fourth quarter, and Jacinth Smiley will provide commentary on the company’s fiscal 2022 outlook. As a reminder, the fourth quarter of fiscal 2021 contained an extra week compared to fiscal 2020. The line will be opened for questions following Jacinth’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 are welcome to get back into the queue. An audio replay of this call will be available beginning at noon today Central time. The dial-in number is 877-344-7529, and the access code is 10161982. It will also be posted on 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 or implied by the statements we will be making. Please refer to Pages 35 through 41 in the company’s Form 10-Q for the fiscal quarter ended July 25, 2021. It 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, and adjusted diluted earnings per share. Discussion on non-GAAP information is detailed in our press released located on our corporate website. I will now turn the call over to Jim Snee.

Thank you Nathan. Good morning everyone. I want to start this morning by congratulating Jim Sheehan on his upcoming retirement. Jim will be retiring as CFO at the end of the calendar year, so this will be his last earnings call. Jim has over four decades with our company and under his tenure has built a world-class finance, accounting and technology organization. Jim was the guiding force behind Project Orion, an initiative that will benefit our company for decades to come. For over 43 years, with the last five years as CFO, Jim has been a trusted partner to me and many of my predecessors. Jim helped complete over $5 billion in strategic acquisitions, including Justin’s, Fontanini, Seracci [ph], Columbus, Sadler’s, and our largest acquisition ever, Planters. Equally impressive was Jim’s contribution to reshaping our portfolio as he was also a guiding force behind many of the divestitures we made to transform our company. Jim’s oversight to our evolution puts us on a solid foundation for the future growth of our company. Additionally, Jim has overseen the distribution of over $2 billion in dividends to our shareholders. In addition to his business accolades, Jim was the key voice behind our game-changing Inspired Pathways program which provides free college education for children of our team members. Jim will be missed, and we wish him well in retirement along with his wife, Jean. Jacinth Smiley succeeds Jim and brings a wealth of experience from outside Hormel Foods. She has deep and broad domestic and international experience in areas such as corporate finance, public accounting and compliance. Most recently, she served as the Group Vice President of Corporate Strategy. Hormel Foods is fortunate to have Jacinth as CFO and I’m looking forward to her leadership in her new role. My sincere congratulations to…

Thank you Jim. Good morning. The company achieved record fourth quarter and full year sales of $3.5 billion and $11.4 billion respectively. Organic sales increased 32% for the quarter and 14% for the full year. Planters contributed $411 million in sales for the full year. Earnings before taxes increased 26% for the fourth quarter. Strong results in refrigerated, international, and the inclusion of Planters led to the strong finish to the year despite ongoing inflationary pressures. Earnings before taxes increased 1% for the full year compared to fiscal 2020. Diluted earnings per share of $0.51 was a record. This was a 19% increase over last year. Adjusted diluted earnings per share for the full year was $1.73, a 4% increase from last year. Diluted earnings per share was $1.66. SG&A as a percentage of sales was 7.5% compared to 7.9% last year. Strong sales growth and disciplined cost management contributed to the improvement. Advertising investments increased 12% compared to last year. As anticipated, operating margins in the fourth quarter increased compared to the third quarter as a result of effective pricing actions. Segment margins expanded from last quarter by 136 basis points to 10.7% with increases in each segment. In 2021, inflation, labor shortages, and the Planters deal cost all negatively impacted margins. The fourth quarter results including the continued strong demand of our products are an indication of improved market conditions as we exit the year. Net unallocated expenses in 2021 increased primarily as a result of one-time acquisition costs for Planters and higher interest expense. The effective tax rate for the year was 19.3% compared to 18.5% last year. Operating cash flow for the fourth quarter was a record, resulting from strong earnings and disciplined working capital management. Our balanced business model and consistent cash flow provided protection…

Thank you Jim for your kind words. Good morning everyone. For analysts and the investment community on the call, I look forward to meeting you in the coming weeks and months. I am excited to be stepping into the Chief Financial Officer role at Hormel Foods, a company known for its financial strength, its powerhouse brands, and its commitment to employees and communities. In the time I have been at the company, I have found that Hormel Foods is innovative and has a results-driven focus for all stakeholders. As Jim mentioned, allow me to share a bit more commentary regarding key drivers to our fiscal 2022 outlook. Building on the momentum we established during the second half of the year and the strategic investments we have made throughout the pandemic, we expect to generate sales and earnings growth in fiscal 2022 above the long term goals we announced at our investor update in October. We anticipate growth from all four segments, driven by continued elevated demand for our products, the impact from our pricing actions, improved production throughput, new capacity for key categories such as pizza toppings and dry sausage, and the full year contribution of the Planters business. We also expect operating margins to show improvement throughout the year, similar to the dynamic we experienced in the fourth quarter. It is important to note that rapid changes in raw material input costs can shift profitability between quarters. In addition to generating strong sales and earnings growth, we will continue to invest in our leading brands through increases in strategic marketing and advertising, capacity expansions for high growth platforms, and capabilities to drive industry-leading innovation. The company’s target for capital expenditures in 2022 is $310 million. We are scheduled to open a pepperoni expansion to our newest facility in Omaha…

[Operator instructions] Our first question today comes from Rupesh Parikh from Oppenheimer. Please go ahead with your question.

Good morning, thanks for taking my questions, and Jim Sheehan, congrats on your retirement as well.

Thank you Rupesh.

I guess to start, maybe just on the pricing front, if you can just remind us where you guys are with the pricing point, and at this point have you guys seen anything, I guess different versus expectations on the elasticity front? Just curious how your pricing actions have played out so far versus your expectations.

Yes, good morning Rupesh. We have not seen the elasticity that we typically would have been pre-pandemic. The demand has held up really well across the entire portfolio, and really where we are in our pricing journey, we’ve got another round of pricing in our grocery products portfolio that is in the midst of being implemented, executed right now. On the refrigerated side, that’s a pricing model that ebbs and flows, and so we’ve seen some relief in commodity markets - we’re watching it closely, but at this point in time don’t have any additional pricing scheduled for that part of our business. But in grocery products, we do have another round that’s getting implemented right now.

Okay, great, and then maybe just a follow-up question just on guidance. I was curious about the latest in terms of what you guys are incorporating for Planters accretion. Is that still in that $0.17 to $0.22 range for this year, and is there anything you could share on the cadence of operating or EPS growth, maybe first half versus second half for this year?

Well, the first part of the question is we are still in that range, and we’re expecting to be on the high end of the range, just like we were in fiscal 2021. As you think about just the business throughout the course of 2022, you’re going to see sales, earnings and margins as really improving throughout the year. As Jacinth mentioned in her comments, we do expect to have continual improvement in the supply chain that will help with fill rates and load factors. Our organic growth will be driven in large part by that improvement. The thing that we have to be on the lookout for, as we were in ’21, is just the volatility in markets or supply chain. It really can shift profits between quarters.

Okay, great. Thank you.

Our next question comes from Tom Palmer from JP Morgan. Please go ahead with your questions.

Good morning, thanks for the questions, and Jim, thank you for your help over the years and congratulations on your retirement.

Thank you Tom.

From what we can see, pork costs have eased a bit in the past couple months, at least on a spot basis. Feed costs are lower than they were earlier this year. At what point do these costs begin the flow through the P&L?

I think you saw, Tom, some momentum especially near the end of our fourth quarter that helped with these declining prices. You’ve seen today, for instance, hogs are down to the mid-60 range, they averaged $86 in the fourth quarter You’ve seen trim ease off, and certainly you’ve seen an easing in belly, so you’re starting to see the advantage already. You can see, as I said, in the fourth quarter you saw that momentum start to pick up near the end of the fourth quarter, so I think that we’re in a good position as we go into the first quarter and into the new year.

On just on the feed side also?

Well you know, we’ve locked in our feed costs. We’re under market for--we’ve locked in about 80% of our corn and it’s under the current market, so our feed costs will be stabilized for next year. We have a good handle on the feed costs. You obviously always have the basis risk that exists, but basis has been fairly neutral for the last few months.

Okay, thank you. If I could follow up just on what that translates to, so you’ve talked about earnings growth in all four segments in the coming year. Should we expect to see that starting in the first quarter, so essentially in the first quarter should we look for growth in all segments?

Yes Tom, we would, and as Jim is describing in the markets and in his prepared remarks, we’re seeing some lower markets right now in the first quarter, but on average over the full year, we do expect them to be fairly flat to 2021, so you are obviously going to have some moves up throughout the year but we do expect all segments to show that growth starting in Q1.

And Tom, as you look at 2022, remember you have Planters - we didn’t pick up Planters until the third quarter of last year, so you’ll see the significant improvement in the first half of the year.

Understood, thank you again.

Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.

Yes, thank you. Good morning everyone. Let me echo everyone’s congratulations, Jim, on the retirement. My first question is on Jennie-O, and I was hoping maybe to get a little bit more color on the decision to close the plant. Jim Snee, if you could maybe just elaborate a little bit on how this changes the sales mix margin structure potential of the Jennie-O business moving forward, and a corollary to that is just help us think about costs associated with these actions on a cash basis over the course of the next 12 months.

Sure, so the first thing, Adam, is we’re going to come back to you in Q1 and give you a more detailed report on some of the things that you just described, so we will be getting that information to you. I think the big thing in all of this, these strategic actions that we’re thinking about, is turkey is not going away in our portfolio, right? It’s going to continue to be an important part of our company across many different segments, many different brands. We’ve seen the evolution of our company, whether it was Project Orion, our one supply chain effort, really this opportunity to move away from duplication of resources - that’s the first thing. The second thing is when we’re honest with ourselves, the business has underperformed in recent years, and that’s not through a lack of effort on our team’s part. That’s dealing with a significant oversupply situation that’s created a lot of volatility for us, so as you think about how we’ve managed other parts of the business, it kind of flew in the face of really what we’ve been trying to achieve. Really, this announcement today is a bigger step in that evolution to make sure that we’re moving from a commodity-driven or a supply-driven business to a more demand, consumer-driven business. It also allows us to move towards a more fully integrated supply chain. There is still a lot of work to be done. We’ll be coming back to this group with more information in Q1, but feel like it’s the right and proper first step on the journey to make Jennie-O really a more long term sustainable growth engine for the company.

All right, that’s really helpful color. Then just a follow-up on some of the labor challenges that you called out, both in the press release and the script. Was wondering if you could frame just the impact that labor’s had on your production volume. Is it customers who are unable to accept orders because of labor? Any way to dimensionalize the costs, and any comments you’d have on wage rates? Just trying to get a flavor for where we are in terms of managing labor issues and the operations in the supply chain.

Sure. We’re not new to this story. We’ve taken wage rates across our entire hourly plant structure, and we’ve had to become and maintain our very competitive wage rates, so that has added costs. I think the other thing to really understand is just the labor pool in general. The idea that you’re going to rely on the traditional labor pool that you’ve always had, it’s not going to get you where you need to be, so our team has done a really nice job of sourcing non-traditional labor pools, being creative in how we’re staffing our facilities to make sure that we are becoming more employee-friendly, and we’ve seen an improvement. I’m not going to spike the football here and say that we’re over the hump, but we have seen some improvement in our labor rates, and even more importantly is we’ve seen some improvement in key plants for us, so key plants meaning two of our larger refrigerated foods plants have seen dramatic improvement in labor rates. Two of our grocery product plants have seen improvements in labor rates, so that’s been really helpful as we’ve progressed throughout the fourth quarter and then head into 2022. The staffing levels that we’re talking about are really helpful. We still have work to do, but it is setting us up for a better 2022.

All right, that’s all really helpful color. I’ll pass it on, thank you.

Our next question comes from Eric Larson from Seaport Research Partners. Please go ahead with your question.

Yes, good morning everyone, and my congratulations to Jim - thank you for all of your help, and Jacinth, congratulations to you. It’s a very coveted executive position in the food industry, and I’m sure that it’s very well earned, so congrats. My question really comes down to your input costs last year - bacon, trim, etc. I think Jacinth talked about the uncommon, and I’ve been doing this industry for a long time and I can’t remember the volatility that we’ve seen in the last year. Your pricing is going to reflect a lot of what the volatility is, but how much of a headwind or even potentially tailwind could your input costs be for pork in ’22?

Well Eric, it really is more of a timing issue. You think about where we are right now in Q1, and so we have priced to those uncommon markets that you described, and I think we have--we will watch the markets and see what happens, and if the market--if the commodity markets become volatile again, we’ll be prepared to react if we need to. The other thing to remember in all of this, that we’ve talked about many times, is our grocery products pricing is very sticky, and so the pricing that we’ve taken and that we’re in the midst of executing the additional price increase, that pricing will by and large sustain. On the refrigerated side, that underlying pricing commodity, we do track that more closely both in retail and food service, so we’ll react accordingly there. But I think your comment is a fair one, that says where we sit today, it’s a tailwind for the organization, we just obviously will be watching the volatility over the course of the year.

Yes Eric, the term you used, volatility is the key word. The volatility, as we’ve talked about before, can move earnings between quarters depending on the timing, but if you take out the spikes and you just look at the trends of the increased costs that we’ve been faced with over the last year, we’ve done a remarkable job of pricing into those rising markets, and the demand for our products really hasn’t failed. I think we’ve done a great job with our pricing, I think it’s been very effective. We will have times that volatility will help you or hurt you at times, but you really have to look at this as a long-term trend, and over the long term trend, it really shows that the value of Hormel products are accepted by the consumer and that we are able to price effectively into the marketplace. I think it’s been a great success.

Okay, thanks. Jim, just on that note, you’ve got a new contract with Fremont, I think you disclosed that it was about $350 million worth of commodity pork sales annually. What might be the delta for that, either positive or negative, for ’22, if you want to just give us a rough range on that?

Well Eric, you’ve been in this business long enough to know that it depends on what day it is.

Right.

Overall, it’s very insignificant to the business. Some days it would be positive, but there’s a lot of days that it’s very negative, and in fact some of this product that we’ll no longer take will no longer be--you know, was never profitable, so it gave us a little bit of lift in 2021 but it’s really not that significant to the performance of the company, and we’ve talked for a long time about eliminating the volatility around commodity products, so whatever the difference is, it’s so small, the lack of volatility is the success here. We’ve talked for a long time about selling less and less commodity products. The first step was turning over the Fremont facility, which was an old facility that needed a lot of capital. Our goal was always to get to a point where the amount of product we took matched our value-added products and our value-added needs, so this is an evolution of the process.

Okay, thanks. Just one quick follow-up. The industry, the packaged food industry literally in the last several weeks, I think probably the new-news is that we have not taken enough pricing and we’re seeing rounds coming from everybody - General Mills, others have announced that. When you look at your fiscal year now and the pricing is going to be effective, I’m assuming it’s around January 1, the full effect won’t take place until your second half. Is that the way to--is it a more second half stabilization of gross profit margins the way to look at it? How should we kind of look at that, at the industry’s new round of pricing and any impact on margins?

Yes, so Eric, a couple of things there. We feel really good, as Jim said, about the pricing we’ve taken so far, and we’re always ready to take additional pricing actions as the market conditions warrant. Through all of this, we still have to be very aware of consumer retention. We want to make sure that we’re not losing consumers through all of this. But in terms of the pricing that I described earlier, really think about it as a second quarter on effect, that it’s being--again, timing varies, but think about it from the second quarter on for the GP portfolio.

Our next question comes from Ben Bienvenu from Stephens. Please go ahead with your question.

Hey, thanks, good morning, and Jim Sheehan, congrats. Enjoy retirement, well earned. I want to ask, as you think about the labor dynamics in the business that exist and the opportunity to further automate, in terms of what you can automate, how much have you, and how do you think about how the current and more sustained tight labor environment has informed your thoughts about what you might think about automating and the returns that you could achieve by doing so?

Yes Ben, we’ve got a number of examples of the automation that we’ve been able to put in place, and we’ve got both ends of the spectrum. When you think about our newer facility in Omaha, we started out with a blueprint that had more automation built into it than we’ve had in our other facilities, so that’s been very, very helpful, whether it’s been racking, loaders, the transfer vehicles. It’s an incredibly automated facility, but you’re starting with a more recent blueprint. In some of our existing facilities, we have always talked about the need for automation and have looked to find those opportunities, but I would say that the opportunity projects have accelerated over the last 12 to 18 months, and so we’ve got a number of projects across multiple facilities where we’ve talked about the package placement, we’ve talked about a lot of the boxing and other packaging opportunities. Mark Coffey did a really nice job in his one supply chain video during our investor update demonstrating that. But I think the other part, and you mentioned it, is how we think about automation going forward and then how do you factor in that labor component, which maybe wasn’t as important to factor in, in previous years, but I do think that’s going to be part of that opportunity cost that has to be figured into the automation equation as we go forward. As we think about it from an engineering perspective, we’re allocating resources in our engineering organization that we’ve never had before to make sure that not only are we identifying existing automation, but really helping to support and develop automation that isn’t even out there yet, that we believe we need in our operations. There’s still a long way to go, a lot of work to be done, but there is a very, very keen focus in our organization to get us there.

Okay, thank you for that. My second question is related to Jennie-O. I know you’ll come back with more details in the first quarter, but should we understand this to mean that by taking these actions, we reset the base of volume off of which you grow and enhance margins going forward, or is this just a consolidation of capacity on existing volume and as a result, you kind of get rid of unused capacity in the facility that you have today?

The answer, Ben, is both. I think when we come back to you, we’ll be talking about what the business is able to generate in terms of growth going forward, but then a second part of your question, it’s really, really important just as we think about how do we fully utilize all of our facilities in our network to make sure that we’re optimizing those opportunities for capacity expansion. Through this integration into our one supply chain network, you’re going to see Hormel lines, perhaps a bacon line be in what traditionally have been a Jennie-O turkey facility, so it’s really leveraging the resources, leveraging the parent company to make sure that we are truly optimizing the assets that we have employed in our business.

Our next question comes from Ben Theurer from Barclays. Please go ahead with your question.

Good morning and thanks for taking my question. As well, Jim all the best in retirement. Hope you can enjoy. I wanted to follow up quickly on Planters. You said you’ve been seeing that you’re basically coming from an accretion point closer to the high end of the range, but if we look into the profitability in the quarter in grocery products, it clearly was down on a year-over-year basis and I guess there was still some of the integration costs. But can you give us a feeling of how you think Planters over time is going to be accretive into 2022 from a margin perspective in grocery products?

I think the best answer there, Ben, is the accretion model that we gave you at time of acquisition was that $0.17 to $0.20 range, and through our comments we’ve indicated that we expect to perform at the high end of that range. Of course that is a mix in grocery products and in our food service or convenience store channel, which is part of refrigerated foods. The business itself has been operating really, really well, meeting our expectations. The integrations have gone smoothly. We talked about already integrating one facility, the other two are right behind it, so the business is doing everything that we thought it would do so far. But then, the opportunities going forward in terms of what we’re going to be able to do from branding, flavors, innovation - I mean, there’s still a lot to come, and that’s why we’re so excited about what it has contributed and will contribute in the future.

Okay, perfect. Then my follow-up question is really more around the product, and I remember you’ve talked a lot about the big potential you’re seeing with in creating new products, innovation, Planters as an opportunity to leverage some of the other categories within snacking. If you would have to take a look at the first couple of months of operations, is that something you continue to be very positive on? Have you seen any incremental opportunities to grow that business and to combine it with existing snacking opportunities, and where do you think this is going to turn out in more of the medium term time frame?

Sure, so there’s two parts to that. On the retail front, we are having different, more fruitful conversations with retailers in regards to snacking as a category and how we approach that as an organization, and that’s exactly what we expected on the retail side. On the food service or convenience store channel, the same thing is happening - we’re having much different conversations with convenience store operators. In the past, everything we did was the back of the house when you went in to get food for sandwiches or pizza. Now, that retail section of the convenience stores has been opened up because now we have something to talk about with Planters, and we’re able to follow on with other parts of our portfolio. Those are the new things for us. There was some basic blocking and tackling that we knew we’d be able to get done as well in terms of filling distribution gaps, just like we did when we acquired the Skippy business. Again, you start piecing this all together and that’s why we remain so optimistic about the acquisition and what it holds for us going forward.

Our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.

Hi, thanks for the question. Jim, best wishes in your retirement. I hope you never have to talk about trim or belly prices ever again.

It’s my favorite thing to do, Rob! I get up in the morning hoping to talk about trim and belly prices. Come on!

Why are you retiring then? Hang around! I would like to know about the guidance, the earnings guidance. If I just assume $0.20 of accretion from Planters, then I don’t get much growth from the core business, and you are forecasting growth across your core business, so is the trick here to take the earnings base for ’21 and reduce it for the extra week, and if so, how much should I reduce it? I suppose I should also strip out the acquisition integration costs that you had, which I think are maybe $0.04 in 2021. Maybe you can help me with the math on that, and then I have a quick follow-up.

As we explained before in my prepared comments and then Jim and Jim, we do expect to have both sales and earnings growth through all segments for next year. We definitely do have some puts and takes, so the 53rd week is about $0.03, so we would pull that piece out, and again Planters is at the top end of our range that we gave with $0.17 to $0.22, so that’s a piece of it. I think with that, it should really get you to showing sales and earnings growth and margin growth throughout the year. Certainly it will vary, as we talked about, from quarter to quarter, but we do expect to see organic growth especially with new capacity coming on and really sits in the range of our long term goals that we have established and talked about at investor day.

Rob, the only other thing I would add just as a point of clarification, is you had mentioned $0.04 of deal costs. We’ve talked about that as $0.06, so there’s another $0.02 there that you want to put into your model.

Okay. Regarding the deal costs, did you have $30 million year-to-date pre-tax, or--? How much in 2021 so far?

It’s closer to $40 million when you take in all of the issues.

Got it, okay. Okay. I guess with your sales up so dramatically in the last couple of quarters, I would think you’d also have your biggest sales gains in first quarter and second quarter, just because of the commodity pricing. Is it fair to say that first and second quarter strongest sales growth will be there, but maybe margins will be kind of compromised because of just the mathematics of the profit flow-through?

I guess I would say again, it depends, right? There is volatility, and being so commodity-driven, that can really flip at any point in time, so that’s why we continue to stress just that shift from quarter to quarter. It’s something that we need to watch out for, but we do feel good about the full year and the growth that we’re expecting, both from the organic piece of it and then what Planters is adding.

Rob, your assessment on the first two quarters is correct, because you’re going to have--a big part of that will be Planters, which will be $600 million to $700 million for the full year, but basically against zero last year in the first two quarters.

Great, okay. Best wishes.

Our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead with your question.

Hey, good morning everyone. Rob took my joke as well, but Jim, best of luck and good luck in your retirement. It is well deserved.

Thank you Ken.

Let me just ask, how much has your margin structure been inhibited by labor and low utilization rates over the last year, and do you think you’ll regain a majority of that in 2022?

Ken, there’s been the impact that is probably easily quantifiable when we think about commodity costs, packaging costs, freight costs, all those things that you see, but there are other costs that have been built into this crazy volatile year, and the idea of all of a sudden one week, you might have film or ingredients or things that aren’t showing up as planned and having to react as a supply chain to make sure that you’re sourcing those, and when you’re looking to source those, it’s about supply, not cost. There are a lot of those examples on a week-to-week basis in the environment we’re in right now. I think as the entire supply chain, backwards and forwards, starts to moderate throughout the year, we’ll be able to capture more of those or have those go away so it will be less of an impact, and I think it’ll just happen throughout ’22 and probably--I mean, we’re hoping that there’s just more normalcy as we head into 2023.

Okay. Then with your turkey actions, how do you much think that will structurally enhance your turkey margins? I’m not talking about the industry, but your actions, is that worth about 100 basis points, 150? How do you contextualize the margin enhancement based on your actions in turkey? That will be my last question, I’ll leave it two questions.

Yes, thanks Ken. Two things there. The first driver through all of this for the [indiscernible] piece is really moving away from that commodity nature of the business, creating less volatility that we’ve seen over the last five years. We’ll be--like I said, we’ll come back to you in Q1 and give you a lot more color in terms of what you can expect from that business going forward.

Great, thank you guys. Be well.

Our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.

Hey Jim and Jim and Jacinth, good morning. Thanks for taking the question. I’ll keep it to one because I know we’re a bit over time. I guess just on the new pork supply contract, I think historically you disclosed that you buy about 10,000 hog carcasses a day from Wholestone kind of at the cut-out price, and I just wanted to understand in the new contract, because you’re not buying all of the cuts now, how we should think about if that’s priced differently, are you buying only at belly prices or trim prices, is it still that same 10,000 equivalent a day? Just any more detail there to help us understand some of the pork costs.

Sure Peter. If you think about it, bellies, trim obviously are in high demand, but hams, for example, we sell hams out onto the market, and so we just pass through hams. That would be an item that we wouldn’t take. There’s multiple items that we’d take during certain parts of the season, for instance ribs. It basically allows us to agree to take the products that we need for our value-added production.

And is that 10,000 equivalent hogs or whatever the number was, is that still a good baseline to use? Has the contract expanded?

Sure, yes, that’s a good baseline. For instance, off of their lines, we would take all of their hogs, we would take the trim, we would take various other cuts of meat that we needed our production, and there are certain types of things that we would not--we may not take any of them because we just--you know, as I said, it’s just a commodity product that’s being passed through, and if commodity margins, whether they’re positive or negative. When you look at the critical inputs, think about 10,000 hogs.

Got it, thanks very much, Jim.

Our next question comes from Michael Lavery from Piper Sandler. Please go ahead with your question.

Thank you, good morning. I’ll echo all the congrats, Jim, and welcome to Jacinth. Wanted to just touch on the capacity piece, maybe two things. One is for the pepperoni expansion in 2Q - any sense of when within 2Q that might come? Should we really just count on any bump-up there in the second half? I guess the maybe bigger question is how does the guidance--how does the capacity expansion fit in guidance, and maybe getting at if there’s any delays, would that potentially impact what the outlook might be?

We’re still thinking about it being operational in the second quarter, so you’re really going to see the ramp-up in Q3 back half of 2022. We’ve got it modeled and right now, Michael, there is no indication that we’re going to have any delays getting the plant up and running, so we are very, very confident in our ability to meet the numbers that we’ve put into our plan for 2022.

Okay, great. Just on the margin side, you’ve got some mix lift from the new Fremont contract, you’ve touched on pricing and productivity, and it certainly looks like some of the costs are turning more favorably. As you build out your plan, can you just point to maybe what’s the most critical? Is it the cost moderation, is it the pricing piece, are they similar in weight? How do we think about the build to the margin piece that you’re seeing?

What you’re describing, Michael, is exactly right - we’ll get the benefit of some of the raw material declines that we’ve seen. But the pricing here is key, so our ability to get the pricing through when we did was very, very important. I think we’ve demonstrated a track record of being able to expand margins on the other side of these market declines, which we expect to be able to do again. It’s a combination of both of those things.

Okay, great. Thanks so much.

Our next question comes from Carson Barnes from Consumer Edge Research. Please go ahead with your question.

Morning, thanks for the question. Just in terms of cost, what do you see as the biggest risk in 2022? It sounds like feed costs are hedged for the most part. Do you see it as transportation or packaging or wages? Just curious how you’re thinking about that and where you’re the most exposed.

The biggest risk, Carson, is the volatility. We expect freight to continue to show increases, we know that packaging is going to have some increases in 2022, and we’ve built that into our plan already. Really, where you get caught in it is more of that quarter to quarter thing, is the volatility like we saw in 2021, so from our perspective as we sit here today on December 9, it’s the volatility throughout the year that really poses the biggest risk again this year.

Makes sense. Thanks for the question.

Ladies and gentlemen, with that we’ll conclude today’s question and answer session. I’d like to turn the floor back over to the management team for any closing remarks.

Well, thank you for joining us this morning. It’s clear that we have a lot of momentum in our business as we head into 2022. This momentum didn’t happen by accident. It’s a result of a lot of hard work by our team members around the globe, and I am incredibly thankful for all this great work that has put our company in this enviable position. I wish all of you a very safe and happy holiday season, and have a great day.

Ladies and gentlemen, with that we’ll conclude today’s conference call. We do thank you for joining. You may now disconnect your lines.