Good morning, everyone, and welcome to the Hormel Foods Third Quarter 2022 Earnings Webcast and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to David Dahlstrom, Director of Investor Relations. Sir, please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the third quarter of fiscal 2022. We released our results this morning before the market opened around 6:30 a.m. 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 Jacinth Smiley, Executive Vice President and Chief Financial Officer. Jim will provide a review of the Company's third quarter results and update on business initiatives and a perspective on the remainder of fiscal 2022. Jacinth will provide detailed financial results and further commentary on the third quarter and our outlook. The line will be open for questions following Justin's remarks. As a courtesy to other analysts, please limit yourself to one question with one follow-up. If you have additional questions, you're welcome to 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 access code is 1874087. 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 our most recent annual report and Form 10-K and quarterly reports on Form 10-Q, which can be accessed at hormelfoods.com under the Investors section. 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 net sales, adjusted operating income, adjusted operating margin, adjusted diluted earnings per share and net debt to EBITDA. Discussion on non-GAAP information is detailed in our press release and third quarter earnings supplement which can be accessed from our corporate website or located on our investor website, investor.hormelfoods.com. I will now turn the call over to Jim Snee.

Thank you, David. Good morning, everyone. With the results we announced this morning, we have successfully achieved seven straight quarters of record sales and four consecutive quarters of earnings growth. In the current environment, this is an especially notable achievement. Over the last 12 months, we have delivered four consecutive quarters of record sales in excess of $3 billion. We've grown diluted earnings per share 15% compared to the trailing 12-month period. We've made considerable progress across our supply chain, including investments in capacity to support high-growth categories and improvement in the staffing levels, production volumes, inventories and fill rates. We've integrated our largest acquisition to-date with the Planters snack nuts business. We began transformational work on the Jennie-O Turkey Store segment while simultaneously managing through the impacts of HPAI. We further de-risked commodity profitability with a new pork supply agreement, we have generated over $1 billion in operating cash flow, and we've increased the dividend for the 56th consecutive year. Our experienced management team has again proven their ability to navigate and grow the business in volatile market conditions. And these results demonstrate that our business is built for growth, our brands remain vibrant and relevant, our strategies remain effective and our inspired team members around the world truly embody our results matter mentality. In the third quarter, we delivered another quarter of record sales and double-digit operating income growth. Our team's execution again played a pivotal role in growth this quarter. As together, we overcame significant challenges, including continued broad-based inflationary pressures, persistent upstream and downstream supply chain disruptions, limited turkey supply and impacts in China from COVID-related restrictions and temporary plant shutdowns. Double-digit operating income growth this quarter was led by outstanding contributions from Jennie-O Turkey Store and Refrigerated Foods. The Jennie-O Turkey Store team significantly outperformed…

Thank you, Jim. Good morning, everyone. Record third quarter sales were $3 billion. Net sales and organic net sales increased 6% and 3%, respectively, compared to last year. Volume for the quarter was 1.1 billion pounds, down 9% compared to last year. Organic volume declined 11%. These declines were in line with our expectations and are attributable to our effort to rationalize lower-margin commodity port volume and lower turkey sales as a result of HPAI. These volume declines generally had strong underlying growth from many of the value-added businesses. Gross profit increased to $83 million compared to last year, a 20% increase. Gross profit margin was 16.7% compared to 14.8% last year. Improvement was driven primarily by strength in Jennie-O Turkey Store and the Refrigerated Foods in addition to strategic pricing actions to help offset inflationary pressures. SG&A expenses declined 2% in the third quarter as we lapped the Planters' acquisition-related expenses last year. SG&A as a percentage of sales for the third quarter decreased to 7.3% from 7.9% last year. We continued to generate strong sales and demonstrate disciplined cost management. We again increased the support for our leading brands. For the quarter, advertising expense increased 21% or approximately $0.01 per share. Advertising expenses have increased 29% year-to-date. Operating income increased 40% to $291 million. On a comparable basis, which removes the impact of Planters one-time costs last year, adjusted operating income increased 17%. Operating margin for the quarter was 9.6% compared to 7.2% last year. Adjusted operating margin was 8.7% last year. The effective tax rate was 24.5% for the quarter, up from 13.3% for the same period last year. Last year's rate reflected the benefit from a large volume of stock option exercises and a one-time foreign tax benefit. Our effective tax rate guidance range of 20.5%…

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

I want to start with the longer-term question, and I'm guessing this may have to wait until next week. But with your Go Forward initiative, which segments do you think will see the greatest impact from the structure change?

Yes, I mean so obviously, the biggest impact is going to happen in our Retail segment. And that's really the segment that we're excited about all of them. But as we think about the opportunities for us to really accelerate progress on our six strategic priorities, that's the one that's going to have the biggest impact. So really being able to align the operating model with the strategic initiatives in a bigger way than we ever have before is really going to be exciting. Foodservice will have some impact as we move our -- some of our affiliated business in there and then also move the Jennie-O foodservice business in there. It will strengthen us in certain channels or segments like K-12. International will be the least impacted of all the three. So, really retail, then foodservice and then international.

Okay. Great. And then maybe one additional question. I'm not sure -- same thing, I'm not sure if you guys can comment on it. But if you look towards next year, like any early puts and takes on the operating margin line? I'm just trying to get a sense just given all the moving parts on your Jennie-O, some of the cost pressures whether you think you can actually expand operating margins versus your current guidance for this year?

Yes. I mean it's early to look into 2023. I mean as we're thinking about it, so far, we expect that our brands will continue to perform well in face of pricing. We talked about some of the innovation that we'll be able to bring to the marketplace as supply chain improves. We do expect to see some supply chain improvements. We talked about some of the operational challenges that we've had with new labor turnover, some variances that we hadn't planned for. We know that we've got to get better on that side. So, there's certainly going to be opportunities for us in 2023, also a recovery in our International segment as we think about maybe lockdowns of not being as frequent in China, exports being able to pick up. And then we do expect a benefit from our Go Forward initiative as we think about how we can really accelerate the progress on our six priorities.

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

I actually wanted to elaborate a little bit, and you alluded to it on the sensitivities. So I want to understand if you could share a few more details and between the volume performance versus the pricing performance because it really feels pricing was a big driver during the quarter. Volume down, I get it in Refrigerated just because of like the change in the business model. But then, obviously, if we put it all together, it feels like volume was a little more under pressure. Would you assign this to certain elasticities because of the pricing actions? And how do you think you're going to be able to recover some of the volume over time if we look into fiscal '23?

Yes. I mean as we think about the business spend, clearly, really pleased with the overall health of the business and the performance in the quarter. You touched on it. We knew we were going to have some Refrigerated volume declines. Jennie-O clearly had volume declines tied to HPAI. Our Grocery Products business had strong volume growth. As you dig into some of the specific brands and categories, I would say probably the most softness we have was in the area of bacon, and a lot of that would be tied to the belly market and some of the escalated pricing that we saw throughout the quarter.

Perfect. And then just a quick follow-up, if I may, on the new operating model, and obviously, we can explore this more in detail next week. But if we kind of -- and you said it about the importance of it, and we've seen, obviously, retail performing year-to-date relatively strong, up 12%, but foodservice even more. Can you give us a little bit of preview in terms of like the distribution of these segments in terms of relevance? It clearly feels like retail is like most likely more than 50% of it. And that's why this is the most focus where you're most excited about, correct?

Yes. I mean, obviously, retail will be roughly about 60%. We've talked about foodservice in total being just over 30% and international high single digits. So we're excited about all of them. And really, when we talk about retail being the most impacted, it's because we are bringing together our retail refrigerated, our grocery products unit, our Jennie-O retail. So you do have the most change occurring there. But we also have the most opportunity to really generate the alignment that we need. And so a perfect example of that, I believe, is when we've talked about entertaining and snacking in a bigger way, being a strategic priority for our organization. Historically, we've had pepperoni and refrigerated retail. We've had our gatherings party trays in our deli organization. We've had, of course, now Planters in our grocery products' organization. And now the ability to bring those together under one pillar and really talk to customers and consumers in a way that we haven't before really excites us for the future.

Yes. And just a quick add there, Ben. Jim described all of that from a strategic standpoint, if you think about how we go to market as well, what this model actually does, it really just bolster how we go to market as a company and just bringing that one Hormel to bear, and that's truly going to be a strategic advantage for us.

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

My first question is on SKIPPY, with all the volume that was created there, where does the profit go to? It seemed like there would be a greater association with the increased opportunity created there. Did you guys have co-packers? Was there a shortfall of supply? It just seems like there was a lot of top line but didn't really translate to the bottom line.

Yes. There definitely was a benefit from SKIPPY in the quarter. Really, as we talked about it with the escalation in costs, it's really across the board. We've talked about the operational inefficiencies. So, even though in aggregate, we're at a good place with our total number of employees, those employees are younger, less experienced and we are seeing that turnover. And then, we talked about some of the input costs, so continued escalation for -- across the supply chain -- and then specifically towards the end of the quarter as we saw some of the raw materials run up. And so, that really is what created that erosion of the benefit from SKIPPY. But we definitely did see a benefit in the quarter.

Okay. And then my second question is when you think about your long-term guidance, look, the last couple of years, you really haven't been within that. Is it -- what is it that changes? And is 2023, 2024 back into that long-term guidance range? Or is it going to still take time to reestablish your growth algorithm on a more consistent basis? How do you think about that?

Yes. I mean we're very positive about the business. We know that the brands are strong, the business is strong. We continue to fight the escalation in costs. We know that we have work to do on the operational front. We talked about our need to really capture the synergies and the value and our expanded logistics model. We've taken appropriate pricing. We are starting to see some relief on input costs here in the fourth quarter. That should translate into 2023. We've got back to pricing, the full year impact of some of the pricing that we've put in place. And I think -- for us, it is a better internal supply chain performance that will be a key driver for us. We do expect brands to continue to perform well. And so we're confident in our ability to deliver our long-term growth algorithm. We do have some work to do, but we're confident that we can get it done.

Yes. And just to add to that, we also are currently underway executing the automation and really getting optimizing in different fronts from an operation standpoint. So that should certainly add to us being successful at executing on our long-term goals as well.

Our next question comes from Tom Palmer from JPMorgan. Please go ahead with your question.

I wanted to ask on the Grocery Product side. Is the pricing that you've taken enough to offset the inflation that you're facing? Do you need additional rounds of pricing to address this still mounting inflation or maybe given your view that costs eased are added rounds of pricing maybe not planned at this point? Just trying to understand that dynamic and what kind of causes the inflection in grocery.

Yes. Thanks, Tom. Obviously, we're pleased with the strong organic top line growth, the strong demand for the Grocery Products portfolio. And you described the cost and pricing scenario very well. With the relief that we've recently seen from some of the key inputs, we don't believe that additional pricing is going to be necessary, that the pricing that is now going into effect in Q4 will be sufficient. But we did have pressure at the end of Q3 and in the early part of Q4 because of those elevated markets.

Understood. And then maybe ask another question on the 4Q outlook. So, it sounds like the third quarter overall was pretty consistent with what you had talked about a quarter ago. So it would seem that essentially, the guidance cut was mainly for reduced expectations around the fourth quarter. From the comments today, it sounds like the kind of greatest incremental pressure was on refrigerated food -- is that accurate? And then to what extent do these easing costs that you mentioned in the last week, are they factored into the guidance range?

Yes. So it's a couple of things. The Refrigerated Foods group is impacted by the elevated markets as well. And as we think about the fourth quarter, there's always going to be the puts and takes. We've obviously seen a reoccurrence of HPAI with Josh. And so really, watching to see how that plays out throughout the quarter from an upside potential? Or is there some risk, really understanding what will happen with the consumer with this last round -- most recent round of GP pricing. And then the other part that is on our radar is although we've seen this market relief, we have also seen just an incredible amount of market volatility throughout the year. And so we've seen significant moves up and down. And so while we're in a better position today, we'll be watching that closely because we know how quickly that can change.

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

A couple of questions. In the Grocery division, I'm now forecasting based on your guidance. I think a decline in profits for the year of about $20 million, $30 million. And that's despite having seven months incremental of the Planters acquisition. So, I guess I'd like to know, is Planters weaker than you thought? I didn't hear you reiterate Planters is double accretion number today. Maybe that's just -- it's still there. But -- and if it's not that, what is -- is it, which of the other brands? And then I have a follow-up, please.

Yes. Rob. So a couple of things. Your assessment of the GP division is correct. That will be down for the full year. When we think about Planters, although we probably weren't as intentional, the sales we're on track for the sales guidance that we've provided in line with our $1 billion guide, our earnings continue to be at the high end of that accretion model. And really for us, the long-term strategy is intact, right? So as we think about this being an important part of our entertaining and stacking platform, the work that we're doing in C-stores, the business is still performing the way we want it. There's always opportunities within categories. But overall, the business is well in line with our expectations. And really, what it is, it's the inflation that we've experienced in Grocery Products. And so, we've had significant packaging inflation. We've taken incremental pricing along the way. This most recent round of pricing should be very positive and favorable as we head into 2023.

Okay. Maybe a follow-up then. When you talked about transitioning to one supply chain model, it sounded like a great idea and it consolidated a lot of the information, consolidated a lot of the, I guess, the decision-making. And yet, here we are in a year where your warehousing costs are higher than you thought your freight is and you're having still lingering labor issues. And I guess I have to ask, did this transition, did it exacerbate any issues? Did it make any of these issues incrementally easier? Why don't the transition help prevent a lot of these situations?

Yes. Great question, Rob. I mean -- and as I sit here, I can't imagine us having gone through what we've gone through over the last several years without having our One Supply Chain in place. Everything you described to have one purview of the supply chain has really helped us throughout COVID and some of these labor challenges. We're not alone in what's happening. You can go across industry and the conversation about turnover and these manufacturing variances, I mean, they're everywhere. We have work to do. And so we do -- we're getting people through the door. We're getting people hired -- there's work to do in terms of training and retaining those people so that we do, over time, develop that experience. That is a problem today. That's not a one supply chain issue. That's a broad-based issue. And I think when we think about other challenges, we continue to see countless upstream challenges from our suppliers. So industry-wide issues persist, and as I -- I'll finish where I started and that I just can't imagine us having gone through what we went through the last several years without having our one supply chain in place.

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

I just wanted to come back to looking ahead a bit into fiscal '23. And maybe specifically, can you give a sense of how much of your commodity exposure is already locked in or hedged and how that might compare to what's typical?

So we are currently, for the moment for 2022, have hedged our grains at around 80% for the year, and we have already started hedging and have actually locked in our hedge for 2023, albeit at an elevated level, given where grain sits today. So that's, of course, another challenge, and we're not 100% hedged. So, we still have a little bit of exposure to the market and working through as we think about other areas as well, leaning into four contracts where we can, where we are not able to really execute any hedges in those areas.

So for this time of the year relative to the following fiscal year, are you less or more hedged than normal?

We're consistent with where we're normally sitting at this stage.

Okay. And just back to Jennie-O, you touched on the volume impact that will run at least through 1Q '23. Can you give a sense of the magnitude there? Obviously, third and fourth quarter this year, at least what you reported and expect is pretty different in terms of the magnitude of the impact on volume. What would it look like going forward?

So going forward, I think tough it depends on what happens with HPAI, certainly. I mean, for this year, for the third quarter, our impact was about 20% less volume going into the fourth will be off 30% volume for the fourth quarter. And our expectation is as we go into the first quarter of next year, if for the fourth quarter. And our expectation is as we go into the first quarter of next year, if nothing else happened from an HPAI standpoint, we should be rebuilding our supply there and be in a good spot.

So I think you had mentioned though, just a recent case or something that would add some pressure on 1Q. Would the volume pressure there be more like more similar to 4Q? Or do you expect it to be improving?

No. Yes. We don't expect that volume pressure. So, we actually -- and you're exactly right. I mean we've had a couple of situations here within the last few days with -- but these were really young birds. And so, it is an impact that doesn't impact Q4 at all and actually pushes into the first quarter of next year, but really will be immaterial to the quarter.

Yes. So Michael, if we stay where we are today, we don't expect a material impact in Q1. As this always is, it's a developing situation. And so, we'll be watching it closely. But at this point, it's really too early to tell what the impact for Q1 would be.

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

Jim Salera on for Ben. I wanted to drill down a little bit more on some of the labor challenges. Is it that you're seeing more acute labor markets in the areas that you operate your facilities? And maybe as the economy weakens, that loosens up a little bit and gives you an opportunity to hire more people? Or is it just pure wage issue or flexibility? Or what are some of the specific challenges that are preventing getting those under control?

Yes. So the issue of hiring, getting people through the door is not a problem, right? So we're getting people hired. What we are seeing is that they're not staying, that there is higher than normal turnover, there's significant absenteeism. And we do think that partly driven by the labor market that we've had, the ability to find many jobs elsewhere. So to your point, is that as the labor market potentially tightens, does that lead to lower turnover, the ability to keep people longer and then build that experience and that training? Absolutely. So, it's not getting people hired, it's not a labor rate, it is just keeping the turnover down so that we can build the experience within our facility.

Okay. And as you expand automation through your plants, what's the time frame of how long it will take to get those equipment -- get that equipment in the plant and up and running to supplement maybe some of the necessity for those higher turn labor positions?

Yes. So I mean that's going to vary, right? So we'll continue to always evolve and look for opportunities to take costs out of the plant. So there isn't really any point in time I'd say that we would stop doing that. So it really is a continuing improvement in our mind.

Okay. And then if I could sneak in one quick question on HPAI. Yes, I know there's been a couple of cases pop up here more recently despite the weather getting warmer. Do you guys have anything in maybe your contingency plan? Or if anything you could do to prepare for the possibility of this popping back up as the year progresses?

Yes. I mean we've obviously done a lot of work since -- you go back to 2015, the biosecurity efforts, the investments that we've made on our farms have been substantial. So, we've worked really hard. But clearly, this is still an issue. To your point, the new development is historically warm weather or heat has really tapped this down, but you're starting to see cases in California where temperatures are higher. And then just making sure, again, that we've got the continued emphasis and the continued focus on training with our team members that we keep this top of mind so, that we are able to minimize the effect.

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

I'll keep it pretty quick. Jim, just in the context of going back to the new operating model, I guess, I think you're going to stand up a brand -- a new brand center. Just curious, like are there incremental costs or restructuring actions that will come in with the re-segmentation and I guess, streamlining everything? I know you've talked about some of the synergies you expect to get, but just any of the upfront costs that we should kind of think about?

Yes, nothing really significant or material, Peter. We're moving some people around in chairs focusing their expertise in areas that we need some extra emphasis. So as we think about brand fuel, which is that center of excellence to really support all of our strategic pillars and brand in a bigger way. That will consist of our digital experience group, which has been a huge benefit to our organization. We'll continue to strengthen that area, making sure that our insights group is being fully utilized across the entire organization. So making a few investments there continued our good work on innovation and having that even more ingrained with the brand and the strategic pillars. So nothing really material as much as it is moving some people in chairs and then making sure, of course, that we've got all the right financial planning and analysis to support the business in a bigger way, but really nothing from a cost perspective that we're thinking about.

Yes. The other piece I'll add there, I mean, really fundamentally, what it has done for us or what it will do is just to bring the synergistic brain power into one place to be able to support the business and just take away some of the silos in which we're working today and also bringing jobs as well into play as we integrate them into the organization as part of the transformation.

Got it. Okay. No, that's helpful. And then, Jim, I just want to go back to your comments around what I'm assuming mostly pertain to the hog markets. Obviously, you've seen a little bit of relief here. Your commentary suggested over time, you're expecting some relief. But just as we think out 12 to 18 months, just what are you tracking? What are you seeing that's suggesting you maybe that you'll get some relief on the protein side? Just given some of the USDA forecasts or maybe for less protein availability next year as opposed to more, and I would think that would keep prices higher, but just curious if there's anything that you're seeing that we should be aware of?

Yes, I think the biggest thing there, Peter, is the volatility that we continue to see. So in terms of the absolute supply, I mean our view is consistent with what everybody else is seeing. We're obviously going to be making some forecasts that are probably tied more to slightly higher than historical averages. But really, the difference in all of this is that, that volatility or when some of these markets are staying elevated longer than they historically have, like we've just seen here at the end of Q3 and for us, the first period of Q4. That's where we really start to experience some of that compression. So when you've got the elevation that's higher longer and then some of the volatility that has been persistent throughout the year.

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

A lot of grounds been covered, but hoping maybe kind of get your view on trade and promotional spending here. I mean, you talked about the specific advertising dollars in SG&A that are up, but the trade spend that would be kind of above the revenue line. Any color on what that looks like today relative to maybe pre-COVID? And do you think that's going to have to get a bigger lever to pull over the next 12 to 18 months to combat maybe more risk in consumer price elasticity and retailers that might be a bit more wary of pricing actions?

Yes. I think, Adam, as supply continues to improve and we talked about still having a number of categories where demand is outstripping supply, but as supply continues to improve, we do expect that to be a lever that we've -- historically, we've always used it. We'll continue to use that in conjunction with the advertising dollars that we need to build the brand equity and build that connection with consumer. So yes, we do expect to see that to continue to be an integral part of our business going forward. And as we think about our updated operating model and we start to bring these retail businesses together, that's also going to be a benefit for us as we'll have, again, a bigger purview of all the retail businesses in terms of how we're interacting with customers and consumers.

Okay. And then just quickly, in foodservice, any color you could provide maybe by some of the different channels or verticals within foodservice between quick service or institutional? You guys have a pretty broad kind of customer set there. And just any color on differences in trends between them would be helpful.

Yes. Not at this point, Adam. I mean we're seeing continued strength across all of the different channels where we compete. And I would say that a big driver of that, we've talked about some of our labor issues. So many foodservice operators are facing those same labor issues. So they're forced to think differently about how they're going to be able to provide products. And we talked a lot about the value-added offerings that we have in our foodservice portfolio really being able to help those operators move the labor that they do have from back of the house to front of the house, and we are -- we continue to see that play out. We have seen a strong back-to-school season, not only with our Jennie-O K-12 business, but with the work that the Hormel side does on the colleges and universities. So again, really, really strong broad-based foodservice business.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. At this time, I'd like to turn the floor back over to Jim Snee for any closing remarks.

Yes. Thank you. I want to thank all of you for joining us today. As we've talked about this morning, our business remains incredibly healthy even as we continue to navigate some of the most difficult operating conditions in our company's 130-year history. Our team is focused on a strong finish to 2022, but we're also incredibly excited about our future with the implementation of our Go Forward initiative to update and better align our operating model against our strategic initiatives. This is a positive and exciting time for Hormel Foods. Have a safe and enjoyable Labor Day weekend.

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