Good morning, and welcome to the Hormel Foods Corporation Third Quarter Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to David Dahlstrom. Please go ahead.

Good morning. Welcome to the Hormel Foods Conference Call for the Third Quarter of Fiscal 2023. We released our results this morning before the market opened, around 6:30 a.m. Eastern Time. 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; Jacinth Smiley, Executive Vice President and Chief Financial Officer; and Deanna Brady, Executive Vice President of the Retail segment. Jim will review the company's third quarter results and give a perspective on our outlook for the balance of fiscal year 2023. Jacinth will then provide detailed financial results and further commentary on our outlook. Deanna will join Jim and Jacinth for the Q&A portion of the call. The line will be open for questions following Jacinth's remarks. As a courtesy to the other analysts, please limit yourself to 1 question with 1 follow-up. If you have additional questions, you're welcome to get back into the queue. At the conclusion of this morning's call, a webcast replay will be posted to our investor website and archived for 1 year. Before we get started this morning, 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 on 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. Non-GAAP figures adjust for the impact of an adverse arbitration ruling of approximately $70 million reflected in operating expense. These non-GAAP measures include adjusted operating income, adjusted operating margin, adjusted selling, general and administrative expenses and adjusted diluted net earnings per share. Discussion on non-GAAP information is detailed in our press release, which can be accessed from our corporate or investor website. I will now turn the call over to Jim Snee.

Thank you, David. Good morning, everyone. In an increasingly dynamic and competitive environment, we grew volume across all our segments, delivered adjusted diluted net earnings per share in line with last year and made further progress addressing the near-term challenges impacting the business during the quarter. This progress included reducing inventory, continuing to build momentum in the Planter snack nuts business and driving adjusted operating margin improvement compared to last year. Reducing inventory to more historical levels remains a top priority for the company. Our actions to rectify the inefficiencies caused by elevated inventory are working, demonstrated by a sequential reduction in dollars of both finished goods and total inventory. The value of finished goods inventory ended the quarter at its lowest level since the same time last year, representing meaningful improvement. We expect further declines in the fourth quarter and also plan to achieve our day sales and inventory target by the end of the year. We also drove improvement in our Planters business, supported by another quarter of higher shipments and positive results in consumption data. For the quarter, retail shipments of Planter snack nuts and Corn Nuts varieties were up 5% and 24%, respectively. Retail data shows dollar consumption and share improving sequentially for the last 52, 26 and 13-week periods. Volume trends remain encouraging as well with above category performance over the last 6 months. And more recent data shows Planters volume and dollar shares have inflected into positive territory. The launch of our innovative flavored cashews is meeting expectations, and we are seeing strong acceptance from our customers. While early, our flavored cashews are overindexing with younger consumers as we see the benefits of leveraging our brand equity to drive excitement for the category. We are supporting the launch with social and digital activities as…

Thank you, Jim, and good morning, everyone. During the third quarter, we delivered volume growth across all of our segments and net sales of $3 billion. Our businesses benefited from higher turkey supplies and continued improvement across our supply chain. Third quarter gross profit was $498 million. Gross margins for the third quarter increased compared to last year and improved 30 basis points sequentially compared to the second quarter. SG&A expenses increased compared to last year due to a $70 million accrual resulting from an unexpected unfavorable arbitration ruling. Adjusted SG&A expenses were in line with last year. Advertising investments were $43 million during the quarter, up 15% compared to last year, as we supported our leading brands in the marketplace. We expect full year advertising expenses to increase compared to the prior year. Equity and earnings of affiliates for the third quarter increased compared to last year due to higher results from MegaMex. Operating income for the third quarter was $217 million, and adjusted operating income was $287 million, 1% lower than last year. As Jim noted in his remarks, operating income was negatively impacted by supply chain disruption caused by third-party logistics provider shutdown. Our teams did an excellent job of diverting products through other distribution centers during this brief period, though we absorbed an impact from shortages, incremental logistics costs and elevated levels of distressed inventory. The effective tax rate for the quarter was 21.7% compared to 24.5% last year. The lower effective tax rate was primarily due to favorable adjustments related to our fiscal 2022 federal tax return filing. The effective tax rate for fiscal 2023 is still expected to be 21% to 23%. The net result of all these factors was diluted net earnings per share of $0.30 and adjusted diluted net earnings per share…

[Operator Instructions] Your first question comes from Ben Theurer from Barclays.

Yes. So Jim, I'd like to just follow up a little bit on the cadence of the year, the changes in outlook and wanted to get your thoughts how to put things into perspective. So if we go back first quarter, obviously, there was a lot of like the inventory issues, too much production, you had to work this through. You took a big hit and you kind of laid the ground as how the rest of the year expected to be, second quarter, very much in line with everything that you've talked about. And it feels like the third quarter started to kind of get sidetracked again. And obviously, with your implied guidance, and you've mentioned you expect EPS in the fourth quarter to be down year-over-year, that's very different from the commentary we got just about 3 months ago when you actually expected in the fourth quarter to see most of growth. So can you help us understand what in particular it was that drove that significant turn over the last couple of weeks from being on track to being maybe not so much on drag and then to actually be off track again. And what you, as a management team can do to get back into the right direction.

Yes. Ben, it's a really, really good question. So we've done, obviously, a lot of thinking about that and there are some things that are uniquely different and the conversation that we had at the end of Q1 and the conversation we're having today. If we take a step back, to the Q1 call, really what we were talking about were more internal dynamics, when we talked about and identified those near-term challenges in Q1. And as a reminder, as you said, it was our inventory situation, the performance of Planters and then the cost margin implications and work that we had to do there. And you fast forward 6 months from that time frame and really, really good progress against all of those near-term challenges. And we feel really good about the work that the team has done. But as we sit here today, the conversation is different, and the conversation is driven more by what's happening in markets, some of the competitive activity and really overall consumer dynamics. And so those are very uniquely different conversations. More specifically, as we've thought about the fourth quarter, and I think it's important to get that out there, what has changed for us. Well, our Foodservice business hasn't changed. We expect that business to remain well positioned, continue to deliver growth, continued segment profit growth in Q4 on higher volumes. Our International business, I think what's changed there is that it is weaker than we anticipated the last time that we talked. We had talked about an inflection point in China. And we haven't seen that, especially on our retail business. We've talked about some elasticities in our international SPAM business, primarily in the Philippines. That's a sizable legacy market, and we've seen significant pricing activity over the last several years.…

Your next question comes from Peter Galbo from Bank of America.

Jim, thanks for all the thoughts. I guess just maybe a follow-up to Ben's question or to put a finer point on it, one of the big questions we are getting this morning is just within the range of outcomes in 4Q in your guidance, it still seems like there is a fairly wide range, a $500 million range on revenues at least. So just, I guess, within the context of that, you talked about all of the headwinds, but I guess what could go right that would push you maybe towards the higher end of that versus the lower end of that I think might be helpful.

Yes, it's a great question. And really, the biggest thing, and we've seen it very recently in terms of the market performance is we've had significant volatility in 2 very important inputs. You think about what's happened in the belly market, the run-up and now the softening of the market. We have seen strength in 72 lean trim. So there's been a lot of volatility there. And then probably the detailed answer that I gave a little while ago is how does turkey come back and at what rate. And then the other thing is you got the market conditions, but we've had pretty strong volume as well. So I think when you put those 2 things together, it's important for us just to have that range.

Got it. Okay. That's helpful. And you touched on this a little bit, Jim, but I think in the context of bellies and this may have been in the prepared remarks as well, give us a sense, something maybe in real time there. The July move was outsized even relative to seasonality. You played a role in that. But just -- you saw that run up a decent amount. It's come back a bit. Just what are you seeing in real time given that it does impact a meaningful part of the business?

Yes. I mean, I guess what we're seeing in real time is what you're seeing in the marketplace and that it does have an impact in terms of how we are pricing the product. And as you know, as markets run up, you're always lagging a little bit further behind. And then as markets come down, you're catching up that way, too, but you probably see a little bit of expansion. And so the volatility is the thing that really as you know, leads to the unpredictability in what we're talking about.

Your next question comes from Ben Bienvenu from Stephens.

I want to -- if you would discuss these drivers that are negatively impacting 4Q results that have kind of evidenced themselves intra-quarter during the third quarter, what is your view at the moment on the duration of these impacts. So thinking about more challenged exports, increased promotional activity at retail and then weaker China results would -- I would think that those would have more duration in the fourth quarter, but how would you expect these things to play out based on what you've seen in the past?

Yes. Ben, that's a good question. And that's really what we're focused on is we know we've got some of these near-term challenges in Q4. A couple of things that we talked about that are really, we think, immediate or more closer in improvement, so when we talk about the SPAM business in International, we're seeing that improved offtake. And so we expect that business to be better in Q1. We talked about the lean ground turkey business. And so that really is just that continued acceleration. And we've seen recent improvement in that business. So that's only going to continue to get better. We're in the middle of the whole bird thing and that will shake out here between the end of Q4 and early Q1 given the timing of the holidays. The competitive dynamics in the domestic retail business outside of what we've talked about, I think our team is doing a really good job in terms of marketplace execution. We are now seeing some cost favorability trends. I think our innovation pipeline that we're seeing is really robust. So there is a lot to like outside of some of the things that we've talked about. The part that is still a wildcard is the macro issues in China. Obviously, we've said earlier, we thought there'd be an inflection point, and we were wrong. So we're going to continue to do our work there in terms of driving distribution, the focus on innovation, getting our Foodservice business to continue to grow. And so we are optimistic about what the future holds. But clearly, we've got some of the short-term challenges that we're addressing.

Okay. Fair enough. On thinking about the Jennie-O business, there's a number of puts and takes. The International business segment seems to be negatively impacted by it, while some of the other segments are positively impacted by it. When you think about the runway over the next 6 to 12 months, we have declining turkey prices, but meaningfully stronger volumes as you regain distribution and the flock comes back, your production comes back. You should also be rotating into considerably lower feed prices over the next year. So what would you expect the net benefit or detriment of all of those various factors to be as we look out over the duration of this next 6 to 12 months?

Yes. I think your -- the things that you're talking about are the things that are going to drive that business into 2024. And again, when we talk about the nuances of the turkey business. And this is going to get it a little bit in the weeds here, Ben. But when we think about how maybe our lean ground business didn't accelerate as quickly as we thought, while there was some turkey that international had to sell, and those market conditions were depressed. And so as our lean ground business regains distribution and accelerates, there'll be less of that commodity type sale that they'll have to endure. And so that's a positive for us. You're right on the feed costs. I mean, we expect that to be favorable as we head into 2024 and breast meat prices should be more in line with more historical levels. So we haven't done the math yet to say how is that going to shake out in total but I think the bottom line, and we said this a couple of times throughout the year, is that turkey is an important part of this portfolio. When we think about it from a Foodservice perspective and we have it in our Retail portfolio. It's good to have turkey back. And for us to be able to operate in a more normalized environment over time, I mean, that's really where we're at our best, and that's what we want to get to.

Your next question comes from Rupesh Parikh from Oppenheimer.

I know it's a little early, but just curious if you can give any puts and takes as you guys look to FY '24. And would you expect at this point to return to growth next year?

Rupesh, I think we'll probably tag team this one a bit because I think as we look into '24, it applies to -- everyone's going to have a point of view. I do think it's important to go back to some of those internal dynamics that we addressed early on in the year and that we are in a better spot on those near-term challenges or we'll call them key priorities. When we think about the state of the Planters business today, the work that we've done on inventory, the margin improvement that we've seen. And there's more work to come in that area, but we've done some really nice work and then really leveraging more of the Go Forward benefits in year 2, right? Year 1 is always feeling things out a bit, but we know that there will be more benefit in year 2. But Ben mentioned feed costs. We do expect feed costs to be a tailwind as we head into 2024, further leveraging and capitalizing on those investments that we've made and then we've also talked about the recovery in volume -- turkey volume. And so having that volume at more normalized market conditions is a good thing. The offsets, obviously, we talked about China, the China economy, what happens there? What does inflation do with labor is a big component of that. So we feel really good about the core business, the things that we can control. It's the things that are always out there that are outside your control that can be some potential headwinds. But by and large, continued strength in Food service. Retail continue to be competitive, but we expect to hold shares in our categories, I've mentioned already, strong innovation pipeline that's really exciting. And then International should improve offtake, I mean, obviously, a significantly lower base. And so Jacinth, I'll let you add your two cents word.

Yes, certainly. Rupesh, Jim has talked about a lot of the headwinds and some of the tailwinds here and things that we're working through from a market and customer consumer standpoint, there are a lot of other things we're also doing in parallel here as we think about getting back to the margin structure that we have talked about before. And so we're heavily focused from a project standpoint, working through how do we get our portfolio more healthy. And so there are a couple of projects I'll just throw out here that we'll talk more about in Investor Day as we think about portfolio segmentation and optimization, continuing on with Project Orion as we think about our supply chain and the effectiveness there and building out the right infrastructure to support this business as we continue to evolve and modernize and just also thinking through advancing on different areas from an end-to-end planning standpoint and continuing the transformation and getting the cost out of our system internally from an effectiveness and efficiency standpoint. So there is a lot of work going on in parallel as we deal with the tactical to operate the business. We're also thinking about long-term growth and setting this business up as I said, to continue to return to a margin structure and expanding margins from where we are today.

Rupesh, this is Deanna. I just wanted to tag team on that from a supply chain standpoint, but from a retail standpoint, we've been not only managing to the current environment, but continue to stay focused on standing up Go Forward and what that looks like and really starting to see the benefit. As you think about -- Go Forward was to align our structure to our strategy. And if we think of one of our company strategies of snacking and entertaining, the team has been really a cross-functional team dedicated to modernizing the Planters business as an example. The team has made significant progress, and we're seeing that play out. A few things that we've done as we pull our resources around Planters in particular, we've pulled up our innovation pipeline. We're currently in market with 3 new flavors of cashews. We've quickly come to market with advertising to support that new launch, help to surrender to the cashew, and we're having great response pulls from our retailers and our consumers. Additionally, the team has looked at capital expenses and modernizations that we need in the plant to align with the consumer and packaging as well as a really robust innovation pipeline that's coming at us. And then from a sales execution against Planters, again, as a benefit of Go Forward, thinking about hard about regaining distribution, we did a price pack architecture study in the first half of the year, and the team is out working with our retailers to help them think about the category itself and the set and that price pack architecture work is helping us have really fruitful, insightful and analytical conversations with our retailers about how we grow together and how we can both meet the consumer with products that are going to be relevant and provide category growth.

Your next question comes from Tom Palmer from JP Morgan.

I think in the past, what we have seen with the whole turkey business is falling commodity prices don't always flow through the retail business immediately just given how supply contracts are structured. You made a comment about unique market dynamics and customer behavior for whole birds. I just wanted to unpack what's happening. Is the net of this that whole bird prices are coming down at retail may be faster than we typically see? Or did you mean something else by that?

No, that's correct, Tom. I mean I think at this point in the year, you'd see some higher bookings but as the market has declined, I think there is a bit more of a wait-and-see mentality and so that's really what we're talking about when we're saying that there's some unique market dynamics.

And then just on the competitive environment at retail and your comment about the promotional activity, just categories stepping up. Are these – I guess, first, like what are the categories where you’re seeing that competition and promotional activity most intense? And then how would you describe kind of the start of that activity? Is it you’re running it to drive share in certain categories? Or is the promotion step up on your side more in response to what you’re seeing from competitors?

Tom, this is Deanna. Thanks for the question. This isn’t new for us, although it’s new probably over the last couple of years as companies have pulled back on promotions just because of supply and high demand. So this isn’t new for us. And having promotional activity as well as a balance with our baseline business is really normal, but it hasn’t been normal in the last few years. So as we re-enter promotional activity, we have the opportunity to really think about it strategically and to leverage our revenue growth management team and price pack architecture work to really inform and sit down with the retailers to say, how do we do this, that’s really positive for both of us. And how do we ensure that we’re meeting the consumer and that we’re reminding the consumer about our products the value that they provide as well as keep them coming in the store, either in-store or online. And so we’re thinking about both our digital activation, our in-store activation. And it really goes beyond just a promotion or price point. We need to make sure that we have advertising in place as well. We need to make sure that we have innovation. So I point again to the Planters example where we have innovation, coupled with advertising and promotion in place and it’s working. From other categories, we’re really, again, as we re-enter promotional, trying to do it as smart as we can, I point to bacon. We’ve had a lot of good activity and growth in bacon this past year. We’ve had a cadence of promotional activity at bacon, advertising, as well as we’ve got innovation coming in the bacon category that we’re really excited about in 2024.

And Tom, at an even higher level, Deanna gave you a great answer. When we said heightened competition at retail, I think it’s fair to say that we are seeing demand normalizing to some more historical levels. Edible sales flat versus last year. Units have declined since 2019. And so as you’ve got that and supply chains have somewhat normalized, that I’m not going to say everywhere there’s capacity, but there’s probably some additional capacity in the industry and fill rates get better, there’s work to make sure that you’re filling that up. So it’s that at a higher level. And then to some of the specific activities that we’re working on that Deanna talked about, that’s really what we meant when we say heightened competition at retail.

[Operator Instructions] Your next question comes from Adam Samuelson from Goldman Sachs.

I guess the first question is trying to maybe clarify on tying the turkey comments, specifically. I think previously, I know Jennie-O is on a reported segment as such any more of a previously playing turkey profitability in fiscal '23 as being roughly flat year-on-year. Is it fair to say that, that's a decent chunk of the outlook cut today is attributable to turkey, and so that is going to be down a decent amount year-on-year even with the volume recovery from HPAI.

Yes. I think that's fair to say, Adam, is to be slightly down year-over-year. That's really due to some of these Q4 issues that we've talked about.

Okay. And I guess just to the Q4 point, I mean, the full year range, you've got 1 quarter left. The sales range widened relative to your prior guidance, you have the EPS range narrowed. And I appreciate that maybe there was a pretty wide EPS range previously. But can you just help us understand kind of the puts and takes around, is it just the uncertainty on some of the commodity pork cuts and some of the turkey [Holberg] pricing. We've got much uncertainty on volume. And why wouldn't that revenue volatility kind of manifest in a wider EPS range out of the outlook has been recalibrated.

So Adam, I'd say for all the reasons that Jim talked about in terms of just the dynamic that we're seeing here and just the volatility, that is exactly why we have the ranges that we have as we sit here at the moment.

Okay. But that's certainly on revenue, but why would that change in revenue not fall to the earnings line? And why would it fall -- why would there be more volatility previously on the range of outcomes on earnings and less on revenue today. Just with 1 quarter left in the year. I'm just -- maybe it's a recalibration --

All mix, right, all mix driven. You think about the mix between even from a commodity standpoint and where markets are priced, it really depends on what that mix looks like? I mean you could have it a drag on the top line where you have really strong volume hitting your top line and just depending on where markets are, doesn't necessarily fall through on your margin line.

There are no further questions at this time. I will turn the call back over to Jim Snee, CEO, for closing remarks.

Yes. Thank you. 2023 has certainly been a challenging year, but we continue to make great progress to addressing the near-term challenges. Our continued investment into our brands, our disciplined financial strategy, our continued balanced approach across our business all position us very well for future growth. My sincere thanks to all the hard work being done by the Hormel team to set us up for future success. And I want to thank all of you for joining us this morning and hope that you all have a safe Labor Day weekend.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.