Q3 2020 Hormel Foods Corp Earnings Call
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I would now like your turn the conference over to Nathan.
Director of Investor Relations Hormel Foods Corporation. Please go ahead.
Good morning.
Under the Hormel Foods conference call for the third quarter fiscal 2020.
We released our results. This morning before the market opened around 630 am eastern.
He did not receive a copy of the really you can find it on our website Hormel foods dot com under the Investor section.
Our call today is Jim Snee, Chairman of Board, President and Chief Executive Officer, Jim Sheehan, Executive Vice President and Chief Financial Officer.
Jim Snee will provide a review of the company's current and future operating condition.
Commentary regarding segments performance for the quarter and an update on the company's response to the code at 19 condemning.
Jim Shandell provide detailed financial result, and commentary regarding the company's current and future financial condition.
The one will be open for questions following Jim's sheehan's remarks.
As a courtesy to the other analyst.
It yourself to one question.
If you have additional questions you are welcome to get back into queue.
An audio replay of this call will be available beginning at noon today Central standard time.
The dial in number is 8883176 003 and the access code is nine to three.
789.
It will also be posted on our website an archived for one year.
Before we get started I need to reference the safe Harbor statement.
Comments made today will be forward booking.
Results may differ materially from those expressed.
For in client by statements.
[music].
Please refer to page 35, 42, and the company's form 10-Q for the fiscal quarter and April 26.
20, it can be accessed on our website.
Additionally.
Please note the company using non-GAAP results provide investors with a better understanding of the company's operating performance.
Non-GAAP measures include organic volume.
Organic sales and operating free cash flow.
Gosh in on non-GAAP information detailed on our press release located.
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I will now turn the call over to Jim Snee.
Thank you nice and good morning, everyone.
Before we get into the business results of the third quarter I want to take this opportunity to say thank you to all of our dedicated plant professionals for showing up everyday in our manufacturing facilities.
They are the true heroes of our company in this crisis.
And it's been a remarkable to see our chain work together to provide safe high quality food for millions of consumers impacted by the pandemic.
I'm very proud of how all our team members for others to challenge what a sense of responsibility purpose enterprise.
On the very beginning of this pandemic, we committed to putting the safety of our team members first.
I believe this safety first commitment is what has set us apart during a pandemic.
Since we last update you in May our coded leadership team, including operations quality control communications legal R&D and human resources has continued to enhance and refine our safety practices.
They are cleared expanded automated temperature screenings. The addition of horse staggering production chefs and increased training on cold chain best practices.
Our awareness campaign keep calling it out is also helping prevent the spread up the virus elect communities, where we live and work and keep the virus out of our production facilities by outlining the various preventative measures. We can all practice in order to stay safe.
We partnered with the CDC to review our efforts related to cold chain and how we have implemented guidance from the C.D.C.N. Osha at one of our production facilities.
Their review included a multiple day visit to the facility along with surveying employees regarding their knowledge attitude and practices Autoscope at 90.
I'm pleased to what their findings, namely that we had implemented virtually all recommended controls to prevent transmission of Kobe 19.
The survey of our diverse team found that more than 90% of our employees have a comprehensive understanding oh prevention techniques and what to do if they get sick with the virus.
In addition over 98% of our team members surveyed reported that they wore a financial covering went out in public.
These actions are making a difference to stop the spread of cobot 19, and our communities.
You have heard me say Hormel foods is an uncommon company and that has never been more true than it is today.
Our inclusion and diversity guiding coalition is an example of a group that has demonstrated our uncommon culture. During this difficult time.
As we witnessed the social unrest. This summer we knew we needed to take action as a company.
Or else inspired giving platform is our response to this important cost.
As a company that is inclusive and all that we do.
We decided to lead our team members choose how we should launch our new inspired giving program and I am incredibly proud of the partnerships they selected.
15 years selected three organization has to make donations to.
Minorities in agriculture, natural resources and related scientists.
The NAACP legal defense and Education fund.
And you NCF.
These organizations are all helping change the world by tackling a quality and education.
Today, we separately announced a milestone effort in our commitment to education.
We believe education has the power to change the world and access to educational opportunities can lift up people and communities.
Equality and education can be a game changer, and we have decided to take on that challenge.
Try new program called inspire pathways, we are going to make the dream of a college education available to that children of our team numbers.
When you think about how a college education can change alike.
Started a ripple effect that will be felt for generation is that the change maker Hormel foods wants to be.
We will be finalizing the details over the next several months, but beginning in the fall. It's 2021 Hormel foods will provide for every graduating senior who is the child of one of our employees the opportunity to attend community College on us.
Program is one of a timed and truly on column.
I'm excited to see the difference these cheer new programs inspired giving and inspired pathways well make in our communities.
Turning to our business results. This quarter, we delivered record third quarter net sales as three of our four segments delivered sales growth.
This achievement is a testament to the strength of our brands the dedication of our supply chain teams and the balance across our business.
For the quarter volume increased 4% and organic volume increased 3%.
Sales increased 4% and organic sales increased 2%.
Before I get into the segment results I would like to provide some channel perspectives as each of our domestic segments have exposure to the retail and foodservice channels.
Total retail sales increased 19% during the quarter with straying from virtually all of our brands.
In many categories, we were able to once again capture market share by outperforming our competitors.
According to IRI during the quarter, we grew share at approximately 60% of the categories, where we are the number one or number two brand.
We also saw tremendous growth in E commerce, including direct to customer and online grocery pickup and delivery.
During the quarter, our track purchases through IR I were up over 100% and our brands continue to outpace category growth and capture market share in many categories.
The investments we have made into our E commerce capabilities are having a very positive impact on our performance in this important channel.
Throughout the pandemic were brought millions of new households into our brands.
Using a combination of biraj data on shelf availability data customer research and data science, we are gaining deep insights into the number of new consumers coming into our retail brands along with their demographics behaviors and assessment of whether they will stay in our brand.
Franchises over the long term.
Well, we know it sounds reasonable to retain 100% up a new consumers as brand stewards. It is our responsibility to keep as many consumers in our brands as possible.
Well, we are seeing a rebound in our foodservice business as restaurants reopened and pipeline is refill.
Total sales in our foodservice channel declined 19% compared to last year.
So many pay trends are returning to their favorite establishments. It is clear the industry will be in recovery mode for quite some time.
We are proud to have built strong relationships in this industry at or among the first to offer our assistance to those operators who needed our help to navigate their new reality.
The whole deep competitive advantages in the food service industry.
Including our relationships with operators and distributors that span decades.
A large direct salesforce and a balanced product portfolio.
We also have the advantage of being able to quickly turned and insights from our Salesforce, who are on the front lines and kitchens, each day and to solutions that solve for the challenges and concerns of operators.
Nowhere is this more apparent that in our pre strategy with pray marinated pray cupped pre sliced at a fully prepared product offerings.
Brands like Bacon, one fire Braised, Austin Blues Cafe age natural choice FERC, Jennie O Fantini and the recently acquired settlers brand have created solutions for operators in the areas of convenience safety first such.
Melody and flavor.
For years, many operators has slowly shifted their purchases to these types of products and we believe that Colgate 19 pandemic will accelerate the conversion.
I'm confident our portfolio is well positioned to adapt and grow as the industry recovers.
It is also important to note that this is the first time, our foodservice business has had to emerge from an economic downturn.
During the recession in 2008 in 2009, our direct sales for us expanded their reach to the emerging channels of lodging healthcare and colleges and universities.
This intentional pivot provided significant growth for the next decade.
Today, we are leveraging many of those same strategies with an increased focus on the newest emerging segments.
From a financial perspective, we delivered earnings per share of 37 cents, which is flat to last year.
Joe Shan will provide more details, but I do want to mention that our earnings fully reflect $40 million are almost six cents per share increase supply chain costs related to covert 19.
Looking at the segments grocery products volume increased 6% and a sales increased 7%.
Similar to the second quarter, we saw exceptional growth from nearly every brand, especially brands such as spam and Skippy Air Daz, Hormel, Compleats and Dinty Moore.
Earnings for grocery products increased 36% driven by strong volumes and improved margins due to favorable product mix.
It is clear that brand is still matter and never have consumers relied on established and trusted brands to feed their families like they have during these times.
Many brands within the grocery products portfolio has not only seeing extra ordinary growth, but they have outpaced the competition.
Continuing to invest in these core brands as one of our highest priorities and responsibilities.
One brand, which has seen a resurgence of demand as skippy.
While the entire peanut butter category has seen growth as kids stay at home.
Skippy brand has thrived and outpaced the competition.
We've also launched numerous new innovative products, which are seeing early success.
Skippy squeeze skippy no sugar added at a skippy peanut butter blended with plant protein h. deliver unique consumer proposition.
And our helping extend and grow this iconic brand.
We were pleased to that our Skippy squeeze pouch recently won an award from Food Network magazine for smartest, new packaging for a long time favorite.
International volume decreased 5%.
Sales increased 2%.
Segment profit increased 26%.
Results from our China business were very positive during that quarter, primarily due to higher retail sales for spam and skippy, but also from other refrigerated products in country.
We saw continued improvement in our foodservice business has restaurants reopened.
Similar to the past few quarters the team in China is working through higher pork prices and are taking the necessary pricing actions to offset cost increases.
Worldwide demand for Skippy, peanut butter, and spam luncheon meat was strong which drove higher exports and growth from our affiliated businesses and the Philippines, South Korea and Europe.
The dynamics, we are seeing in the United States are playing out across the globe in a similar ways.
We did see a sharp decline in our fresh pork exports as variety meet supplies were eliminated because of and plant labor shortages stemming from the cope at 19 pandemic.
Jennie O, Turkey store volumes declined 9% and sales declined 4%.
We saw a very strong retail sales led by our Jennie O lean ground Turkey.
This growth has a continuation of the progress we made in rate gaining distribution prior to the pandemic and we plan to advertise against the Jennie O brand in key markets later this year.
While we saw strong growth in our retail business. It was not able to offset declines in our foodservice commodity and whole bird businesses.
Segment profit decreased 67% driven exclusively by the impact from Trey plant pauses and incremental supply chain costs related to co bid 19 safety measures.
This is an important distinction as it speaks to how the earnings strengthen our retail business was able to offset the declines in our foodservice business.
We are making excellent progress in many areas, but the cascading impact of three plant pauses throughout our vertically integrated supply chain had an outsized impact on profitability this quarter.
As such the overall earnings declined this quarter is not reflective of where I believe this business is going.
I'm confident later on the right path.
Refrigerated foods volume increased 8% and organic volume increased 7%.
Sales increased 5% and organic sales increased 2%.
Retail in Delhi demand was led by strong growth from products, such as Applegate natural and organic products Hormel Black label, Bacon, and Columbus grab and go shark Kittery.
Fresh pork sales also increased on strong demand for retail park.
One brand I wanted to highlight as applegate consumers are discovering the applegate brand at a rapid rate as families are looking for options to feed their kids, while at home during that pandemic.
Our offering span multiple categories, including chicken Nuggets, Hotdogs burgers and breakfast sausage growth, we've seen from applegate in the last few months, a staggering and we are investing in the business in order to maintain momentum.
The Applegate team delivered these impressive results even as a battle disruptions in their third party logistics system due to cultivate 19.
And I've had to work creatively to find additional capacity in their supply chain.
The Hormel Deli solutions team has also seen impacts from cope at 19 as consumer shift purchases away from behind the classmates and prepared offerings to pre packaged and pre sliced options.
Strengthen our grab and go offerings more than offset declines in our prepared foods and behind the glass businesses.
We expect this trend to continue as our Hormel gatherings party trays and Columbus branded items provide differentiated at home experiences.
Another brand I'd like to highlight as our Hormel gatherings party trays when the pandemic started we saw sharp decline in sales due to social test and saying mandates.
As always our marketing team went to work to solve this problem.
Quickly repositioning the brand from a focus on social gatherings, among friends to a more family oriented brand message.
Our foodservice business, which represents approximately 40% of refrigerated foods sales saw double digit declines during the quarter.
However, we are very confident that as the foodservice industry recovers our product lines featuring create cooked pre sliced and pray marinated products will thrive as operators look to simplify preparation and reduce handling of products.
As I mentioned in my earlier remarks on the foodservice industry.
It is important to remember that we have been through this before.
The foodservice industry, a well reimagine itself and we are perfectly positioned to support them. During this time.
This past quarter, we successfully integrated the Sadler smokehouse organization into of refrigerated foods.
We received a lot of positive feedback from the prior owners, who credited our team for providing access to hormel foods resources and necessary support during a pandemic.
Early indications are promising.
Especially seeing the ease that which sandlers was able to pivot from foodservice to expanded retail distribution.
I'm personally excited to see how our broader organization is able to leverage Sadler is unique product offerings to deliver innovative new products.
Earnings declined 11% due to lower foodservice sales incremental supply chain costs and losses on strategic hog hedge positions.
Setting aside the offsetting channel dynamics within refrigerated foods.
Incremental cobot banking cost and the losses on the strategic Hog hedges were the primary reasons for their earnings decline.
As we look forward.
For the total company, we expect the fourth quarter to mirror many of the dynamics, we experienced in the third quarter.
We expect continued strength from our retail businesses as consumers engaged with our brands that elevated rates.
There remains a high level of uncertainty as to how quickly segments in the food service industry, such as casual dining lodging in schools will reopen.
Therefore, we expect our foodservice business will show declines in the fourth quarter.
As I said in my opening comments the members of our supply chain team, our heroes and the pandemic. Their tireless dedication has allowed us to meet the high level of demand we are seeing across our business.
In many businesses were producing more product than we ever have to meet the increased demand.
Examples include plants, where we've not had positive kogut 19 cases, our plans for we had excess capacity to meet the surge in demand.
In other businesses factors, such as limited labor availability and short term inefficiencies due to cold that 19 safety measures are limiting our ability to meet the high levels of demand we are seeing.
Further the third quarter as historically, when we built inventories to meet the seasonally high demand in the fourth quarter. However, the record sales in our third quarter.
Has led to abnormally low levels of inventory.
Which further limits our ability to meet demand in key categories.
Jim Shannon will provide more details regarding our inventory levels.
Without compromising employee safety our supply chain team is working to find solutions to increase production through continuous improvement further internal production capacity and by working with our trusted co manufacturing partners.
Consistent with the second quarter, we are incurring incremental supply chain costs related to cope with 19.
During the second quarter, our costs increased by approximately $20 million and in the third quarter, our incremental costs were approximately $40 million.
Yes were primarily related to team member bonuses and half safety measures and lower production volumes.
In the fourth quarter, we expect to incur another $20 million to $40 million of incremental costs. In total we expect our co bit 19 related cost to be between.
And $100 million this fiscal year.
In closing.
I am confident we have the right strategy sound business fundamentals best in class management, and the financial strength to thriving grow in this dynamic marketplace.
We are well equipped to weather the storm and will be stronger because of it.
At this time I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter.
If an update on our financial position and provide commentary regarding key input cost markets.
Thank you Jim good morning.
You heard Tim give a few examples of how uncommon Hormel foods is I'd like to share. Another example.
Early in the pandemic the project Orion team made the commitment to push forward with the go live of the financial system.
In spite of the difficult circumstances, the team was able to fully convert the financial systems to the cloud.
Turning to finance team and deliver a third quarter financials on time.
By doing so.
Ryan team kept us on track to achieve the benefits of this best in class financial system.
These benefits include.
Improved analytics.
Robotic process automation and real time financial data.
Further implementation of the supply chain remains on track and will take place later in 2000 22021.
Net sales for the third quarter increased 4% to $2.4 billion, which was a record.
Higher sales were driven by strong value added retail sales across all segments.
Segment profit declined 3% compared to the prior year as the business absorbed incremental cobot 19 related investments of $40 million and generated lower earnings from the food service businesses.
The earnings worth $203 billion up 2%.
Earnings per share of 37 cents was flat to last year.
Yes, Jason <unk>, excluding advertising modestly increased to 6.6% of sales compared to 6.5% last year.
Higher employee related expenses were mostly offset by reduced travel expenses.
Advertising investment.
The third quarter.
$24 million.
That allocated expenses declined $5 billion for the quarter due to improved return on investments operating margins were 10.5% compared to 11.2% last year.
Margins were impacted by additional investments into the safety of our play of professionals employee bonuses higher operating costs and the impact of operating pauses.
At Jennie O Turkey store.
Effective tax rate was 21.6% compared to 23.6% last year.
Even as these uncertain times the company continues to generate strong and stable cash flows.
Cash flow from operations and free cash flow for the quarter increased 59% and 72% respectively.
Cash flow benefited from lower levels of inventory the third quarter is usually spec building inventory in anticipation of higher seasonal demand in the fourth quarter.
As Jim mentioned.
Due to the significant demand for our products in the third quarter and limiting factors of production of key brands.
Tory levels for unseasonably low as we began in the fourth quarter.
To provide context. The current finished good inventory level is 24% lower than last year.
The segments, most impacted by lower levels of inventory, our grocery products and refrigerated foods.
In July we issued $1 billion of 10 year bonds at the favorable interest rate of 1.8%.
This cash will provide ample liquidity at allowed the business to take advantage of strategic opportunities such as M&A.
We have $250 million a bonds maturing in April 2021.
Our solid cash flow liquidity position and strong balance sheet gives us the flexibility to fund our capital needs, while continuing to invest it long term growth opportunities.
We paid or 360 eightth consecutive quarterly dividend effective August 17th.
At an age of a rate of 93 cents per share at 11% increase over 2000 alike team.
This completes our navy second consecutive year of dividends.
The company did not repurchase shares during the quarter.
Capital expenditures in the quarter were 88 billion compared to 67 million last year.
Large projects for the remainder of the year include the Burke Pizza Toppings play if expansion.
But do dry sauces facility and project Orion.
Companies target for capital expenditures in 2020 is $350 million.
Solid market was a 20 year lows during the quarter. This benefit was reduced by our mix of hog procurement contracts and losses on strategic hog hedges.
These hedges or put it over a year ago to proactively manage the risk of higher prices due to African swine fever.
Currently pork industry production is operating at near capacity levels.
According to the you Sta pork production is expected to be 3% higher for the year.
We expect continued lower hog prices given that their TARP.
This environment supports plentiful supplies of pork, though plant disruptions would pose a risk to production volume and commodity prices.
The volatility in commodity values at the beginning of the third quarter negatively impacted margins.
The U.S. da composite cut up peaked in early may at levels that seeing since the PDP virus outbreak in 2014.
The cut out fell nearly 50% by early July.
Bob trophies trim and bellies exhibited similar volatility.
Overall pork true was higher by 21%.
Trim was higher by 38% for the quarter.
These cost of moderated in the fourth quarter.
Selling prices were 9% lower that have remained below last year.
Worldwide demand for Fourq is strong.
Ustašas expected exports increased 18% for the year driven by strong demand from China.
We continue to monitor African swine fever in China, Southeast Asia and Europe.
Fundamentals in the Turkey industry remain mixed.
Full placements continue to trend lower.
Got any markets rebounded somewhat of a third quarter presby to buy meat prices are significantly below last year.
Over prices are favorable to last year, helping to offset declines in other markets.
Feed costs for the third quarter was higher.
At this time I'll turn the call over the operator for the question and answer portion of the call.
We will now begin the question and answer session last quick question in the press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Ben Your of Barclays. Please go ahead.
Yes, good morning, Jim and Jim and first of all congrats on the results and on all the initiatives you're announced especially one on education and think this is this is a very good.
Where you're supporting your workers.
Now I wanted to dig a little bit into what you've said about the inventory levels and declines here and what it means cope with fourth quarter. So.
Thanks for sharing a little bit of detail already in the prepared remarks on.
The impact words, mandiants within grocery and refrigerated foods now how do you think this is going to impact your ability to supply the demand into the fourth quarter, which usually obviously has has an impact and then an uptick in sales so just to understand a little bit.
What might be hibbett. It in terms of both sales and what might be the impact if demand remains strong and particularly retail channels as we've seen.
Would be my one question. Thank you very much.
Yep.
Thanks, Thanks for the comments, we sincerely appreciate them.
In regards to via the business question around inventory levels really.
As we've said multiple times in the comments here are the supply chain team since the start of this pandemic has done a ROIC work to me increased demand.
And really what we're trying to convey here is as we think about what happened and Q2 Q3.
As we had more.
Happy initial outbreaks and we had planned pauses and more significant disruptions to the supply chain. We did have inventory as a buffer and were able to continue to fulfill orders as we were working our way through the initial stages.
Over the course of those quarters, though and we import we've heard that inventory and so now as we head into the fourth quarter I mean, it's going to be very important Paramount. If you will that we keep our supply chain operational and like I said the teams done a great job.
But we can't afford any disruptions and although we're not seeing the level of outbreaks of cobot cases, and we are still having cases on occasion and those cases can have production impact so.
The team's doing a great job as you heard keeping cove it out of our facilities working with team members in the facilities to make sure they understand the importance, but really it's the messaging that says.
We were able to have inventory as a buffer we really in some areas don't have that now and so making sure that our supply chain and our production efficiencies are where they need to be has got to be critical to meet the increase demand.
And so I mean, if you look at some of the demand that we have met.
Significant increases in pepperoni, Bacon and spam some of our center store items. So we've been able to me that increased demand.
But we just have to make sure that we keep that supply chain in our production facilities going.
Okay very clear and then just the technical one of the 40 million direct in direct cost supply chain disruptions and so on can you break that out on on a segment basis, just to understand where but majority was impacting is it.
Those refrigerated foods, but also Jennie O how much would impact that you have there because of some of that.
And Pos is that you had.
Yep.
Gerardi FM majority of those costs for in refrigerated foods, and JOTS and obviously in our comments, we are pretty specific to talk about that that outsized impact if you will in shot so.
Thats, probably the right way to think about it.
What I would add to that.
Because jobs is vertically integrated.
The impact on on jobs, not only us and the products. They fell in the availability of that product in their production lines. It goes all the way to the growth side.
Yes, okay.
Okay very good I'll leave it here congrats again, thank you. Thank you.
Next question comes Rupesh.
Hi, Mark. Please go ahead.
Good morning, Thanks for taking my questions and also congrats on nice quarter.
I guess I wanted to go back to John Yes, It really profitability was challenged during the quarter are we now passed the plan pauses or is that still and ongoing headwinds and then just curious just any thoughts in terms of how you see that profit recovery on boarding per year for jobs.
Yeah. Thanks fair, Thanks, great product.
So we havent had any any plant pauses since the beginning of the third quarter and and we continue to to bring labor into the plants I mean, that's a key ingredients and making sure that we can run the harvest facilities.
Those three plant positives that we had in Jennie O, Turkey store and the costs associated with that had a big impact Jim just mentioned that it goes all the way back in the vertical supply chain.
And when we can't harvest birds, but we have higher life production costs through higher feed.
And then other issues so ill on on me supply chain side Bank Big impact.
But as we think about the dynamics of that business my comment about why I feel good about it as well we saw that benefits of the distribution that we had regained.
Pre cobot 19.
Now, we understand the impact of consumers and ill go and eating at home more but obviously, we had to be on a shell for them to be able to find us. So the distribution gains that we had we benefited from.
We did have a negative impact on our foodservice business, especially early in the third quarter ale like our Hormel foodservice business, we've seen some recovery the Jennie O, Turkey Star Foodservice business as a little more skewed to schools and they have the impact of K through 12, and we're trying to understand.
How that plays out this semester so.
I mean, all in all it really is sale tobin related costs that negatively impacted the business. We feel good about the retail side, we've got to have recovery in the foodservice side, but everything that we put in place pretty poll of it is playing out and Thats why were optimistic about the business heading into the future.
Okay, Great and I guess my one follow up question just on ecommerce you guys had very positive commentary in terms of what you're seeing in ecommerce both direct to consumer in the clicking collective earlier consumers from Ram perspective, where are you seeing the most strength right now and is anything surprising in terms of where you are seeing restaurant.
Yeah, we were pleased with that because we thought across the board we saw it in a lot of our refrigerated of products and also in our and our grocery items. So it was skewed to any one one brand or product line really good balance across the portfolio.
Great. Thank you.
Next question comes from.
The new.
Please go ahead.
Hi, Thanks, good morning.
Taking questions.
Yes.
I've got one for Jim Snee, and then one for Jim Sheehan, Jim Snee I'd be curious to hear your thoughts on what impact if any there has been term covered on the product innovation cycle. You noted some of the call outs around.
New packaging for Skippy, you all had a pretty successful heritage of new product innovations that have driven incremental market share.
Oh is colder than the operational heavy lifting that you have.
We're seeing that innovation cycle out or are you still making headway on on that front.
Great. That's a great question, Ben and I will tell you.
We are making great headway on that front reference the this skippy products that we're bringing into the marketplace and having some really good early success in multiple items.
I just recently had an update on terms of the pipeline that that is coming this fall and I mean, it continues to be very strong it's exciting.
So on trend and our customers are looking for that innovation. So.
I have been really really impressed with the work that our innovation team, which of course encompass as so many other functional areas has been able to do.
Remotely at the other thing that I would mention and what we talked about it I know on our last call I don't think we mentioned at this time, but we continue to track at our 15% goal in regards to innovation and so.
In the midst of everything else that's going on we Havent lost sight of the fact that innovation as part of our life blood and something that we need to continue to deliver to drive the company forward in our our team has just done at amazing job responding.
That's great Okay. Thanks, Jim Sheehan.
We called out some of the color around your hedging strategy for hogs makes perfect sense in light of what 2020.
We're supposed to look like in light of African spine Tiberend pretended for hog prices.
Would you expect with your current hedge book would you expect continued headwinds from Hong hedges in the fourth quarter in light of home prices still being down pretty materially.
Does a good morning dead, but as I said the.
The hogs.
He had a 20 year low during the quarter and obviously, our hedge positions, where we thought were favorable but anytime you take hedge position, you're really mitigating the risk and not trying to time, that's our strategy.
We look at at purchasing hogs.
On a balanced model that has some on the open market some on the western corn belt Salon.
The composite value and utilizing hedges so the hedges will be a headwind as we expect hog prices to be continued to be down.
You know production has backed up a bit during the time period that there has been some some pauses in production but.
Again, it's a balanced bottling as we've looked at our hog cost startup costs were still down 20% compared to the prior year. So.
It takes an approach that is.
Is viewing both the future in the current circumstances.
Understood Okay, great. Thanks, Hello.
The next question comes from Michael.
I understand please go ahead.
Thank you good morning.
A little bit more color on.
Foodservice channel splits you gave us really helpful. Maybe just some of how that progressed over the course of the quarter and what you've seen sense in terms of just the momentum or or volatility around that.
Sure.
Early late second quarter early third quarter.
Yes, thanks Bye.
That we saw in our foodservice business and.
Early in the third quarter, we started to see recovery.
The businesses was on a very nice trend upward trend and as we started to see.
You know more cobot outbreaks around the country.
What happened and it actually was was kind of nice to see as we saw the business or the recovery kind a plateau.
So ill at the outset, what we saw was that initial significant decline in the business and what we saw this time with some of the outbreaks.
With that the business maintained the level. It was added just plateaued. So it didnt continue its recovery and now.
We are starting to see a bit more recovery as different states do get under control.
But I mean that the fact is it still significantly behind a year ago.
For us it is all about what has foodservice look like in the future how does the industry reimagine itself what are the emerging segments.
That will come from this.
We do believe that that food away from home is just such an ingrained behavior in our society that it's going to continue in some way shape or four but it probably will will look different for the foreseeable future.
Okay. That's helpful. And then just on the M&A I want to follow up on your prepared remarks, you, obviously mentioned it as and when you consider your balance sheet is great for that and there's there's nothing new there maybe just was a little interested that it stayed in the prepared remarks or is it getting mentioned.
In an environment like this where it looks like it feels like it could be more difficult to get deals done is that not your sense or is there some.
Better amount of activity there you're doing then it might seem with just the disruptions and some things remote and everything else.
Yes, I think the key takeaway there is again go back to the early stages here you had so many companies. So many people just really trying to figure out which way was up and so the idea of having M&A activity was not at the top of anyone's lift it was about really running running the day to day Bill.
Yes.
Thank you thats moderated a little bit and people have figured out.
Maybe a little bit of what a new normal might look like.
Areas there are more conversations there as more interest and I would tell you that at.
The communication is picking up a little bit so.
From our perspective.
We believe that were we continue to be in a really good spot with the strength of our balance sheet, Jim Jim talked about our debt offering when we did it why we did it but then also what that could mean for us down the road so.
We we continue to value M&A as an important part of our growth strategy growing forward.
Great. Thank you very much.
The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, guys Okay.
Good grocery sales seemed a little lighter than I would've expected.
How much of that is reflecting in the demand side versus how much is it operational inability to get the prior to the consumer.
Well the retailer and then on addition to that is.
When you're looking at your inventory levels in your harder ability to get to the retailer what are the longer term implications on shelf space.
And your relationship in terms of shorting customers given the demand.
Sure I'll I'll answer both of those Ken and now Jim as any inventory follow up I'll, let them do that.
As you as you think about grocery products I mean the core.
Right spam and Skippy, the Chile, the Dinty Moore.
All of that business was very very strong and are able to meet that demand probably that that gap, you're describing and we had a little bit of this I believe in the second quarter as sale this offset by food away from home and contract manufacturing so the food away from home exist in our Megamex.
Business and that like our Hormel foodservice at our Jennie O foodservice business.
It was down and then we also saw a decline in our contract manufacturing business. So as you think about that Delta. Those are those are probably at the two pieces that would would lead you to that that underperformance comment, but I mean from our perspective, our legacy or core grow.
ECS business was was really really strong and even our megamex business was sale was up but we did have a negative impact from their food away from home business.
On the inventory piece I mean that your comment as well made that al if over a long term, you're not able to supply a customer there theres going to be ramifications and heavy and we're not in that position I mean, we're able to to meet and maintain our shelf space with our with our customers.
And going back to my earlier comments the whole the whole comment around inventory is just that its shifted ray we don't have that as a buffer. So we do need to make sure that the operations are are running as efficiently as as they can so yes, where as you would expect and I'm sure.
You are hearing from others wearing a constant dialogue with with retailers in terms of making sure that where were meeting their needs. They understand what our situation as and and certainly we're not going to put any of our business our shelf space at at risk Ken The only thing that I would add to that is that.
As you think about the inventory decrease.
The decreases don't all have the same impact for instance, we know our foodservice business is down so we're purposely decreased our foodservice inventory so that we could reallocate resources into the retail production.
So the supply chain is doing that's all the time and there were trying to meet every need we can so there are some there are some areas that are not going to have much of an impact because they're short such as some of the areas of foodservice.
And my follow up just a clarification.
On the turnkey business is everything working now and we should be thinking more normal margins at this point relative to whatever the industry is or is there still operational.
Legacy issues I, just didn't understand the commentary and I'll leave it there I'll have happy to clarify that I mean, the plants are all up and running.
I think from an industry perspective, I mean are our margins our business are always a top of the industry. We do continue to have higher covance related costs and so ill pp.
You know some of a some of the labor issues that would lead to lower volumes lower overhead recovery.
I mean, those are still there as we progress in the quarter, but I mean, the plants are our cell running we havent had any positive since the beginning of a quarter and so the retail demand, especially in a lean ground, Turkey area really really strong foodservice business recovering, but still trailing last year.
Jim I don't know when added an issue you know again with being vertically integrated.
As you've held birds longer.
There are heavier birds, they don't perform as well.
We're starting to move through that inventory, but thats why the impact on Jennie O has a longer tail then into areas, where we're not vertically integrated.
And could you clarify if the plants were running what.
Operating margins would have been and I really we'll leave it there I'm sorry.
Yes.
No.
Can you.
You can have that offline with with maintenance are seeking to do a more clarification great. Thank you guys.
Thank you.
The next question comes from Tom Palmer of JP Morgan. Please go ahead.
Good morning, Thanks for the question in the refrigerated Foods segment price mix was down pretty meaningfully.
Wanted to better understand to what extent this reflected upload through of lower industry commodity pricing.
Whether mix such as the higher from Fourq sales retail were a factor and then as we think about.
Fourth quarter might play out on pricing could proceed, especially considering that it sounds like supplies admitted to constrain right now and some pricing we're at least pullback in promo could make some sense.
Tom.
As you look at the sales that refrigerated foods, they certainly were impacted by lower commodity prices.
Volatility, but but the prices generally were lower.
As you look at the.
At the various items for instance, even bellies, it's it's AD.
Volatility, but it into closer to the.
Below last year was below last year. So that's certainly had an impact in the.
In the sales prices in refrigerated foods less than a months.
And as you think about the fourth quarter I mean on the.
Markets I mean, it feels like all of the supply plants are running at very solid levels and in though.
The supplies are going to be adequate going forward. So would expect more of the levels that were seeing right now.
Okay. Thank you and I guess, just a follow up on.
The co Packers.
How do you see margin overhang going away over time is it driven by over the next couple of quarters, taking certain products in house or is it more that that.
Demand.
The increased demand for products start the essentially that the co packer issue solves itself. Thanks.
Yep.
So Tom just to just to clarify I mean, we have already a very well developed and trusted network of co Packers co manufacturers that that support different areas of our business.
I guess, what what we were saying is as we think about.
The need to continue to me increased demand and make sure.
That we have the right appropriate risk mitigation.
We are finding ways to expand the capacity with some of those trusted co packer. So.
It's really less about bringing it back in house, it's more about finding those opportunities to expand the supply side of the business.
Okay. Thank you.
The next question comes from Heather Jones, and other Jones Research. Please go ahead.
Good morning, Thanks for taking the questions.
Just have a couple of quick ones.
On Q4, I just wanted to make sure I understand correctly, Jim Snee, you're saying that if your plants run well you should be able to sustain the sales gains you saw in Q3, you don't have the inventory buffer, but your plants are running at higher capacity I understand that correctly.
I guess, what we're saying they're Heather.
Yes.
I mean, we know that theres going to be increased demand and continue to be increased demand and to meet that demand.
We have to have our plants run as efficiently and effectively as possible.
Because we don't have that safety stock to drop of so I think where I think we're saying the same thing.
Okay Perfect and then the second thing is yields you all mentioned the.
Tax from.
Talk hedges that you put in place last year, but then some lower cash cash hog prices so for the quarter.
I understand you correctly and I think this is.
From CMS comment I understand you correctly, though that net net even of the hedge impact that hall costs were more favorable Q3 than they were in Q3 of 19.
Thats correct other.
Okay perfect. Thank you so much.
Thank you.
Next question comes from Peter Gullible Bank of America. Please go ahead.
Hey, guys. Good morning, Thanks, Thanks for taking the question.
Jim.
Just as we're thinking about foodservice out over the next couple of quarters, you guys have a large direct salesforce rate that they probably have more touch points.
With some of your restaurant customers, maybe in some of your competitors.
I guess the question, we're kind of grappling with this point in the weather starts to turn maybe people go or force to go back inside outdoor dining isn't really as much of a possibility.
What are some of the high level conversation that your salespeople are having with customers at this point that you'd be willing to share with us.
Sure that I mean, thats, a great question and that is certainly a risk.
To to the next couple of quarters, but but I think the other part that we've seen Peter as you know so many restaurants have become so much more perficient at at take out right. I mean, it again as this started take out was not a big part of the foodservice.
Operators ammo.
I mean summed it up better than others, and clearly had drive throughs I get all that some of that casual dining locations. They had as an option, but it wasn't a variable developed option, but I think it's fair to say that operationally from a packaging perspective. So many foodservice operators have become so much more better so much more profile.
With that and then I go back to this idea.
Of how does foodservice reimagine itself and so this idea that that over all these years. We've developed this behavior of food away from home and now that's just going to I guess at a went away for a period of time, but to think that it's going to go away for ever just seems to be a bit of a stretch.
If you ask me so I do think that food prepared away from hall.
Going to continue to be on everyone's radar and I think as more and more especially casual dining segments get comfortable with to go takeout.
That's going to continue to be an opportunity we also.
You know our are seeing and working with operators on different grab and go options. So not just for that you bring back into your house, but but as you think about ill where individuals with maybe want to go and sit and have a meal.
They're not doing that it is more of a grab and go and so everything that we have in our portfolio that we described around all of our pre options sets us up really well to take advantage of that as foodservice continues to reimagine itself. So.
And our direct Salesforce as you mentioned is going to play a critical role and making sure that we understand that were on the front end up this reimagination, it's going to be really really important for us so I.
I mean, those are those or some other conversations we're having.
But I mean, it's still this has got to be a work in process, but we feel good about where we're adding in the cycle.
Okay now that that's that's helpful. Thanks, very much and maybe just Jim Sheehan a quick one just you're kind of a month ended the quarter at this point you saw that.
Pretty wide range on the Colby costs for the fourth quarter, just what would drive you to the high the high end versus the low end of the 20 to 40 million. Thanks very much guys.
The.
The issue that would create the highest cost would be a play a pause.
The fact that.
We talked about this I think even last quarter.
Every day, we're getting better up running our facilities under the current structures in the current cost base tricks that we have.
And we'll be we were better at the end of the quarter than we were at the beginning of the quarter in the end of the fourth quarter will be much better. So we continue to improve and we address these costs.
But there are real cost of they are there.
So we're building efficiencies that their record if theres a plant pause that would have the biggest risk of increasing our costs.
The next question comes from Adam Samuelson Goldman Sachs. Please go ahead.
Hi, yes. Thanks, good morning, everyone appreciate and of me squeezing me in.
So my question is you thinking wrapping all but a lot of grand covered.
The comment on the fiscal fourth quarter kind of mirror the dynamics of the third quarter.
I'm, just trying to translate that into an operating performance a little bit and.
Is that intended to reflect.
Sales and year on year sales in EBIT in are you you're on your margin performance would look similar absent kind of substantial change in Nicole good.
Outlook or just help me think about kind of what that actually means as we think about sales margins.
And your business.
Yes, so Adam good morning, I guess I'll take apart from a sales perspective, and so when we say similar dynamics to Q3, and we're thinking about continued strong retail demand both from grocery products refrigerated foods and shots.
Still experiencing recovery and the foodservice businesses and.
A reminder, that they're a big part of refrigerated foods and jot. So we have continued to work to do.
Our international demand is strong across most geographies, we expect that to continue.
As I said earlier from a supply chain perspective ill not having outbreaks, but we continue to battle on that production of front as well as as we do have individual cases and that can create production challenges.
Well, we've talked about the safety stock as a buffer and the need to have supply chain hitting on all cylinders and so thats. When we say you know the dynamics are similar to Q3 I mean, that's how we're thinking about it from a demand at a supply perspective.
So hopefully thats helpful to you.
It is in Asia last quick one the $80 million to $100 million of covered related costs, the you're expecting to incur in fiscal 20, you have any rough idea of.
What that could look like in fiscal 21, I imagine there's a portion of that bonuses that you wouldn't necessarily plan on.
The PD.
Yes, we don't have we don't have an estimate on that for 21 yet.
You know we.
We're or starting that whole process and how we're trying to get a better read on those that are permanent or longer term and those that are temporary. So we don't we don't have that today and as soon as we get more clarity on that will pass that along.
Okay. Thank you.
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The last question today will come from Robert Moskow.
Credit Suisse. Please go ahead.
When an honor to be the the wrap up question Okay.
I believe or not it's still about inventory levels. So.
One point of clarification I guess.
Last quarter.
I think.
What we what we learned is that maybe 20% of the grocery division is contract manufacturing.
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We're also.
Some alternative channels that.
Our not growing within grocery so is it fair to say that that's the that's the reason why.
Your grocery division has not demonstrating the same level of growth.
Most of us see in Nielsen measured channels have at retail.
It's.
I have become a figuring out whether retailers reduced inventory or not it sounds like the really didnt.
Third quarter.
That's really the difference between the Nielsen measured and Lucky reporting here is really get the alternative channels.
Yes, that's right Rob first I'd say, it's always an honor to that cleanup. So we're honored.
But you're right I mean, we do have that delta in grocery products that is that the food away from home that say Megamex and then the contract manufacturing that I know, we talked about last quarter.
And so that is that as a delta.
From a retailer perspective, I mean, where you have seen anything significantly different in terms of what what they're doing with their inventory levels.
Okay got it so it's not like we're going to have a big retail in the October corner.
[noise] related to the fall season, or anything like that will ship to consumption.
In the fall in the October quarter.
Is your expectation.
Exactly okay. Okay, and then last question on refrigerated.
I think your commodity costs.
They are down.
Do you use to give us fresh pork.
Profits in the past when it was kind of normalizing lower so our first port core profit is higher in this quarter versus year ago as a result of those costs being down.
There are actually relatively comparable.
Comparable yes, they're comparable because obviously the there's been so much volatility.
In the markets I mean.
It's just been while bellies were low as low as 89 and as high as to 67 and the timing of when you're buying that winning wittner selling just could have fun played havoc on that so Rob this is.
Fresh pork is probably the most this isn't the best quarter to measure profitability of fresh pork, but it was in the range.
Okay, and when you're talking about fresh pork, you're talking about also including those hedges as well.
Favorable in the quarter right Thats true.
Alright. Thank you very much yep. Thank you are up.
This concludes our question answer session I would like to turn the conference back over to Jim Snee for any closing remarks.
Well, thank you for joining us on our call today, one of our cultural beliefs as results matter and as you heard today, we delivered results.
We delivered results in many areas we delivered results in our business, we delivered results and keeping our team members safe and once again, we delivered results as a great corporate set us up.
So our team members lessening out thank you for all year to stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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