Q4 2020 Hormel Foods Corp Earnings Call
[music].
Welcome to the Hormel Foods fourth quarter 2020 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask the question you May press. The Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over the Nathan and as director of Investor Relations. Please go ahead.
Good morning.
Welcome to the Hormel Foods conference call for the fourth quarter fiscal 2020.
We released our results this morning for the market on around.
Around 630 and Easter if.
If you did not receive a copy of the release you can.
And find it on our website and Hormel foods Dot com under the investors section.
On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer and.
<unk> share executive Vice President and Chief Financial Officer.
Jim Snee will provide a review of the company's current and future operating conditions.
Commentary regarding the segments performance for the quarter.
And update on the impact of the COVID-19 of pandemic.
And they perspective on the school 2021.
Get and she and will provide detailed financial results and commentary regarding the companys current and future financial condition.
The while the open for questions following Jim's Sheehan's remarks.
As a courtesy to the other analysts please limit yourself to one question with one follow up.
Yeah, the additional questions Youre welcome to get back into the queue.
An audio replay of this call will be available beginning at noon today Central standard time the day.
While the number is 888.
Free one seven.
003.
And the access code 5831 of the 860 and.
And will also be posted on our website and archived for one year.
Before we get started I need the reference to the Safe Harbor statement.
Some of the comments made today will be forward looking and actual results may differ materially from those expressed and or.
Or implied by the statements we will be making.
Please refer to page of 34 through 41, and the company's form 10-Q for the fiscal quarter ended July 26 2020.
It can be accessed on our website.
Additionally, please note the company uses non-GAAP results to provide investors with the better understanding of the company's operating performance.
These non-GAAP measures include organic volume.
Organic sales adjusted diluted earnings per share and operating free cash flow.
Gosh and on non-GAAP information is detailed on our press release located on our corporate website.
I will now turn the call over to Jim Snee.
Thank you Dave good.
Good morning, everyone.
Oh and get into the business results of the fourth quarter.
I want to say, thank you to all of our supply chain and the plant professionals.
They continue to show up every day and their dedication is remarkable day.
They are the heroes and our company during this pandemic.
We remain focused on keeping all of our employees sales.
Regarding our communities through these difficult times and meeting the needs of our consumers customers and the operators with safe high quality food.
With the dramatic increase of cold and 19 cases upon us.
Doubling down on our awareness campaign called keep the co of it out.
And various preventative measures are focused on the stopping the spread of the virus and the communities, where we live and work.
And the keeping the virus out of our production facilities.
In addition to our virus mitigation efforts and the safety initiatives and August we announced the milestone effort and our commitment to education.
Our new program called inspired pathways well per.
On slide for every graduating senior who is the child of one of our employees the opportunity to attend community College on US. This program is one of the kind and truly on the comp.
Our team is making excellent progress on the program and we are excited for the first class to begin in the fall of 2021.
We know the application process is a major roadblock to college and mission.
For this reason we are building out of network of mentors and our company to assist employees and their children sort of the college application process.
Ill foods is the change maker and we are excited for the impact. This program will have for our families and all the future of Hormel foods families for generations to come on.
Fiscal 2020 was by all measures challenging.
This year, certainly tested our balance business model.
Coming into this year, we were confident we can deliver record sales.
Never could we have the imagine how it on unfolded.
All four operating segments contributed to the record as each grew sales for the full year.
This is even more impressive when you consider all four segments of sales and to the food service channel, which showed sharp declines due to the pandemic.
An important component to our growth this year was and adventure.
I am pleased to say our team achieved our goal of having 15% of our sales coming from new products created and the last five years.
Even in the midst of the pandemic our team developed launched and through new products sales.
On the items contributing to this accomplishment, our skippy peanut butter squeeze packs Hormel Cup and and Chris Pepperoni share debt salsa across most of his happy little plants plant based pepperoni and foodservice and many other innovative items.
Earnings per share for the full year or a $1.66 compared to $1.80 last year.
This includes over $80 million and incremental supply chain cost, representing almost 12 cents per share.
This is in addition to a 10 cents headwind from the divestiture of Cytosport and 2019.
As you think back on 2020, our experienced team managed through a lot of rapid and unpredictable changes.
We have been through a lot and the last nine months and we have gained and understanding on how to appropriately operate and this and environment, while never sacrificing employee safety.
And in March and April we all witnessed the foodservice industry and collapse on premise dining was shut down completely and most establishments, we're not prepared or structure the handle a large influx of pickup and delivery orders.
Jamie asleep grocery store shelves were emptied due to incredible consumer demand.
We saw raw material markets declined precipitously as demand dropped only the same market spike as some of the harvest facilities temporarily paused operations.
We also put multiple of production facilities on the voluntary pause to protect the health and well being of our team members, while also dealing with our suppliers pausing their production.
It seems like each week set of the pandemic started we had a different raw material ingredient or packaging component shortage to manage through.
As we sit here today, we believe there is more stability across the industry because of the learnings from the last nine months, even as COVID-19, and cases search across the country.
And the foodservice industry.
On the on premise dining is being restricted again in many states operators are better prepared to effectively manage pickup and delivery.
Our supplier community is also more experience and how to handle manufacturing facilities and limited labor situations.
There are countless other examples of improved the stability across the foods supply chain.
But the bottom line is we do not expect there to be the same level of chaos as there was nine months ago.
Looking at the fourth quarter volume decreased 2% and organic volume decreased 3%.
Sales decreased 3% and organic sales decreased 4%.
Earnings per share was 43 cents down from 47 cents last year fully reflective of three cents per share increased supply chain costs related to cobot day team.
Turning to our segments grocery products volume increased 1% and the sales declined 1%.
Low inventory levels and production limitations and certain categories, such as canned meats, and Shelly limited our ability to meet the unprecedented customer demand.
And categories, such as nut, Butters, where we had adequate capacity and labor sales grew double digits.
Earnings for grocery products increased 1%.
The improved results and the categories, such as nut Butters and microwave meals offset increased freight expense and lower earnings from our Megamex Foods service business.
International volume decreased 1% sales.
Sales increased 8% and.
Gross profit increased 55%.
The strong sales and earnings performance was led by our retail and foodservice business in China.
Products like spam and Skippy have shown except channel growth, but we've also seen growth from innovative new items, such as our hormel beef jerky.
This product was launched in the E Commerce channel and as the most successful new product launch and Hormel China's history.
We remain very positive about the long term prospects of our China business.
International demand for Skippy, peanut butter and spam luncheon meat was very robust.
Both our us export business and our affiliated businesses and the Philippines, South Korea, and Europe benefited from the us consumer demand.
The air Turkey store volume declined 2% and the sales declined 6%.
Growth and Jennie O lean ground, Turkey, and whole birds was exceptionally strong.
We did experience declines and foodservice, which was disproportionately impacted by lower sales to K through 12 schools.
Segment profit decreased 21%.
Lower food service sales and increased supply chain expenses associated with Kobe and maintain or key drivers to the profit decline.
The plant pauses and the second quarter, and 10 year to impact performance within our vertically integrated supply chain.
Refrigerated foods volume decreased 4% and organic volume decreased 5%.
Sales decreased 5% and organic sales decreased 7%.
Brands, such as Applegate, Hormel Black label, Hormel fully cooked entrees and hormel always tender generated exceptional growth this quarter.
Lower levels of inventory and production limitations on certain categories, such as dry sausage and of sliced meats limited our ability to meet the unprecedented customer demand.
Our foodservice business, which has historically represented approximately 40% of refrigerated foods sales saw double digit declines during the quarter.
Earnings declined 17% due to lower food service sales and the incremental supply chain costs related to cope and 19.
Looking forward our solid performance this year amid the uncertainty posed by the pandemic along with our balance business model gives us confidence, we can perform well and in many different economic scenarios.
The give you a sense for how we're thinking about the future I'd like to walk through three important drivers to our near term and long term performance.
Great channel dynamics for our brands, our leadership position and the foodservice industry and our supply chain performance.
And the retail channel like most food companies, we have seen dramatic increases and measures such as sales household penetration and by Ray and repeat rate for our retail products as consumers eight more meals at home.
The set of reviewing all of the metrics I want to provide some insight into the underlying consumer dynamics. We believe are important to understanding how hormel foods is positioned to outperform as the pandemic subsides.
Long before the pandemic started we were witnessing a shift away from the traditional sit down and family debt.
Anyone with kids has experienced this.
And many activities not enough time and dinner was whatever could be between activities.
The pandemic brought the sit down the family dinner back.
Sales previously eight and on the go have become family activities and early on were viewed as enjoyable and highly anticipated within the home.
Through our research we recognize that consumers are enjoying the new ritual of eating at home, but want products that are convenient versatile and flavorful.
We have a portfolio of brands that meet these consumer needs. These brands were growing before the pandemic and we believe they will have staying power as the pandemics of sites because they are uniquely positioned to meet the evolving needs of consumers.
Another important trend and retail is E. Commerce, we continue to drive market share gains and our biggest and most important categories as consumers quickly gain acceptance of ordering of food on line.
We continue to shift our investments toward this channel and are excited by the growth we see.
Turning to the foodservice channel, we are committed to the future of foodservice.
We are confident consumers will want the choice to purchase food prepared away from the hall.
As a leader in the foodservice industry, we are adjusting and investing in our capabilities, we are shifting resources to faster growing channels and.
Thing and our direct sales force talent and continuing to support the foodservice distributor and the operator community as they battle through this difficult time period.
We cannot overstate the importance of relationships and this industry.
And the long term competitive advantage our direct sales force provides.
When the foodservice industry of returns to growth and.
And our stand operators will be looking for products to simplify their operations save time and minimize flavor of.
And while preserving the flexibility to add their own unique touch to a menu items.
Products like Hormel Bacon, one hormel fire braised meats Sadler is authentic smoke barbecue and cafe age globally inspired proteins are well positioned to thrive and this market.
Finally, I want to address our supply chain.
And many categories. We have produced at very high levels relative to our historical performance, we have been able to steadily improve our throughput as we learn how to operate in a co pay of 19 and environment or supplement our internal production and with trusted co manufacturing partners.
Yes.
On our third quarter call, we talked about short term supply chain risks, including lower inventory levels limited labor availability and production inefficiencies that could impact our ability to meet the unprecedented demand.
The played out and certain categories and in the fourth quarter.
Production in categories like canned meats, pepperoni, and Chile was kind of strange due to labor shortages, but also because of cove and related changes and our production lines.
Our supply chain team has done an excellent job solving for each individual issue and our production capacity is structurally higher as we move into 2021.
We continue to focus on the health and safety of our employees, which impacts our ability to adequately staff our facilities.
Our cobot 18 leadership team, including operations and quality control Communications R&D and human resources are working tirelessly to keep our team and informed by the.
COVID-19 preventative measures.
We are much better and adjusting through rapid changes and the staffing and we were when the pandemic started and will continue to keep the health and safety of our employees and.
The top priority.
The benefit we have this coming year as additional capacity from the investments we made before of the pandemic started.
Our Burke expansion and innovate, Iowa will open in our first quarter and will give us additional capacity for pizza toppings.
Throughout the pandemic, we have seen sustained demand as pizza continues to be a favorite amongst consumers and patrons.
This new capacity will help us meet that demand.
We will also be opening our new dry sausage production facility in Omaha, Nebraska during the first half of the year.
This facility will produce Columbus, charcuterie products, which is an important milestone in the trajectory of this leaving deli brand.
We also announced and additional investment for Pepperoni capacity. This will give us the right of way to continue growing our retail and foodservice business.
As you consider the various factors influencing our business and our favorable balance across the retail foodservice Deli and international channels. We are optimistic about our ability to grow sales and earnings and fiscal 2021.
While uncertainty exists we do want to give you some basic and insight into how we see the year playing out.
For our retail business and will be hard to replicate 2020 from a sales demand perspective.
However, we do expect continued growth of.
The beer at a slower rate.
Our foodservice, we expect a modest recovery and the industry, but likely not back to 2019 levels. The.
Good day foodservice operators are better equipped to drive growth, even with fewer patrons of physically and their restaurants or venues.
We expect modest growth and our deli business as retailers are more experienced and operating their daily business and a co that and environment.
As a reminder, our deli business exhibits characteristics of both retail and foodservice.
Finally, our international business is poised to continue growing and barring any unforeseen geopolitical issues is expecting a strong performance next year.
Hormel foods has the right strategy.
Our business fundamentals are solid and we are on the sound financial footing.
I continue to be incredibly optimistic about our long term performance, even as we navigate all of the uncertainty co of it as fraud.
As the global branded food company, our balanced and diversified business model positions us to win across all of our key channels.
At this time I will turn the call over to James Sheehan to discuss our financial information relating to the quarter given an update on our financial position and provide commentary regarding the key input cost markets. Thank you Jeff good morning.
Net sales for the fourth quarter were $2.4 billion, a decrease of 3%.
For 2020 of the company generated record sales of $9.6 billion, a 1% increase.
Our balance model proves successful it's all four segments grew sales for the year.
Fourth quarter and full year segment profit declined, 9% and 4% respectively.
The business absorbed approximately $81 billion and incremental cobot related expenses during the year the.
20 million and impacting the fourth quarter.
Earnings per share for the fourth quarter was 43 cents compared to 47 cents last year.
Our fourth quarter results reflect approximately three cents of incremental cope and related expenses.
And one set and losses on strategic cost positions.
Full year earnings per share decreased 8%.
One dollar and 66 of us on an adjusted basis earnings per share declined 2%.
Cytosport contributed 10 cents earnings per share and 2000 and lighting.
Moving the gain on sale.
Yes, gionee, excluding advertising and the expense reductions from the sale of Cytosport 2019 was 6.6% of sales compared to 6.5 per sub last year.
Advertising investments for the year were $124 million compared to $131 million last year.
And the increase advertising on 2021.
Support many of our leading brands.
Jennie O Turkey will be the first Turkey company to have a flow in the 94 year history of the Macy's Thanksgiving Day parade.
On the allocated expenses return to more normal levels and the year compared to the prior year.
Which included the favorable impact of the sale of Cytosport and the legal settlement.
Full year operating margins were 11.5 per cent compared to 12.6% of last year.
The decline was driven by the COVID-19 related expenses.
And the impact from lower foodservice earnings.
The effective tax rate was 18.5 per cent compared to 19.1% of last year.
Begin the executed our disciplined financial strategy. Despite the disruption caused by the end of it.
2020 group.
True operating cash flow.
The record dividends.
Vested and capital to grow our value added businesses and acquired Soundbars.
We also secured $1 billion and debt to provide liquidity at the well the business to take advantage of strategic opportunities.
The company remains sort of position of strength heading into 2021.
For the year the.
The business generated cash from operations of $1.1 billion, an increase of 22%.
The cash flow benefited from lower working capital.
Finished goods inventory and begin the third quarter and up seasonably low levels.
The on demand for our retail items continued into the fourth quarter.
Retail business in grocery products of refrigerated foods are most definitely impacted by this dynamic during the quarter.
You are seeing the gradual improvement and inventory levels.
Throughputs and operations labor availability.
In total capital expansions.
And the increased use of strategic manufacturing partners give us confidence and the ability to expand supply in 2021.
And our 369 consecutive quarterly dividend the effective.
The upper 16, and announced a 5% increase for 2021.
The marketing the 50 fiveth consecutive year, we have increased the dividend the.
The new annual rate for 2021 will be 98 cents per share.
During 2020 of the company repurchased 300000 shares for $12 million.
Capital expenditures, and 2020 or $368 million compared to $294 million last year.
Recently completed and expansion of the FERC Pizza toppings plant.
And the part of nearing the completion of the new try sausage facility of Nebraska.
2021, we will continue to prioritize investments to support the growth.
Of the value added businesses.
Moving a new expansion for pepperoni.
The company's target for capital expenditures in 2021 is $350 million.
The hog market has recovered from 20 year lows due to strong domestic and export demand.
The less da composite cut out showed similar strength throughout the fourth quarter before moderating or recently.
Who sta is projecting domestic production of port to increased 1% in 2021.
We expect talk prices to rebound significantly in 2021.
Continue to have ample ex us dogs of pork raw materials through our balance mix of hog and pork supply contracts.
Wes da composite cut out the is expected to be modestly higher than 2021.
Although the outlook remains uncertain given the surge of cases happening now the.
And as our expectation that over the full year.
The industry operating efficiencies and production levels will increase in 2021.
Labor availability will continue to be a significant factor and the industry's ability to operate efficiently.
We expect and much lower levels of commodity volatility compared to last year as supply stabilizes and demand exhibits less dramatic changes within the year.
Strength of our brands of balanced approach to procurement.
Will be key of managing through this volatility.
Our current markets are expected to decline and 2021, but the value is highly dependent on the pork industries operating level.
We anticipate belly prices will increase from the current levels. This is based on the moderate food service growth.
Fundamentals on the Turkey industry remain mostly unchanged.
The benefit of favorable whole bird and prices lower pulp placements and reduce cold storage levels are being offset by lower breast and side meat markets due to lower demand.
We anticipate lower commodity prices of Turkey, and 2021 of.
On a sustained recovery and the foodservice and just straight would likely benefit of Turkey markets.
The cost is expected to be higher.
Managed the cost through a combination of spot volume derivatives and adjusting the formulas.
We expect to go with the site gene related higher cost structure to continue through the first step.
We expect the majority of the public Thomas to subside as the day and debit comes under control.
Although 2020 whats the challenge and here it is important to revisit the accomplishments related to long term growth and stability.
We've maintained one of the strongest balance sheets across the fortune 500 companies grew.
Total operating cash flow and excess of 20% and issued bonds that were well received by the debt investors.
We use this capital to gain market share and ecommerce and retail support our leading brands through advertising and marketing of.
Achieve our 15% innovation goal.
Invest and value added capacity thanks.
The expand our authentic foodservice portfolio with the sellers acquisition.
And transform and modernize our company through project Orion.
And one supply chain initiatives.
All of these actions will help us obtain long term growth goals, while continuing our outstanding track record of returning cash to shareholders.
And one of the most difficult years, and our 130 year history. We have shown our continued commitment to our employees our communities and our shareholders.
At this time I will turn the call over to the operator for the question and answer portion of the call.
We will now begin the question and answer session to ask the question you May Press Star then one on your telephone keypad.
If you are using the speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thanks, good morning, everyone at a pretty good morning, and so I guess, Jim Jim and trying to wrap my head around the kind of how different moving pieces.
In the outlook on.
And there's a lot of the Utah. The you just gave on on the on the cost side, but and a high level, meaning.
I mean, there is an expectation of sales growth.
On the cost side raw material wise it seems the kind of.
The balance of puts and takes.
A reduction in coal good related expenses.
Potentially step up and advertising.
And then just help me on tax rate and just how many of the other moving pieces I think the bridge from sales to earnings per share the only you're not giving explicit guidance.
Thanks, Adam I'll go ahead, and start and I'll, let Jim.
Finish up.
All of the markets and you're right. There obviously are a lot of moving pieces as we're thinking about 2020 and just like there were in 2020.
Start with the demand of side of the business and I think if you go back to our our channel guidance around and our retail showing growth, albeit on a smaller rate.
Service, having some modest recovery deli business, showing some some of growth and international maintaining its strength I mean, that's the important first piece of the puzzle of the sales.
Second piece of the puzzle for us as the structurally higher capacity and so as we've tried to be and very upfront about it we didnt meet the demands of the business and the fourth quarter and Theres a lot of work happening behind the scenes a lot of it was already planned some of.
If it came to be during the.
Pandemic, but its work and execution that the.
James Spin and accomplishing over that time, and that's why we feel good about where we're going to be from a capacity perspective, heading and into 2021 to meet the demands of the business.
From a from a couple of it cost perspective, and Jim talked about having the.
The same cost structure and the first half of the business.
We need to all understand the.
The vaccine come into play when as it distribute Edwin went on we see broad distribution.
But I think the timing that we've been hearing and have recently hurt is that first half second half window seems to seems to make sense. So.
The demand side and the supply side for US we feel really good about as we head into 20 and 21, Jim I'll, Let you maybe talk about some of the markets or any other financial information on your good morning, Adam.
Your comment about markets be mixed I think of is a fair assessment of how we see 2020.
2021, excuse me the.
The main issue here is that you won't see the volatility that you saw especially in the second and third quarter.
Okay.
2020.
Those periods, we had a drastic decline and the food service demand and then you have plant shutdowns. So that just created the almost a violent level of volatility that we believe will be much more stable.
Of the a much more stable.
The environment in 2021.
Part of the change and the in the input costs for instance, Belize will be dependent on how quickly the foodservice business.
Regained strength, the bellies track that foodservice delay and very closely.
So overall it is a bit of the mix, we see our hog costs somewhat similar to what they were and 2020 and may be slightly lower we'll.
We'll see what that happens so understanding that.
Costs or the western corn belt is forecasted to be much higher but thats not really the basis of of what we see.
Well, we purchased products on the other issue you asked about was tax rate.
We don't see of these significant.
Change and the tax rate of 2021, we believe the tax rate will be between 20, and 20% and 21 of the half per cent, let's use that as the range as to where we expect the at the end up.
Okay. That's the that's Super helpful. And then if I could just squeeze the question and on on Jennie O.
The business has had some challenges in recent years and kind of ex Colgate and I think there was a thought that we might be turning the corner there.
But but now and maybe a and non Thanksgiving or different Thanksgiving, maybe impacting inventories on the whole bird side, just help us think about the trajectory of for the for the Jennie O business specifically.
Sure add on if you go back to Q4 of of last year.
And we really had started to turn the corner in terms of our the strategy that we were building out and rate gaming and lost distribution, especially Farley and ground business and we had a solid Q4 solid Q1 and quite frankly Q2 was was pretty good as well and.
As as total that came into play and dramatically impacted the supply side of the business has for that product also impacting just the the supply chain right vertically subs vertically integrated supply chain that had plant pod and severe of disruption and increased costs now.
As we made our way through that we're still seeing impacts and the supply chain and any time, you backed that supply chain up your kind of have impacts for a while the part that we remain optimistic about into strategy of building out distribution and we still had success with the clean ground, Turkey, the dramatic impact the on supply.
The change has been Jennie O foodservice business like and the Hormel foodservice business significant declines.
There is probably a little greater of strip and they've got to take our presidents and K 12 business, which has been dramatically impacted this year. So I mean, you're right it's been on.
A mixed bag for Jennie O over the last several years, but we feel good about where we were headed create Tibet. We've done all the right sales during the cold and environment and feel like as we emerge from this this pandemic the fundamentals of the business, especially on the retail side our store.
And then we are going to need to see and and recovery on the food and service side.
Okay I saw the helpful color I'll pass it on thank you. Thank you.
The next question is from Peter Galbo with Bank of America. Please go ahead.
Hey, guys. Good morning, Thank you for taking the question.
I guess just the first question you know on on on the retail.
Sales guidance of.
The second growth despite and flow rate.
I guess, we're having a hard time understanding I get on the first quarter, where the comps of kind of continued to accelerate but as you start getting the some of the tougher comps in the second quarter and back half of the year understanding the capacity coming on line could you help us understand your thinking around organically or from a demand perspective why.
And that should continue to kind of grow in the second quarter and back half of the year.
Right and you hit on it on the first half of the year.
I think the.
The second part of your commentary there and that unknown of.
Even though we all have and all of us.
Vaccine and place, but how quickly are you going to see that debt recovery and foodservice and how quickly our consumers going to move back to historic behaviors.
You know I think EPS, it's too.
Too early to tell I mean, we do see that modest recovery and foodservice, but I don't think retail is just going to hit that cliff I think the other part for us and in the back half of the year and the fact that we did have some of the supply disruptions and we didn't need all of the demands of the business so from a.
Cost perspective, we think there's going to be opportunities for us as as well on the in the back half. So I mean, the asked whats really driving our our outlook for the retail business and continued comps and really the first part of the year and then as we are going to be popping against some and.
Demand and the back half of the year.
Okay. Thank you and then.
Jim maybe just on on Jennie O Turkey your comment maybe in the in the cost section on the.
And remarks with.
Higher grade and maybe lower commodity prices on.
And maybe if you could also comment on free.
Just how should we think about the margin trajectory and 21, maybe not from from an absolute level, but just.
His historical can we can we get back to 2019 type level of on the margin side just.
Help me understand that thanks, very much guys sure Peter.
We obviously expect to continue to have some cobot cost in 2021, especially in the first half that will be a headwind of Jennie O Turkey.
Good day, but.
One of the things that we can't understate, the as the impact to Jennie O Turkey.
And their their life production.
Operations by the interim.
The interruptions and production that they saw on 2021, how that backed up the birds, you're feeding birds longer you are processing birds of the heavier weight that underperform and I think thats, a big benefit as we keep the operations running at a more consistent level and don't have these.
Play interruptions, that's going to be a significant benefit to their cost structure. So yes, there will be headwinds with cobot costs.
Great cost could be higher, but we manage that grain costs through through our hedges that we have we do support buying on on Gray and and we also could adjust the feed formula. So that we're we're mixing the feed a little bit better to improve our feed costs. So there was a lot of levers there the weekend.
Let's say.
So in 2019, we had about a 9% March and on this business. We think that we can go back and achieve that the debt level in 2021.
The next question is from Ben Bienvenu with Stephens, Inc. Please go ahead.
Hi, Thanks, good morning, everybody.
The part of that part of Bill I want to I want to ask and persist the clarifier on the the commentary and the press release, the you're optimistic about revenue and earnings growth and that's why 21 I assume that's true even on the 52 week basis.
And then I want to tack on to that.
And you highlighted and it's.
And.
It's been and really unusual challenging two years from an external.
The endpoint of a number of.
Elements that have caused the volatility headwinds and inefficiencies.
But you've also been undergoing some significant supply chain and supply chain.
Adjustments over the last two years in Fremont in particular and.
I'm curious you know, we havent seen earnings grow and a few years and I'm wondering what kind of what kind of the external environment. Do you think we need the for the earnings growth potential of the business. The shine through and then at what point do we start to see kind of steady state around supply chain costs side of things as it relates to the adjustments that you've made internally.
Yes, so bad and we certainly would agree it's been the unusual and and challenging and.
The work that are on the supply chain team has has done and has been absolutely phenomenal.
Not just the with a free of on transition, but in the midst of of this pandemic and making sure that we've got one message consistently across the organization.
The guidance or the comments that we've made about about sales growth.
Does play out and 52 week year, obviously, we've we've got a 53 week year of.
The next year.
You know for us and the.
The business.
We expect.
Ill moderate growth and our retail business. So if you go back to the grocery products business and when we were showing steady.
Steady growth in grocery products are our foodservice business has been a shining star and our organization and continue had been outperforming the industry.
Significantly and the investments that we've made around our business outlook with Delhi.
And then of course, our international business, but I think for US is theres, a return to adjust to that level of normalcy and where we can we can see our retail business has returned to historical growth, our foodservice business and the foodservice and industry get back to some level of.
Normalcy.
We've got the right investments we've got the right structure, we've got the right businesses to take advantage of those market conditions and so.
And as.
Obviously unusual and and challenging but we remain very very confident and the way that we've built the balance across the organization and improve sales capabilities on the E. Commerce side, we've made investments and consumer insights and analytics. So.
We've done all the all the right things to support the growth of this business over the long term.
Okay, great. Thank you for that and then on the International business has has had nice results in the midst of this challenging year and it has exhibited nice growth over the last several years.
I'm curious how big do you think that business can get and when you think about opportunities that really as it relates to that business you alluded.
Alluded to some of that on your opening comments, but I'd be curious if you could elaborate a bit more on on that segment.
Yes, we think Theres, our continued opportunities and China, and and we've really seen that team hit its stride. We've built on our our new facility, there and Josh and several years ago to support the expected growth.
And they've they've delivered on on retail and foodservice basis Theyve also as we described had some great innovation.
From a from an M&A perspective, I've I've talked about my desire to really add on to that great platform that we've built all the retail foodservice and then even on retail.
Ambience and on refrigerated and frozen so and it's got a lot of the great attributes at our domestic business has and we we see opportunities for it to continue to grow organically and be supported M&A and from an M&A and perspective.
And our ex parte business. This year demonstrated the power of brands on a global basis, the spam and skippy showing great growth and we expect that to continue to grow. So again, just really optimistic on where the business is today, but then also on the opportunities that exists.
Just organically and from an M&A perspective.
Okay, Jim Jim Thank you and happy Thanksgiving.
Thank you.
The next question is from Robert Moskow with Credit Suisse. Please go ahead.
Oh, Hi couple of.
Questions Hi, you mentioned new capacity, that's coming on line some new plants.
Have you secured labor for the new capacity I know you had some some labor issues.
Sure.
In which the facilities or which regions it's happening.
And and then just the.
The clarification, you said that you're expecting sales growth.
Across all of your sales and profit growth that's excluding the 50 Threerd week correct.
So I'll start on the second one Rob yes, we expect to be able to grow the business on of 52 week basis sales and sales and earnings on that.
Of course next year, and we do have our 50 threerd week as well.
Up from a part of a labor perspective.
The channel up Big Labor needs are the plant and all of our Nebraska the expansion of hard drive cost as our share jewelry line of products for Columbus, and yes. The we've had a lot of success securing labor for that facility, it's a bigger metro.
Politician area and total.
Of our has not been and issue the other big and investment that we described on our expansion and the beta, Iowa, and Eric and we had a great waiver of course, and we've been able to secure additional labor and that facility as well and some of the other areas, where we are expanding capacity with an additional lie and.
We are confident we will be able to do that as we navigate through the the covert and environment, but there of and historically really strong wafer markets for us and ill.
Our standard for example, we're expanding capacity here, and Austin, Minnesota, and and Dubuque, Iowa, very strong labor market for us.
As we've said and some of the of the more rural markets that can be a challenge for us.
Where were currently expanding capacity, we're actually in a good position.
Okay, Good and then.
And the getting some and give you some more questions here.
The the out in the back half of the here I think you said you expect easier comparisons.
Because you will have sufficient capacity.
And Chile and Didnt.
And your other canned goods I can't remember the other on but.
I would imagine demands and those canned goods is going to be down a lot in the back half just because.
We'll have a vaccine and and the consumers will regain mobility. So have you factored that into your your expectations for easy comps and you might have the capacity, but on the up you're going to have the seem to be.
Yes.
And.
Great point, Rob and and we have and so and what we are trying to say and it's not going to be pound per pound in terms of the opportunity, but we do still there we do still expect there to be growth.
And the other part two and considering the fact that I mean, it's business as we're talking about we're largely growing on for a pandemic.
So I mean, yes, we'll have capacity.
We understand and we've said that we do expect continued growth out of slower rate, but we also know that we didnt meet the current demand it's out of the business and so when you factor those three things together Thats why were we expect that to have a strong back half of the year.
Okay Lastly, on peanut butter and did you take a price increase this year your competitor was talking.
Talking about the price increase and they come up.
And and their strong performance and.
[music] ticket pricing and also are you satisfied the or share performance and peanut butter.
Yes, Thanks, Rob we've been really pleased with the performance of of Skippy.
Even before the the pandemic the trends were really positive.
We and we've continued to perform well during the pandemic have done a nice job gaining share.
We are also taking taking pricing on peanut butter and of again feel really good about where the business is trending and weve.
Pat let we haven't had any capacity constraints. The plant has been running well and we've done a great job supporting the.
And has turned and sort of innovation.
I talked about in my prepared remarks about how the team's done a great job in the midst of everything going on chicken and new innovation list Skippy squeezed Skippy high protein Skippy and no sugar.
Just lots of great work supporting that iconic brand.
Great and the good holiday. Thank you best you tear up.
The next question is from Michael Lavery with Piper Sandler. Please go ahead.
Thank you the morning Arnie.
Michael.
Can you just come back to the supply chain, a little bit and you.
You know elaborate a little bit on the status or timing of savings from the one and supply chain and I guess the question is you know its.
It feels a little bit like the the Curveballs you've had this year, which would make it a little bit like changing the attire, while you're driving but it still sounds like you're expecting the savings to the coming through and and not the progress and so.
Is it just maybe that you've settled back into sort of the new normal gruber.
How should we just think about the trajectory of how all that plays out.
Well.
Thanks, Michael we are beating the.
Supply chain savings that we've laid out the would be four of the organization. On fact, we think some of those savings will be accelerated.
Those savings of the pay dividends, the very difficult operating environment. This year and allowed us to do things that we wouldn't have been able to do a.
In the past and other things. So we did much more efficiently. So we're very pleased with the progress of bake it on one supply chain.
No.
It is the hard it's harder to measure because there are a lot of moving parts, but we believe the we've met every expectation that we said originally on this and.
And we think it's going to accelerate as we go through and continue to expand on the efficiency of these operations and.
And Michael I mean, clearly we've had pretty significant cost increases you think about Pete.
Pp team member of bonuses.
Plant disruption and cost lower invent or lower overhead recovery ill and so you're trying to measure it and a year, where you've got so many different pieces and I guess.
And our analogy of changing and higher Rightsizing has.
And so on that I havent heard but it certainly is very very appropriate for the environment that we've been and this year.
Okay. Thanks, that's great color and then just to follow up on the.
The retail side of the business and and your expectations for further.
For the three quarters, where you've given the channel splits the sponsor it was up 16, 19, and and now 7% and.
So you know even if once you was around the flat that's like of about 10 plus piece on the year.
Just the whole that.
Sales level absolute at the flat would seem quite impressive and and sort of grow over and and Bobby I know we've touched on this already but can you just maybe quantify some of what the capacity the impact is or you know just how you're confident that and that's up.
The growth driver over and above the the very high levels. The that you set for fiscal 2000 and.
Yeah, So I mean from and from a capacity perspective, and I talked a little bit earlier about space.
Spam and we were constrained on our spam business, but on a really good position because of the expanded capacity of.
Our Chile, our Stu our hach business.
I'll have had success there but.
Took some type of.
Secure and co manufacturing, but we've also internally and been able to to get to some extended runs of.
Our completes business in terms of adding shifts to that business. So from a product of the set from a capacity perspective, we feel really good about where where we are heading into 2021.
Well, we obviously still understand everything that is happening him and the world around us with these increased cobot cases.
We're experiencing that first hand.
You know I guess products from our perspective, we are we believe the retail number is very realistic.
As we think about the whole year and then on for US really of the key is to be able to meet the needs of the business and so as we head into 2021.
Capacity is of the top of our priority list.
Okay. Thanks, Thats great color. Thank you.
The next question is from Rupesh Parikh with Oppenheimer. Please go ahead.
Good morning, Thanks for taking my question, so just going back and just the foodservice on so if you look longer term do you see any impediments and getting back to your prior to the service levels just given some of the it seems like you know obviously a lot of restaurant permanent restaurant closures out there.
Yes, and when we don't worry of passionately and we leave no the way that we've.
The way the we've attacked the business structurally with the direct selling organization.
The the way we've innovated in the space and relationships that we have live with operators.
Clearly the timing is uncertain.
I. Thank all of our time, we do expect our foodservice business and continuing to be a growth vehicle for our organization.
Okay, Great and I know, there's been a number of questions mr. on cost on on this call. So outside the <unk> corporate costs like I'd expect the continue at least for the first half of next year anything you can share of just in terms of other puts and takes in terms of the costs, whether wages free advertising and anything else and we should be thinking about for the upcoming fiscal year.
Well I think what are the things that that we have the.
Had a challenge and that was and freight cost and that was because of some of that capacity constraints for us that increase in freight cost and to do it not loading full trucks and studying sending trucks out of less than optimal levels. So as the capacity goes up and production improves we think.
Freight cost even those you know there is pressure on freight but.
Sending out of trucks that are full of expense of process, we think theres going to be improvements on on that side of it again with Cobi cost every day, we've heard a little bit more about how to operate more efficiently. So we continue to to have the headwind on on.
On cobi costs, but our operations become more efficient from probably a less direct cost standpoint.
So the efficiencies and the play of the speeds of chicken run those types of things.
But obviously for us regarding co with its employee safety and that will be the the highest priority will continue to invest.
What we need to invest and and those costs to keep our point of sale.
And were cash I would say you know, we are obviously, making the necessary investments and advertising and back to supply chain.
We've talked a while ago about the new distribution center to support our grocery products business that continues to do really well even with the load balancing we're happy having to do and our team is working on another distribution center to support the refrigerated foods business. So we continue.
We continue to see opportunities to get better and that area. The other area of Rupesh that I'd point out is that we have made significant investments and project Orion and the 2020, we are but we havent called it out we havent separated it but the expenses as you might expect the.
Material you could see some of that and our unallocated expenses this share wherever we closed out our.
HR benefit and finance portions of the project and there have been some fixed expenses.
The impacted us in the fourth quarter too.
Okay, great. Thank you for all of the color.
The next question is from Tom Palmer with JP Morgan. Please go ahead.
Good morning, and thanks for the question I wanted to ask on the out of the inventory side I mean, I can see on the balance sheet. The inventory is up pretty substantially versus where it was a quarter ago and you've talked about actions you've taken to kind of resolve that so I guess I really was looking to understand.
Our next earnings call I mean are we going to see some lingering effects of.
This inventory constraint, having weighed on on first quarter, especially and.
As we see kind of a resurgence of koby cases, and potentially pantry stocking again.
Or is it quite the opposite and you have the potential to get a catch up where inventories were drawn down on a quarter ago by your customers and now you can backfill and do it. Thanks.
Good morning Thomas.
Much like 2020 years of a mix of both.
Oh, our raw materials are of finished goods inventory is down. So there is some constraints the wheel lab in Q1, now Q1 is more of a quarter at which you.
You sell total cost of what you produce and it's got a quarter that you build inventory and.
But it's also a quarter the normally you don't draw down on a lot of the inventory.
So it's going to have a less of the impact in Q1, and perhaps it did and in Q4, which is a period of a quarter to quarter in which you draw inventory down you can produce about products.
During the quarter. The other factor is the sectors of increase in raw material or raw materials and inventory and that primarily comes back from products that are generally sold through the foodservice industry and so.
Some of those that means that we won't have to go out and buy products.
And you would we buy products on the open market. Obviously, you have fluctuations of those those costs. This product is put away and as foodservice returns to the.
So the strength, we will be able to drawdown of inventory and perhaps manage our cost a bit better and the foodservice areas.
Okay. Thanks for that color and then just wanted to ask on on pricing assumptions as we look towards the coming year.
There were several segments on a couple of segments were pricing rolled over sequentially I assume that was mainly mix, but then when you're looking at and positive.
Positive growth in the coming year.
How much of the burden is volume driven and then how much is pricing.
And Thomas the Big driver of right now for pricing is and we've talked about skippy and that.
We are expecting on an uptick and volume and we've got opportunities to drive volume this year.
And we do also have pricing power ill and.
We think about products that are tied more to the underlying commodity is on the retail side. So you think about bacon, which is a big driver obviously, we'll be watching that closely Jim talked about the the belly market earlier of but I mean, its volume driven and but we know that we also have pricing power as well and.
And we do have our skippy pricing and place.
Thanks.
The next question is from Ken Zaslow with Bank of Montreal. Please go ahead.
Hey, good morning, everyone.
Yeah.
And there's been a lot of discussion obviously about your.
Bill yet to the inventory levels as well as your supply chain can you talk about how much demand did you leave on the table in 2020 that you will get back in terms of in 2021 because of your capacity constraints can we can you put some.
Sort of quantification to what actually was the impact in 2020, and what will be the benefit in 2021 as you gain your capacity I know, there's a lot of quality of I, just don't understand how to actually modeling.
Yeah, that's a.
The tough part of it.
To get at Cat I mean, I think clearly as Weve talked about the end of Q3 and given the warning signals and to into Q4 of.
You know, we had missed demand opportunities and.
Spam and.
And some of our pepperoni business sliced meats as as Weve described it as it's hard to quantify and we do think we will be able to capture.
Some of that back in.
In 2021 and.
And it is as I've said this on the supply chain the structurally higher capacity is going to be a very key component of the.
For us and delivering the the sales and earnings growth, but in terms of actually.
Quantifying that number that's a difficult number to get at but we know that the opportunities there.
Let me just ask flow more way of asking and maybe it is an easier way how much more capacity will you have in 2021 debt in 2020.
Well, that's going to depend on the on the product lines, but on the key areas, we think that there will be.
So the significant expansion and capacity we've talked about some of the plants of we've we've expanded on.
So as far as a dollar amount to our percentage. That's that's difficult. Obviously, we continue to operate with the uncertainty of go with that.
At.
How much impact as the going to have on our plants, which plants was the going to the impact those are all the difficult you know those are all of the uncertainties that we're living well and.
And.
We wish we knew exactly how hard we could run of the plants and and for how long.
But that's that's a bit of the struggle of what we're looking at in 2021 to two identify that total number.
Okay and then just the final question is do you see the grocery profit will match sales or did I Miss hear that I, just didnt hear that.
I don't I don't think weighted reset that Kevin.
Well the.
Do you want to say something about that of that.
I mean, our bigger conversation and rather than getting into the segments. As we think the channel discussion and is really how to think about the business as we head into 2021 and.
And the obviously, we've given some of some we help additional and good color around retail foodservice deli and and international.
That's great. Thank you be well and have a happy Thanksgiving guys, Yes, you to debt.
The next question is from Eric Larson with Seaport Global Securities. Please go ahead.
Yes, thanks, Kevin or running on time and happy holidays to here as well hope you have a good Turkey day.
The the question of the and Jim alluded to machine and alluded to it a little bit earlier and I had this question and mine, but I think you are now.
I think two years or so into your ERP update conversion will fiscal 21 require the same on the capital I can't talk about of your Capex numbers that are kind of.
What were the were a year ago, we'd be a little bit lower but will that start being a net positive to your corporate expense line and 21 or should we be thinking that the real benefits of reduced ERP expenditures come and F 22.
The there will be of reduction as you.
As we go into 2021 as you think about the US we had three major tasks due to obtain with project Orion first of was HR and benefits.
It was to update the entire fighting the EPS function and third with supply chain.
HR and benefits as completed fine.
Finance was totally completed for example, all of the staffing that had been assigned to our project Orion and the finance group of.
Have been pulled back to the role of job. So those to work on the obviously supply chain is a big task, but as you look at the the.
The accomplishments two out of three of the now being completed as we go into 2020 Watt and you will see significant benefits from what Weve obtained through project Orion and inefficiencies and the operations and insight into the business. The the about of analytics that we're getting the and the scope of information that we have now.
I have two.
To operate the business has expanded drastically lower.
EBITDA of the last quarter.
Okay.
Yes, Thanks, Jim and so my final question and I know this is a very 30000 foot level question, but I you know I think.
Mr. Snee, you alluded to it a little bit and you're in your prepared comments, but you said the consumers are enjoying being at home and cooking and that you know a lot of that will continue going forward on and I'm sure you're talking to your customers. I mean, the debate here is you know customers you know a lot of consumers the on figure of cooking at home.
I can't wait until we can go back to the restaurants sort of kind of a pull and talk the argument. So what what are your cost of your consumers telling you when you talk to on what their behavior changes might be.
Yeah, I think you hit it right on on the head Eric is that a especially early on.
They enjoyed the time together, but theres been a bit of of fatigue, but I don't know that that's going to entirely go away, where a lot of consumers are missing the option of being able to to get out and to their favorite dining establishment.
And I you know I do think they've been able to take some advantage of data and foodservice operators have gotten better and.
Matt on the go and grab and go and and delivery, but I do think work on to see that that shift away from dining at home back into the foodservice channel. The key is that at what rate and so that's why we're saying we expect a moderate.
And of of retail and we do expect and expansion of of foodservice the and.
And as what is the the right rate or the right number and 2021, but there's certainly fatigue I think is the right word to use of.
You know and and we also know that over the long term consumers are going to may maintain their need for convenience and versatility of which so much of our product portfolio, other and retail or foodservice squarely hits hits home.
Got it okay. Thank you and happy and say apologies to all.
Thanks, Eric you too.
The next question is from Benzer with Barclays. Please go ahead.
Hey, good morning, Jim and Jim Thanks for squeezing me and I'm actually first course of reduce machine could you clarify on the Hawk kind of commentary you said something the prices would be up within cost will be down just just to get the circuit. That's right from your commentary you had.
Sure bet and I'll try to clarify my comments you're.
You're seeing forecast that the western corn belt is going to be higher in 2021 and it was in 2020. So for instance.
And the fourth quarter, Western corn belt, Ray and let's say mid Fiftys, probably 54 would be a good number that's about 58 today, we think it's going to go up but what the method of which we purchase hogs that is one component to it actually it is one of the smaller components of which we price dogs that we bought.
The more common.
After that we use sort of the higher percentage of hogs that are purchased our purchased on what's called the composite value.
The composite value.
And you know today of $78 and we see that as the basic range that it will be and for 2021 day, you know and that's actually down from where it was the fourth quarter of 2020, I think was at $83 on average and in the fourth quarter. So yes.
The we often work people the jury you'll hear comments about the the western corn belt prices, but it's not the primary method in which we buy hogs, that's why we see.
So some fluctuation and the cost of hogs as we go into the year, but not at the rate that you're hearing from those that are quoting the.
The western corn belt, we do have hedges in place and those hedges are slightly below the future of spark future markets. Now we've had some negative impact in 2020 from our from our positions that we put on to protect us from a EPS out of those are rolling off and.
And have been very pleased.
Okay, perfect and then of acute Jim Snee, just coming back to the one of the prepared remarks commentary within the.
The retail portion and the balance where is foodservice on those growth rates. So one of the particular things and wanted to focus on is the the.
The makeup of make JV, which you actually highlight the two have seen some of the negative performance impacting on on grocery because of the foodservice piece about it could you elaborate a little bit on.
How that has performed on the retail side and how that maybe has balance, whereas the foodservice and what you're expecting on the demand side over the for that.
Particular segment.
Yes, great question, and our our Megamex business, especially on the retail side has performed really well and again, even even heading and two or before of the pandemic.
On that business was really strong for us and not only just on that organic basis, but the the work that our team at on from an innovation and perspective, we've talked about Aehr test Blackcomb always salsa EPS.
This share were talked about some additional innovation and the team has been able to put in place and so the retail business.
Was strong continued very strong and and we expect it to maintain the strength going forward as you mentioned the foodservice business.
And our other and service businesses were soft and but.
But we do expect overtime to see those businesses recover as well the way, we could not be more positive or optimistic about the future growth of our megamex retail business. We think it's really really well positioned and it's on strategy for us as we think about our desire to grow our EPS that portfolio.
Okay. So net net debt was still up the correct.
Yep Yep.
Okay.
Thank you very much.
Right Thanks debt.
This concludes our question and answer session I would like to turn the conference back over to Jim Snee for any closing remarks.
Yes, thank you on.
And as I said earlier I continue to be incredibly optimistic about our long term performance.
And we have done a great job navigating all of the uncertainty and co but has brought on but I know that this company has the right strategy the right business fundamentals and we are on the sound financial footing.
I want to wish all of you a happy Thanksgiving and please stay safe head of healthy during the holiday season.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
[noise] and.
[music].