Q2 2020 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Hormel Foods second quarter 2020 earnings release Conference call. At this time, all participants are in listen only mode.
As a reminder, this conference is being recorded Thursday may 21st 2020.
I'd now like to turn the conference over to Nathan N.S. Director of Investor Relations. Please go ahead.
Good morning, welcome to the hormones conference call second quarter fiscal 2020, we released our results this morning, where the market oak.
630.
He did not received a copy of every week.
At our website Hormel foods dotcom hunger <unk> that's for section.
On our call today, it's Jim Snee, Chairman of the poor President and Chief Executive Officer, Jim Sheehan Executive Vice President and Chief Financial Officer.
Jim Snee will provide an overview of the company's response cope with 19 pandemic.
Hey reviews, the company's current and future operating condition and commentary regarding each segment's performance for the quarter.
She is quite detailed financial result, and commentary regarding the company's current and future financial condition.
The line will be open for questions following Jim's remarks.
Courtesy to the other analysts please limit yourself to one question with one follow up.
If you have additional question well welcome to get back Q.
An audio replay of this call will be available beginning at 11 am today Central standard time, the dial in number is 888 to 543 590 in the access code 735 Psi nine three to it will also be posted to our website and archive for one.
Here.
Before we get started I need to reference the safe Harbor statement.
Comments made today will be forward looking actual results may differ materially from those expressed or implied by the statements we will be making.
Please refer to page 33, 35, and the company's form 10-Q for the fiscal quarter ended January 26 2020.
In addition to a supplemental risk factor related to the coded 19 pandemic included in our form 8-K filed this morning.
Both can be accessed on our website.
Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operation.
These non-GAAP measures include organic volume.
Organic sales adjusted pre tax earnings adjusted diluted earnings per share an operating free cash flow.
Discussion on non-GAAP information is detailed in our press release located on our corporate website I will now turn the call over to Jim Snee.
Thanks.
Good morning, everyone.
First off I want to take this opportunity to express my sincere appreciation to the essential worker showing up every day, so manufacturing facilities across the industry.
Thank you.
As for the heroic and purposeful work they are doing and they have my most share appreciation and gratitude.
I also want to acknowledge the food industry employees or showing their commitment to every day.
Work, they do whether it be at grocery stores, and Trish restaurant surfing pay trend searching takeout delivery or curbside pickup.
Of course upping the same due to the healthcare workers and first responders or keeping all of us.
Throughout this pandemic our number one priority has been to keep our team members safe.
Especially those who are not in a position to work remotely.
Our akovaz leadership team, including operations quality control communications legal R&D and human resources have worked tirelessly to ensure we have the appropriate enhance safety measures in place, including a personal protective equipment for all plant team member.
Yes.
Temperature and wellness screenings frequent test set affecting us high touch areas. This reconfiguration of common areas than workstations.
Revise shift scheduling.
Reducing production line speeds and guidelines on Carpooling more extensive social tensing measures throughout each facility.
And where possible providing remote work opportunities and improved access to cope with 18 testing.
I am continually amazed and our management team's ability to find innovative ways to enhance employee safety.
Facilities.
Throughout this crisis, we have also been transparent with our team added a public about all we're doing to put safety first.
As part of our industry, leading safety measures.
We have also developed an awareness campaign, we call Keith co head out.
Hey program that reinforces various preventative measures at our production facilities and the communities, where we live and work.
As a global branded food company, we play a critical role and providing safe high quality food during this unprecedented times.
As we all know it has not been business as usual over the past several weeks and we will likely BMS near normal for some time.
I'm very proud of how all our team members have stepped up and reacted to the rapidly changing dynamics in our industry.
Before I get into the quarterly results I want to take a moment.
A few things about our approach over the last several weeks that really stand out for me.
I've told our team that we were made for this and the following are examples of what really makes sense company. So uncommon.
As we progressed into the initial stages or the pandemic our senior leadership team agreed that we would do everything we could to protect the jobs of our thousands of team members.
Each day I heard examples of our supply chain change going above and beyond just shift production between plans or relocate where certain jobs can beta in many cases. These changes had never been done it before.
Balancing workloads across plants in a manner we did.
The most cost effective decision, but it was the right decision.
Another example of what makes US company in comment as our commitment to making the best long term decisions for our team members suppliers customers and shareholders.
Because of our stable cash flows and strong balance sheet, we will not nickel and get a strategic investments during the start of certain kind of.
We have completed.
Comprehensive review of our capital projects and in some cases have slightly delayed project completion.
Michelle capacity isn't needed right now.
However, we continue to move forward with many investments that will enhance our long term performance.
Such investment has project horizon.
Our team's ability to effectively and efficiently work remotely has allowed us to keep project Orion on track and we have made the decision to go live in our financial system update in June.
I know everyone on our finance team is committed to making the important cut over a success. We are confident we will see the benefits from our financial system go lives just as we're seeing from our HR system upgrade completed in January.
I also want to take a few minutes to highlight key areas that are helping us whether the stores.
First our creation of water supply chain three years ago has been instrumental in helping US manage this crisis from one pivot point at an executive level.
Quick decisions, we made early on and not have been made in the same way. If we were operating in four or five different supply chains.
Second.
The significant investments we made several years ago.
E Commerce team infrastructure and capabilities position us to quickly and grow in this emerging channels.
During the quarter, our track purchases through IRA were up over 100%.
And our brands are significantly outpacing category growth and capturing market share in many categories across both center store and parameter.
Finally.
Our decision late last year to transition the entire enterprise to one.
Platform made virtual coordination much easier than it otherwise would have been.
While our decision to transition right before the pandemic with serendipitous, our IP services group deserves a lot of credit for seamless way transitioning thousands of team members to working remotely and less than early.
Now looking at our sales results for the quarter.
Balance we have purposefully built into our business as a competitive advantage set us allowed us to perform well in many different economic situations.
Moving to current crisis.
For the quarter.
<unk> increased 4% and organic volume increased 7%.
We delivered record sales for the quarter with an increase of 3%.
Organic sales increased 6%.
Three of our four segments delivered increases in sales.
From a channel perspective.
Total retail sales increased 16% during the quarter.
Multiple different ways of demand in our retail businesses.
Pandemic has unfolded.
In the first ways, we saw a tremendous demand for nearly all of our center store brands.
Our initial assessment west consumers were stocking up but as the weeks progress we continue to see sustained double digit increases.
The second wave of demand took place shelter in place restrictions were enacted across the country.
And consumer shifted from dining restaurants to purchasing more perishable products across the parameter this store.
We continue to say perimeter sales increase at double digit rates over last year.
Throughout the escalation in demand, we've seen a large increase and a number of new buyers and households, purchasing our branded products.
What I'm, particularly proud about just a number of new buyers that are making a ramping purchases of our brands.
This is an important leading indicator as consumers are using our products and enjoy the experience and repurchasing our brands.
I'm also encouraged by our team's ability to capture share in channels.
Our open and available, namely the retail channel.
From a total company perspective, we significantly outperformed the category private label other large brands into small brands.
Our ability to capture market share.
As a testament to our brands.
And direct Salesforce.
Also to our operations and supply chain team's ability to ensure our products are on Michelle.
One dynamic from the pandemic that as affecting all of us as what is happening across the foodservice industry.
As heartbreaking Jesse distributors restaurants hotels, and many other foodservice spend you struggle to survive.
I have seen estimates of thousands of restaurants across the United States could close as a result at this crisis.
Every entrepreneur behind each restaurant has an unique story.
Why and how they chose to open their restaurant.
Maybe if based restaurant tours are community members trying to make their neighborhood a better place to live and work.
And these closings are tragic.
Our foodservice provisions have been doing their apart to help the foodservice industry.
So the crisis, our Hormel Foodservice group offered a rebate program.
Help offset operators food costs.
Program was successful and exceeded our expectations.
We're also working very closely with our distributor partners to support their teams and their recently received accolades for our efforts.
And finally, we've talked a great deal about how our direct sales force is a distinct competitive advantage.
No time is that more true that right now.
Our sales team has been on the virtual frontline's, helping operators quickly adjust to take out delivery and curbside pickup with best in class guidance and tips and sometimes being the only supplier to personally check in with a restaurant tour.
During this difficult time.
Like others any industry, where size sharp decline in our foodservice business starting in late March.
For the quarter, our enterprise foodservice sales were down 21%.
As you think about our domestic foodservice business. It is primarily sold trigger refrigerated foods and Jennie O Turkey store segments.
Prior to any outbreak our foodservice business represented approximately 40% of sales in both segments.
And the majority of our operator customers are in key segments, such as mid scale to casual dining lodging K 12 schools colleges and universities and healthcare.
Each foodservice segment is experiencing a different dynamics during the shelter in place restrictions and each will have a different recovery timeline coming out of the pandemic.
Even though it is early in the third quarter, we are starting to see orders picked up across our foodservice business.
From a financial perspective, we delivered earnings per share of 42 cents, Jim Sheehan will provide more details of the moving pieces, but I do want to mention that our earnings fully reflect five cents per share and investment losses and increased supply.
And costs related to co that 19.
The high level dynamic during the quarter was similar in each segment.
Really demand shifts from foodservice to retail and higher operational costs.
However, each segment experienced some unique circumstances and I want to highlight those areas.
Grocery products volume increased 7% and sales increased 8%.
Organic volume increased 19%.
Organic sales increased 20%.
We saw exceptional growth from nearly every brand with some products delivering very strong double digit growth, including the spam family of products Skippy peanut butter and Hormel chili.
Two key Easter grocery products success during the quarter, plus a sales and marketing teams focus on limiting production to our priority is high volume items and frequent conversations with our customers regarding assortment and product availability.
We know our center store brands are perfectly suited for value consumers, who need affordable high quality products for their families.
With millions of Americans now on employ our shelf stable products are as important to consumers as they've ever been.
Earnings for grocery products increased 22%.
Despite the divestiture of Cytosport last year.
Strong volumes and improved mix, where the key drivers to the double digit increase.
Jennie O, Turkey store delivered a strong quarter with volumes up 19% sales up 12%.
Segment profit up 54%.
Strong retail Colbert and commodities sales more than offset declines in foodservice.
At Jennie O sales and marketing group made excellent progress rate gaining distribution prior to the pandemic, which put them in a strong position to succeed.
During the quarter Jennie O lean ground, Turkey sales increased by double digits.
Tire sales and operational improvements across the supply chain for the key drivers to earnings growth.
International volume decreased 2%.
Sales increased 2%.
Branded exports primarily spam.
Offset declines in our China foodservice business.
Segment profit increased 62% due to higher brand to export margins increased income from affiliates.
I'm pleased to report our China plant operations are now fully up and running to support our retail and foodservice businesses as the kind of trade continues on its path for reopening.
Our foodservice business in China is improving off the lows we saw during the pandemic.
We are seeing very strong demand for spam and skippy and our refrigerated products at retail.
Team in China is working through higher pork prices, but are taking the necessary pricing actions to offset cost increases.
Refrigerated foods volume was flat and organic volume was down 1%.
Sales decreased 1% and organic sales declined 3%.
Retail demand was led by products, such as Hormel Black label, Bacon, Applegate natural and organic products Columbus grab and go short Critter eight.
And Hormel pepperoni.
We also finalized the acquisition of Sadler smokehouse during the quarter.
The majority of Sadler sales are ensure that foodservice channel, but I've been impressed by the way in which this team has quickly pivot at their production to meet growing means in retail.
What do you mean trend we are seeing in the marketplace as consumers searching for products that can replace a restaurant experience.
Branded like Sadler smoke house, and Lloyds barbecue fit that need perfectly.
In fact, our retail lines at Sadler has had loans have been operating at capacity to meet that demand for their products.
Our foodservice business saw double digit declines during the quarter. However, we're very confident that as the food service industry starts to open up our product lines, featuring pray cooked precise and pray marinated products will thrive as operators look to simplify.
Hi, preparation and reduce handling of products.
Our daily business experienced consumer dynamics that were up blend between retail and foodservice.
Products like Columbus, grab and go short Kittery performed well as consumers search for unique flavorful products.
We did see declines in the behind the glass and prepare food businesses as many retailers closed these areas to re deploy a labor to other sections of the store.
Earnings were down 17% due to lower foodservice sales and higher operational cost as we paused production at two plants during the quarter.
Jim Sheehan will provide more details regarding input cost volatility the refrigerated foods team experienced during the quarter.
As we look forward.
Our withdrawing our full year sales and earnings guidance.
The decision to withdraw guidance reflects on the certainty created by Kobe 19 in several key areas, including consumer behavior at retail and foodservice.
Volatility in our input costs.
And supply chain disruptions.
Our team is focused on these indicators to guide our decisions that investments in the coming weeks and months.
First we are paying close attention to consumer behavior across our entire portfolio.
Or watching consumer buying patterns in the retail channel those metrics, such as household penetration and repeat rates.
We're also watching how consumers emerge from shelter in place restrictions across the country and Reengage the food service industry.
In addition to monitoring restaurant traffic, we're observing how other segments in the food service industry, such as lodging colleges and universities and K through 12 education reopened.
We're also actively managing through the volatility we're seeing in raw material markets.
I mentioned, Jim Sheehan will provide a detailed assessment of the hog and pork industry, but the recent periods of operational pause and a startup and processing facilities across the industry are creating dramatic swings and input costs.
I have the highest confidence in our ability to pass along the necessary pricing, but we may experience short term margin compression or expansion as raw material markets adjust to the rapid changes in supply and demand.
Finally.
While we have implemented industry, leading safety measures, we have experienced operational challenges at some of our facilities due to covert 19.
We are strategically managing through operational disruptions on a daily basis.
These operational disruptions have led to incremental supply chain costs.
During the second quarter, our costs increased by approximately $20 million, primarily related to team member bonuses enhance safety measures and lower production volumes.
In the second half, we expect to incur another $60 million to $80 million of incremental costs that are temporary and these costs will be weighted to the third quarter.
In closing I want to emphasize three points.
First our company was built for this we have the right strategy.
Sounds business fundamentals best in class management, and the financial strength to thrive in this dynamic marketplace.
Second we will not do anything to jeopardize our strong financial position.
Well equipped to weather the star and we'll have a stronger because of it.
Third we have said from the very beginning of this pandemic that our goal was to do our best to do everything right.
From people safety to supporting our partners and customers to ensuring America has food on that shows.
Donating millions of dollars and millions of meals to hunger related causes.
Everything we are doing isn't perfect alignment with our purpose of inspired people inspired food.
At this time I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter provide commentary regarding key input cost markets and an update on our financial position.
Thank you Jim good morning.
Net sales increased 3% to $2.4 billion.
A record for the second quarter.
Organic sales were up 6%.
Segment profit increased 5% to $310 million.
As double digit growth from grocery products, Jennie O, Turkey store in international more than offset a decline of refrigerated foods.
Pre tax earnings were $286 million down 10%.
Excluding the Cytosport gain last year adjusted pre tax earnings declined 5%.
This decrease included significant losses on investments.
The effective tax rate was 20.6% compared to 11.1% last year.
Last year's rate benefited from a tax gain on the Cytosport sale.
Earnings per share for the quarter was 42 cents.
Perception.
Adjusted earnings per share was down 9%.
Selling general and administrative expenses increased year over year.
Lower expenses last year for due primarily to the gain from the Cytosport sale.
Advertising for the quarter was $35 billion flat to last year.
Nick unallocated expenses for the quarter increased $46 million.
The increase was due primarily to $16 million related to the cytosport pre tax gain.
Yes, $19 million of lower investment results from last year.
Operating margins for 12.1% compared to 13.3% last year.
Additional cost included the important investments in cobot 19 related to employee safety measures.
And production professional bonuses.
Both reflect our commitment to our production professionals.
And to ensuring their safety.
The computing continued to generate strong and stable cash flows despite the impact of kogut by team.
Cash flow from operations can free cash flow more than doubled in the quarter compared to the prior year.
We recently renewed our shelf stable registration statement and are considering near term opportunities to access to debt market at favorable interest rates to provide ample liquidity to take advantage of strategic opportunities the company's strong cash flow and balance sheet, along with the investment grade credit.
Rating allows us to manage risk as well as big strategic and long term investments to drive shareholder return, even then types of uncertainty.
We are confident we will remain in a strong position to fund our capital needs, including the dividend capital expenditures and pension contributions as we grow the business.
We paid our 367th consecutive quarterly dividend effective may 15th at an annual rate of 93 cents per share.
At 11% increase over 2019.
Capital expenditures in the quarter, where $80 million compared to $48 million last year.
Large projects for the remainder of the year include the bird pizza topping play of expansion.
A new dry sausage facility.
And project Orion.
The company's target for capital expenditures in 2020 is $340 million.
We completed the purchase of Sandler spoke out for $269 million during the quarter using cash on hand.
Share repurchases in the quarter were $12 billion, representing 300000 shares.
We repurchased stock to offset dilution from stock option exercises and based on our internal valuation.
The quarter was impacted by contrasting dynamic forces.
Within at eight week period, the industry experienced a decline in foodservice demand, creating an oversupply protein.
This was quickly followed by plant disruptions, which resulted in significant protein shortages.
At the peak in early May the industry was operating at 40%, but well capacity.
The changing dynamics of supply and demand Costar swings and hogging commodity values, which have continued into the third quarter.
To illustrate the volatility the U.S.J. composite forecast out declined 40% from March 23 to April night.
Since April 9th prices have increased by as much as a 140% to levels not seen since BBB.
2014.
Likewise, we always have traded between $40 in $270 per hundredweight since the beginning of April.
Beef trim traded at both 10 year lows continue heights over the same period.
The most recent USPI supply and demand report estimates at 1% decline in hog production for the year after estimating a 5% increase in the prior months report.
We feel the hogging commodity values in the near term will be determined by industry processing capacity.
Additional player disruptions will depress our values it increased commodity values.
Alternatively, if the industry is capable of operating at near capacity levels.
Prices in commodity values ship moderator.
Worldwide demand for pork remains strong we continue to monitor African swine fever in China, Southeastern Asia and Europe.
According to the U.S.J. exports are expected to increase greater than 10%.
In the near term we are closely analyzing two key factors.
Processing levels in consumer confidence restaurants reopened.
We're currently using multiple predictive analytic models to monitor and forecast both factors.
We are actively managing the industry capacity issues by leveraging the three ways, we source raw materials.
Internal processing.
Contracted sourcing and purchasing probably most on the open market.
Supply chain strategy is designed to mitigate volatility.
So margins could expand and contract is pricing lags changes in cost this can shift profitability between quarters.
Fundamentals in the Turkey industry were mixed in the second quarter, but recent data indicates improving conditions.
Consistent with the park industry in the near term we are focused on the ability to maintain Turkey operations in the industry and at our facilities.
Placements in the last six weeks of experienced meaningful declines.
This should continue to reduce cold storage levels, which had already significantly declined.
We expect wolford pricing to remain elevated compared to last year for the remainder of the year.
Turkey breast pricing was significantly lower than the second quarter, but pricing has improved in the third quarter.
We successfully implemented the Oracle human capital management system, a project Orion in January.
As June stay said our team was credited with advancing project Orion as we worked remotely with minimal project delays.
We are proceeding with the finance go live in June.
Our team has already benefiting from enhanced analytics and improved demand planning.
In June we will introduce additional capacities such as robotic process automation.
In real time data integration.
Further implementation for the supply chain will take place later in 2020 and 2021.
At this time I'll turn the call over to the operator for the question and answer portion of the call.
If you would like to ask a question at this time leasing opened pressing star one on your telephone keypad.
Easiest speakerphone. Please make sure your mute function is turned off to allow your signal to return equipment.
In press Star one to ask a question.
Moving to allow everyone an opportunity to signal for questions.
We'll take our first question from Tom Palmer with Jpmorgan.
Good morning, and thank you for the question.
You gave some helpful detail on what you're seeing in the hog and pork market.
I just wanted to ask about how that translates to your results as you kick off the quarter right It would sound.
I guess on the on the.
On slide prices down quite a bit you guys historically have not always.
Senior costs tracked closely just just given your negotiated purchases and then on the.
Input cost side Youre seeing some pretty substantial increases. So are you kind of messaging that quarter is going to start off a little bit slower.
I'm a profit standpoint, and then you would look to adjust pricing and kind of we perhaps.
So input costs or not this year.
Good morning, Tom.
First of all the most important thing on pricing, that's going to be the ability to keep the plants running.
The processing capacity and right now that seems to be happening, but theres a great deal of uncertainty as to what plants are going to be hit in.
The volume impact those those interruptions will have so thats. The most important thing as you look at and our quarter that can create volatility that you've talked about the other thing that's happening in the industry is that.
Promos or items raw materials that require additional processing.
Or much more expensive than the less processed items. My example would be hams right now we're running at about $35.
But 72% trim today is 125.
Normally you would take those AMC, new bone them because of that price discrepancy in the in the two items.
And you both the hams for trim, but right now it's hard to find the labor would be absenteeism. That's in the plants to do that building. So theres, a quite quite a bit of diversity in the pricing of the probably most right now as far as hog prices today hog prices are at about $39 as the western corn belt at last last quarter our price.
For hogs were not far off of the.
The average.
Western corn belt likely was about mid Fiftys 50, 455 in that range.
The only thing that was a.
Bit above average for us where green based contracts and so.
On pricing for us is not out of line of what you're seeing in the western corn belt.
We're watching the input costs greatly and you're seeing the volatility.
I mean take a look at 72% trim.
It was as low as $34 in the second quarter went as high as $145 in the second quarter.
That compares against $68.
Price today, and Thats, a 125, you've got bellies that range from $41 at the low to to 67 at the high averaged about 113 and its drops to $94 just the last week.
So it's really hard to to read the the.
Or estimate the primal values, the raw material costs.
Watch whats happening the plant performance again, as I said as said before.
If we're able to key players both the industry and our plants variety that about capacity.
We think there will be a moderation in both both hog prices.
Overall primal values I hope that helps.
That does thank you.
And then just wanted to ask on the on the Ginnie inside the volume growth I think.
Additionally, about three quarters of your product.
Internally supplied.
I'd be surprised if you were able to do slaughter volumes by as much as that segment volumes were up so could you talk about your purchases this quarter any changes to inventory levels, and then how you're thinking about kind of the mix versus slaughter and purchases going forward.
Yes.
Obviously, we're really pleased with the quarter that at Johns has.
Really good work coming off of.
To me out of our first quarter call, we talked about what they have done in distribution and really what they've continued to do especially on lean ground Turkey.
They've been able to really move through some of that in some of that inventory because we bought the business has been driven across the entire portfolio. So whether it was retail whole birds commodities.
It's been a really really good mix of products that have put them in a great positions in the quarter.
In regards to some of the EXFO harvest volumes and some of those questions.
We will have Nathan follow up with you on that level of detail, but just overall really strong demand across many areas good quarter for jobs.
Okay. Thanks, guys.
Okay.
And we'll go to our next question from other Jones.
Good morning, good question.
When you talk about food service and the refrigerated foods business.
I guess two part question.
Wondering if you could give us sense.
What proportion of that.
Like the QSR.
The.
Pizza Takeouts forces.
To conclude so those institutions.
Business and then the second part of the questions you talk about you start to see this demand come back if you could just give us some.
Magnitude of recovery you've seen.
Sure.
Thanks for the question.
Our foodservice business.
Totally was off to a great start this year and in the quarter. We saw it really strong growth through mid March.
And then a sharp decline through the end of quarter, we talked about business being down 21%.
As we think about the channels, where we compete.
We have a very balanced foodservice business and so you think about lodging college and universities K through 12.
Mid scale casual chains.
Really really nice balance.
When you talk about QSR, you know if you're talking about traditional burger chains.
Probably don't have a lot of business there, but if you think about locations that still have thrived through business available to them.
We have quite a bit of business in that channel with you want to call it that and so very balanced model across food service.
And as we're starting out the third quarter, we talked about its early.
We're seeing some demand picked up the part that is really hard to read at this point, we'll be watching closely is that pipeline sale or is it true consumer demand. So we're certainly not spiking. The ball. We know we're going to have to watch it closely over the weeks and months ahead, but from where we sit.
We feel like we're well positioned we talked about our direct sales force is able to pivot and get out in front of operators as they are world has changed dramatically the products that we've spent years and years, creating Austin police fire Braised Bacon, one cafe age also well positioned for this new environment.
And so obviously, we're going to watch what happens with capacity patron comfort level, the speed and magnitude of rebound so lots of uncertainty there but.
When it's all said and done without an amazing amazing Foodservice group. So they know put us in a great position to win.
Thank you.
Second question is on you.
Im seeing you mentioned utilization of the plans for the industry Andrew Hormel.
Good.
[music].
Listen.
CDC guidelines et cetera.
What do you think over the next six to 12 months feasible Max utilization for these plants.
You guys, having issues with getting labor to debone handsome seats or would you be able to take advantage in terms to pan cost neutral.
Yes ill go and take that one I mean, I think the thing to remember in our facilities, where we don't own any of the harvest facility. So as you think about our processing plants. It is a different business and so yes, we do have some lines some areas.
Where it is hard to socially distance our team has done an amazing job putting in those enhance safety measures and really meeting or exceeding CDC and Osha guidelines.
In those plants I mean, we've seen some lines have to slowdown.
But I wouldn't say that if anything that's going to have a dramatic impact on the business long term.
The the shorter term issue is as you do have more and more positive cases, and you get some absenteeism thats. The short term issue that really is impacting the capacity in some of these plants and so.
We're in a much better place in terms of understanding how to manage through the process all of our plants are up and running today and really want to one of the keys as we progressed through this pandemic is the fact that additional testing has really allowed us to to maintain.
The the understanding of what's happening and who is positive whose negative who have to sit out and who can come back to work. So having more testing widely available has really been a great thing and I think you'll continue to see that the benefit.
As lead with to maintain our operations.
Thank you some months.
Your next question from Rupesh Parikh with Oppenheimer.
Good morning. This is actually Erica eiler on further testing for taking your questions.
So.
You talked about a little bit about why you're seeing the food service channel here.
So far.
Q3.
Is there any color you can provide on what you're seeing.
Within the retail channel lately.
Sure I mean, we continue to see very strong dynamic strong business in the retail channel both in the center of the store and of the perimeter. This store.
We've we've been really pleased with what happened in grocery products.
We've been able to add households, bring new consumers into the mix.
I would say early on in in the crisis.
There there was this view that it was all just stocking up or pantry loading.
But over time, we've seen the velocity, we've seen a sustained demand. So we know that theres a lot of new buyers.
And stronger new buyer repeat and so.
That has that has held up on the retail side of the business both center of the store and perimeter.
Okay, Great and then just given the challenging and foodservice due to the unprecedentedly environment can you talk about your ability to convert.
From your food service supply into the grocery retail channel and some other things you've been doing on this front.
Sure.
Yes early on it I mean, we had our retail team collaborating with our foodservice team and where there were opportunities to re pack products.
We certainly took advantage of that.
Permit ease some of the labeling requirements, which was which was a positive as we were able to move more products into the channel.
But then the demand was so great. We had a number of retailers who were less concerned about maybe the retail packaging and just wondering product available for shell. So we we started to sell foodservice pack items into retail channels as well so it's really been.
A little bit of everything in terms of converting some food service lines into retail moving foodservice product into retail.
All with this idea of how are we helping retailers meeting the increased demand.
Okay, great. Thank you so much.
Your next question from Ken Zaslow.
Bank of Montreal.
Hey, good morning, everyone.
Okay.
When you load from the new.
Hi, good 19, environmental or the new normal however, you want to put it.
Well hormel earnings will be stronger or weaker or the scene in what financial measures we think about.
When you emerging.
Premium.
Yes.
Great question Tim.
Thank you.
When you say when near emerge.
Clearly you have to take out the you know the next few quarters just based on the uncertainty that we talked about and really the industry is talking about three approach from our perspective.
Our thinking.
So two plus years out.
And what we are really confident in.
Is this balanced model that we've intentionally and purposefully built and talked about tirelessly.
Over the last number of years and it's so important because it really allows us to meet the consumer wherever they choose to go and so in the midst of this crisis, obviously foodservice operations shutting down so the consumer behavior was force.
They had to choose parameter center store and we were their front and center by center store parameter.
Deli E Commerce, and so we feel really good about the built balanced business model. We've we've created.
The other thing that we feel really good about is the way that we've been able to provide value variety and versatility across this entire portfolio.
So again as the consumer the falls out of this crisis.
Where are they going to go with the number of unemployed.
Americans now value is more important certainly in the shorter term than it's ever been.
Were there.
And then if there is a consumer trend that emerges in the big way that maybe we're not competing in today. This balance sheet that we talked about that Jim Jim Sheehan reference you to really allows us to quickly pivot and become competitive either by building or buying.
And so I mean, we remain very bullish on our earnings power over the long term as you would imagine, but I think theres. Some some really good data and support behind why we feel so bullish and so.
Lots of great opportunities in the short term, but we think we're well positioned over the long term as well hopefully hopefully that's helpful. Ken.
I guess one thing.
One thing do you think the cost structure will increase in the permanent and.
Food service loses say two to 500 basis points, you will better position or wounds position I guess in Cleveland.
And you also mentioned.
You potentially taking a more debt for strategic opportunities what does that means so again I get the three or four part question ill leave it there.
No I mean, it's a great question, but again its.
So.
Foodservice does have a permanent decline.
Where does that business.
Right and so there's a good our grocery products organization as are going into more fresh me.
That part is still real really too early to tell in terms of what is more permanent consumer behavior, we needed we need to see that play out over time.
I think what what we're really trying to say is no matter, where it goes we'll be there to be able to capitalize on I mean, our goal obviously is to maintain and return to the business that we had because obviously, we know that our foodservice business is very competitively advantage.
In terms of.
What we talked about some of the short term financial opportunities I mean, clearly we don't know what's going to happen as this crisis keeps dragging up and so we just want to make sure aimed at where well position not only for our existing business, but if opportunities arise to be able to quickly take if.
Vantage of it.
Good morning Kit Kim you know regarding the debt, we do have some debt 250.
$1 that matures in April of next year, So it's within one year obviously.
Interest rates are very favorable right now we think that there will be an interest in hormel when the markets. So we think that those favorable interest rates will be passed on to us. If we decide to go out there and as Jim said, we want to be well positioned for any effort opportunities that exist.
During this time period and as we come out at this time period to to pivot and take advantage of those markets that they provide opportunities either new markets or existing markets, where we could expand whether by building within that.
That structure or acquiring.
Great. Thank you.
Your next question from.
Sure Galbo.
Think of America.
And im not sure tires there opera.
Later, you can move to the next person in the Q.
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Operator are you able to move through the next person in the Q.
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Hi, yes, it will just be.
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To all the listeners Oakley stand by our operator is having technical difficulties.
Okay Peter Galbo.
Go ahead with your question.
Hey, guys can you hear me.
Okay.
Yes, we can.
Okay, great. Thanks very much.
Welcome and thanks for taking thanks for taking the questions.
Jim Thanks, again for the with the help just kind of in thinking about.
In ways that you source.
I guess I just wanted focusing on on kind of the sourcing of primal.
I think a few years ago, you would given a number that it's around 700 $900 million annually that you kind of purchase externally.
Given basis I, just want me to that that's still a good number and maybe forgetting about kind of the inclusion in pricing you've seen for a moment has the.
Ability to.
Physically secure supply of product at least approve it all from say kind of the end of April through the first couple of weeks and right now have a follow up as well.
Certainly I think thats, what you're seeing as as I said you saw bellies at 267 during the the depth of.
The decline in operations and now they're back at $94 and you're seeing the movement is plants come online and start to understand how to operate at this at this level you're seeing those prices decrease obviously those are market prices.
Right now, we're not doing a lot of buying on the open market the.
Products that were getting through our internal sources and our contracted sources are providing enough volume for us as you've seen will decline in the in the food service industry the demand from suit foodservice industry.
Again, it depends on what items, you're looking for is to too.
How easy they are a very you know a bone in am you can find any place, but again, it's you have to find that operation that has the ability to.
To source, if you're looking for trends. So it takes some work, but we've been doing this for a long time, we have a highly skilled sat staff that have long relationships and I think suppliers, who appreciate operating with hormel. So those relationships have helped us through this process.
You've seen this in the in the beef industry, where you have be fiftys that a bit as high as 326, but as operations have come back online direct 198. So it's.
It's something that you have to be skill that but it's something that we're able to handle.
Got it okay.
Just a second question you know the the retail sales number that you quoted.
Above 16% kind of kind of seems to imply that maybe under ship.
Consumption relative to what we saw on.
Scanner data.
Was there any.
Inventory drawdown on the part of the retailer or some of your distribution partners that we would have seen or is it really that we should expect kind of CRM.
Pipeline, where do you feel so to speak.
Going to third quarter.
So again, it's early in the third quarter, but so far retail business both center of store in the perimeter is holding up in its.
Strong.
From an inventories perspective.
Any inventory retailers had and any inventory that we had on some of the high volume items.
Those are pretty well cleared and you're dealing with all current production levels.
I mean, our IR identifies still really really is really really strong we grew share in a number of categories again, both perimeter and center of store so.
Really pleased about where the where the business is the part that we've touched on in our comments.
We're also really pleased with is our ecommerce business than we made significant investments couple of years ago and.
We're seeing those investments pay off pretty strong growth capturing share not only in brick and mortar, but virtually and we think we will continue to see that as a growth engine as consumers continue to get comfortable shopping online.
Its delivery or click and collect so we would say retail business across the board in store E Commerce, all really strong Peter.
Your next question from Adam Samuelson with Goldman Sachs.
Yes, thanks, good morning, everyone.
Adam So all right. So I guess first question.
We have a clarification.
$20 million, because the lighting costs incurred in the quarter and 60 to 80 million expect incur over the balance.
A year just help us think about where those actually down from the segments perspective.
You can understand on how the comps layout.
Our next year most of those.
So in the second quarter most of that cost came within jobs in refrigerated foods, probably job refrigerated foods at.
At a little bit higher percentage and.
That had to do with some early interruptions and processing that we saw in good refrigerated foods and then it was followed later by some.
Additional.
Safety measures that we talked and to be very honest, we set a priority of employee safety and we didn't do a lot in negotiation with the team time to going up getting the protective gear, taking other actions. We acted quickly so that we could provide that.
Sure in store to our employees.
As we go forward I think that you're going to look at it is too.
The volume of operations and refrigerated foods.
And grocery products will both see a portion of that.
<unk> expense, probably the highest will fall within refrigerated foods, then genio and then grocery products is.
If you think about roughly but.
It's a changing dynamic.
That's what we expect right now, but with the uncertainty that's going on in the and the operations right now it could shift.
Adam I mean, just remember the plant pauses started at the end of Q2 really the majority that we've seen or in Q3.
Jim referenced the lower volumes lower tonnage is.
Don't forget that we've we've paid significant team member bonuses as well so.
The good news is right now all of our plants are up and running.
All that all that makes sense. Thank you guys and then my second question is in the grocery business where.
Hi, this big surge in CF in sales for legacy can business.
For peanut butter, how are you thinking about kind of how much inventory then you can sort of injuries at this point and.
Hey, anything over the edge again later parts of the year and that gets drawn down or do you think that.
In retail sales next to the.
Consume reasonably real time.
We might not be anywhere.
Yeah, I think I talked about a little bit earlier is that.
Early read probably by a lot of companies was that it was stock up or pantry loading.
But what we have seen is again not only the new households, but the strong repeat rates. The velocities are good and even the new buyers. There is a good new buyer repeat.
And so.
Are there some brands are some categories, perhaps and I think our big brands. When you think about skippy anything about span when you think about hormel chili.
Those items seem to be really clearing not only the retailer, but obviously the households as well.
And so what does that mean for later in the year.
I don't know that it's as much about the brands and how much they have in the pantry as much as what happens with that consumer behavior.
As foodservice, perhaps starts to open up a little bit more and is there pent up demand as consumers they don't want to.
Don't want to be eating at home and they want to migrate to foodservice operations that that's the uncertainty that that were thinking about and talking about.
But as far as the grocery products business and the lift in sales and the repeats we've been really really pleased.
Okay Thats helpful color at some point.
Thanks.
Okay.
We'll go to your next question from Michael Webber with Piper Sandler.
Good morning, Thank you.
Good morning.
Got it.
31 follow up to Ken's question I understand your thinking on.
Capital strategy and the debt can you give us a sense of how actively you might be pursuing things like M&A.
Yes, I mean from from our activity level and how active we army Nothings Nothing's changed I think the big changes what's happening in the marketplaces.
Just a lot of organizations have really had to hit the pause, but so.
Yes, I think we continue to.
Get a number of different processes evaluate opportunities.
But clearly the market itself is not as active as it was so.
Well, it's really hard to read when that will pick up but I mean, we're continuing to be very active process that we always have.
Okay. That's helpful and just on the export.
Outlook can you give us a sense of what your expectations are there.
Any political risk you think there is of.
We're going to China, especially if there would it be any instances of of shortages here in the U.S.
Well, the ustaĊĦas expecting exports to be greater than 10% is what their outlook is.
As we've had an interruption that operations I think it's it's.
Added some.
Concern about whether we'll be able to meet that that level or not but I think there's still a demand for pork.
From the United States to be exported out.
Political activity I guess I'll pass on.
That's really hard to tell I mean, obviously, we've seen a lot in the technology space.
Yes, if people need to eat so thats really kind of hard that's kind of hard to predict.
Okay. Thanks very much.
Okay.
Your next question from Robert Moskow with.
Please.
Hi, Thank you.
Thanks, Good luck.
Trying to do a better job.
Forecasting.
Your grocery good vision and looking at our retail tracking data.
Dictated sales up 40% just for that division alone.
And you see I know you've said that.
We cannot tracking is doing really well.
But it isn't ready.
Right you don't want to give us exactly what you hire I'd tell you it is.
Very helpful.
As we try to.
Generally your shipments to your retail tracking student so that we don't overestimated.
Touching all around on it.
For any reason you don't want to give us like total number for that was pretty good growth. It should we be as big for us to forecast from cell sites.
Yeah, I mean, Rob I guess, we're not we don't have anything that we don't want to tell you about.
Many of our businesses I mean, I guess our position is now are all of our grocery products state I mean products data.
Our retail data in general is really really strong.
So maybe we can help you do a better job of predicting it might be it might be worthwhile in your follow up call with with May tend to maybe get into a a little more detail just so so we understand and make sure we're talking the same way but.
I said from a broader sense.
Our retail business has been really strong across the board.
Well, maybe I'll follow up its way you said that your retail shipments are up 20%.
And with your higher Iraqi data data.
<unk> said.
Our data would indicate whether or not.
Yes, I mean, we've got obviously, some some non measured channels in there.
And I think again empty it better.
Probably a better for you guys doing nascent and I'll walk through maybe channel by channel just so you get to a better number.
Okay.
My follow up actually is on.
The Aussie facility I thought 40 that your facility would get some of the excess.
Like Hong from other facilities nearby that enclosed entirely.
And could actually have pretty strong margins.
To resolve that just kind of making too many assumptions or it's not possible to get extra volume from.
Okay plans, you're buying a close.
Well the.
The facility.
Really.
A few interruptions during the during the quarter.
We harvest at all of our contracted hug. So our first first obligation or to the producers that we have long term contracts Swift and long term relationships with so.
No.
We have harvested on Saturday, we take these decisions about when we.
When we operate the plant as to whether its best financially to operate the plans for periods of time.
When for instance, the demand in foodservice was so far down there was no reason at all that you would extend your your processing capacity. So we've managed the plant to the at a very reasonable thoughtful way, while we are not going to short cut our long term relationships that we have with our producers to harvest.
Another another company Sawlogs.
Okay. Thank you for now.
We'll take our next question from Ben the engineered.
Stephens Inc.
Hi, good morning, everybody to actually pre all non for Ben.
Okay.
Just wanted to follow M&A plans.
I know you guys had said Youre your strategy and remain confident that.
On the food service insights on the leasing clearly been strong revenue growth for the company.
Are you seeing any changes in valuations or greater willingness to sell in the marketplace given the sharp drop in demand that we've seen.
Are you talking about M&A opportunities.
Correct, yes.
I have a while ago I mean, typically there's has been a pause.
In that activity and so it's really hard to to make a statement around valuations just because we haven't really seen simi activity. The evaluation evaluation process that we're going through is active and consistent but.
Really wouldn't be in a position to make a comment on on valuations as of yet.
Okay. Okay.
I just wanted to get your take on the performance in the international business.
Which was up quite strong could you just dive into that a little bit more and to help us think about that business.
In the next couple of quarters.
Maybe just as important moving pieces.
Yes, so I think those to says we looked out I mean, we expect the demand for spam on a global basis to remain very strong.
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We also expect export demand for skippy to be strong.
We expect China to continue improve especially in the food service space.
In China, the retail business really remained strong with spam and skippy and our refrigerated products.
Both in store and E commerce so.
We look forward that probably the biggest difference is that continual buildup, the China foodservice business, which we expect to continue to improve as they emerge from from their lockdown.
Okay, great. Thanks for your questions guys I'll pass it on.
Thank you.
Yes.
Thanks.
Our next question from Ben there with.
Barclays.
Hey, Good morning, Chairman, Jim and thanks for taking my question.
Actually wanted to follow up a little bit on on retail and what we've been talking in the past you have to more medium long term targets new product innovation.
It should be good.
Basically contribution from sales of about 16% from innovative products. So wanted to understand within the more refund dynamic within retail channels could you share a little more detail on repeat rates purchases amongst like call it very well.
Automation long lasting brands, such as spam skewed the hormel chili versus the more newer brands will be innovated ones and the integration just to understand how the loss city and the difference.
In the different subcategories is running that will be Greg.
Yes.
Let me start with the probably the first part around innovation.
And what's been really impressive across our organization, even though that we've we've moved to working virtually is our innovation has slowed down at all.
Our teams did an amazing job being able to work virtually on the innovation process.
In fact, I know, it's a number that we usually report that the at the end of a year, but of course, we track it throughout the year and.
We met our 15% innovation goal and so the results that we're seeing.
Our really really positive sellers, just lots of great innovation work being done.
Not only in terms of the R&D process, but being able to get them out in the marketplace, having virtual product showcases virtual cuttings.
And the innovations across the entire entire pipeline, so whether skipping pepperoni natural choice happy little plants.
I mean, you name it the innovation work continues.
In terms of repeat rates.
Again.
Spam has one of the highest new buyer repeats.
And so you know a brand that's over 80 years old as we said, it's probably more relevant today than it's ever been.
The other repeat rates for items like Air Dance Black label Bake. It I mean, all really really strong so again.
Kind of piggybacking on my earlier comments, just very pleased with the retail performance new buyers from you buy a repeats.
In store E Commerce, So just a lot to feel really good about in there in the retail business.
Okay Perfect and then my follow up question I mean, very clear on on the 20 million now under 60 to 80 million.
For the reminder of the year.
Thank you said most of it is just.
This is actually nonrecurring, but I can imagine that part of it must be to certain degree recurring in terms of some of the ppm until maybe the solution. Distancing then you have to do to bear in mind too.
If you could share a little bit in more medium term outlook would you think.
Yes.
Pension cost burden could be.
One.
Once things back to a more normal level, but maybe not perfectly normal level.
Right well I mean, I think the things that will that won't be re occurring over the long term right. So we have team member bonuses that are built into those numbers I mean over the long term, we don't expect those to be read re occurring.
We're suffering from some lower tonnage is implants right now over the long term, we expect that business those businesses to.
Got to rebound until we won't have have that part, but we are kind of have LPP Pos so whether its mass face yields.
Putting up dividers and the plants to make sure that there is that distance that separation.
I mean, those those things are going to be there on a permanent basis, so where right now evaluating which of those costs are temporary and which are more permanent that will there will need to be passed along and so this is again our number one priority.
Has been to keep team member safe at all costs as Jim said, we were negotiating prices we were negotiating supply.
In the second was to keep the product on the shelf, which we've done in an amazing away and then really our third objective as we go forward is really understand what costs are permanent what costs are temporary. So this is all that work in process.
And the one thing that I would point out is that many of these cost or industry costs.
We'll be.
Every every participant in the market are going to have these types of costs. The other thing is.
We have had time to build efficiency around some of these things we've been we've been reacting to putting the the buyers out, let's say and as we have more time to look at lines the social distancing.
And the costs around those will be able to build efficiencies into the model. So what we're trying to do is to analyze these expenses that were just short term expenses and to some degree have to be absorbed.
And then building to more efficient process.
With the way that we will have to operate in the future and we will certainly be able to do that but right now we're just reacting to the changes.
We will get better as we go through.
Okay. Thank you that's going through an understandable. Thank you very much.
Your last question from Jonathan Feeney with consumer edge research.
Good morning, Thanks, very much I was wondering.
It's possible.
Two.
Quantify the effective profit mix, both within grocery products bandwidth and refrigerator.
Because it strikes me, Dave it's possible because I know, what you're making money given product is all over the place when pumps are all over the points, but if you could imagine a 2019 or more normal sourcing environment I'm trying to understand how structurally the products that declined compared to the products. They grew.
Uhhuh in terms of the structural kind of profit you'd expect to making a normal sourcing environment for the purposes. We just looking at where the business comes out maybe a little bit getting a little bit more detail on that I think kids athletic is similar question about the extra who profitability earlier, thanks very much.
Yeah I think.
Jonathan there's some things to consider I mean, obviously grocery products as a really nice margin structure.
The growth that we saw spam.
Rice drives a lot of that.
The other part that makes it really difficult as Jim talked about is this volatility that you see within the quarter.
And so we're still dealing through that and to get to a normalized number is difficult.
Food service piece.
Again different parts of foodservice, we got some higher margin.
We could decrease slides pre marinated you also have elements of that are going be commodity in terms of risks that are going to to barbecue businesses. So.
The same for remember is I mean will as Jim said in a little Billy fulfilled efficiencies and processes, but will also make sure that pricing is adjusted over the long term, there's really two components to consider that we talked about the markets.
We've already taken pricing on certain products such as sale Bacon, that's moved very in a very volatile way. Some products are more CPG like and we're monitoring those markets and then as the conversation. We just had around supply chain costs or we have to understand which are temporary which are permanent which are going to have to be.
He passed along over the long term so.
It is a difficult question, there's a lot of moving parts that will continue to be working on over the months ahead I think one way to look at it is as we move.
Yes, especially around foodservice into a to a more user convenient products, that's going to add value both to hormel and to our approach to our operators.
And.
That clearly seems to be a shift that's going to happen in the food service industry, where there will be.
Less desire to touch those products when you think about our bacon one in some of the other products we offer.
Those have nice margins on our side at all for the.
Entity for the operator to expand their margins too. So we think thats a win win opportunities.
Interesting. Thank you very much.
My other questions at this time, Mr and is I'll turn it back to you for any closing.
Additional remarks.
Well thank you.
On behalf of the team here at Hormel Foods I want to thank you for listening in today in being patient with our technical difficulties.
No. This is an uncommon company with an incredible 129 year history.
We have weathered many storms during those 129 years and we will whether this storm because we were made for this.
I wish all of you and enjoyable Memorial Day Memorial Day weekend, and please stay safe and healthy.
Today's call. Thank you for your participation you may now disconnect.
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Mhm.
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Mhm.
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