Q1 2021 Hormel Foods Corp Earnings Call
[music].
Good morning, and welcome to the Hormel Foods first quarter 2021 earnings conference call.
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I would now like to turn the conference over to Nathan N. S. Please go ahead.
Good morning, welcome to the Hormel Foods conference call for the first quarter of fiscal 'twenty and 'twenty. One we released our results. This morning before the market opened around 630, a M. Eastern if you did not receive a copy of the release you can find it on our website at Hormel foods Dot com under the Investor.
Section.
On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer, and Jim Sheehan Executive Vice President and Chief Financial Officer.
Jim Snee will provide a review of the company's current and future operating conditions commentary regarding each segment's performance for the quarter an update on the impact to the company of the COVID-19, pandemic and a perspective on the balance of fiscal 2021.
Jim Sheehan will provide detailed financial results and commentary regarding the Companys current and future financial condition.
The line will be opened for questions. Following Jim Sheehan's remarks, as a courtesy to the other analysts. Please limit yourself to one question with one follow up if you have additional questions you're welcome to get back into the queue.
An audio replay of this call will be available beginning at noon today Central standard time. The dial in number is 870 734 475 to nine and the access code is 1015 203 zero. It will also be posted on our website and archived for one year.
Before we get started I need to reference the safe Harbor statement. Some of the comments made today will be forward looking and actual results may differ materially from those expressed in or implied by the statements we will be making.
Please refer to pages five through nine in the company's form 10-K for the fiscal year ended October 25, 2020, it can be accessed on our website.
I'll now turn the call over to Jim Snee.
Thank you Nathan good morning, everyone.
As we approach the one year mark of the pandemic.
I wanted to express my gratitude to our plant professionals for their continued dedication energy and focus.
Continue to be the true heroes of our company during this time.
On our last earnings call in November we were witnessing an increase of COVID-19 cases in the United States.
Our number one priority has been to keep our team members safe and we have been very focused on our best in class preventative measures and educating our employees through our awareness campaign.
Covid out.
As the pandemic evolves and the vaccine becomes more widely available to our team members.
Continue to keep the health and safety of our team members as the top priority.
We were among the first to offer a COVID-19 pay program to allow those who are ill.
Or had symptoms to stay home from work and still be paid.
Additionally, we paid $11 million in fiscal 2020, and unconditional bonuses to our team members to provide further financial security.
Our program has resulted in minimizing the spread of Covid in our workplaces and our communities.
Recently, we have been encouraged to see cases decline and the number of team members on our Covid pay program drastically decrease.
This gives us increased optimism as we head into the second quarter.
We are pleased to announce the entry into a definitive agreement to acquire the planters business last Thursday.
We have many leading brands at Hormel and the acquisition of the plant or a snack nut business will be an excellent addition to our company.
Yeah.
Over the past 10 years, we have made numerous acquisition.
All of which are meeting our strategic objectives.
The performances of Mega mix wholly Skippy Applegate Justin's suraj.
Columbus and SaaS <unk>.
Gave us a high level of confidence in our ability to successfully integrate operate and grow the planters business.
The acquisition of planners is the perfect strategic fit.
The addition of this iconic brand and high margin business.
<unk> is our evolution as a global branded food company moving us further away from our commodity oriented centric company.
As one of our biggest brands, we will give it a high level of focus and attention.
Our core competency and brand stewardship will be key to our success in unlocking the power of the planters Fred.
We know how to manage brands and planters is right in our sweet spot as we know planters is more than simply peanuts in the jar.
<unk> also perfectly complements and enhances and expands our existing snacking business joining.
Joining brands like Hormel gatherings, Columbus wholly and air des.
There are numerous opportunities to leverage the consumer insights from both portfolios to drive further innovation and improved growth per our entire snacking business.
The planters business gives us another iconic brand to grow and increases our scale in key areas, such as center store and convenience stores.
Integration into our direct sales force is a high priority and we know there are immediate opportunities to improve distribution and drive sales growth.
Another priority for us is to integrate the business into our one supply chain and project Orion platforms.
We expect synergies from this integration for the planters, both us and for our existing business.
There is a lot to love about this acquisition and I am excited for the transaction to close so we can begin to get the planters business the attention and focus that needs to grow.
Now turning to our first quarter.
Our team generated strong topline growth with sales, increasing 3% to a record $2 $5 billion.
All four segments delivered sales growth.
And achievement that hasn't been accomplished since 2016.
Incremental supply chain costs related to COVID-19.
$15 million were the primary reason for a.
$13 million decline in pre tax earnings.
Net earnings and diluted earnings per share declined 9% due primarily to incremental supply chain costs.
And higher tax expense.
As in prior quarters, we continue to strike a balance between the consumer demand we are seeing in our supply chain's ability to meet that demand.
We increased production levels this quarter through a combination of improving efficiencies, bringing on new capacity and further leveraging our strategic supply chain partners.
We expect this steady improvement to continue throughout the year.
We have been successful in a number of critical categories, and we will continue to make progress across the portfolio.
Our retail business continued to perform extremely well with sales increasing 13% per their quarter.
Brands, such as spam Skippy, Hormel Chili Hormel Black label Applegate Hormel Pepperoni.
Hormel fully cooked entrees and Justin's all delivered very strong growth.
Most encouraging was the sales growth we saw from the Jennie O brand.
Every major retail category, including Jennie O lean ground, Turkey burgers.
Any items.
And marinated meats group.
The Jennie O brand continues to resonate with consumers and the efforts we have made on gaining back customer distribution are paying off.
Our ecommerce business continues to be a bright spot as it almost doubled in the last 12 weeks according to IRI.
We grew share in several key categories and have a high level of momentum in online grocery pickup delivery and direct to consumer.
Our deli channel sales increased 7% this quarter.
Columbus branded products led the way with exceptional growth from grab and go items.
The opening of our new plant in Omaha, This quarter, which produces Columbus charcuterie products will provide much needed capacity for this business.
While the Columbus brand was declared later for US this quarter and the Delhi our team generated growth in every day OE segment. They competed including grabbing go prepared foods behind the glass and fresh sliced deli meats.
Our party trays business also grew volume in sales over the holiday season, despite fewer group gatherings.
A testament to our team's ability to keep this brand relevant.
We saw positive signs of recovery in foodservice this quarter, even as the business declined 17% compared to last year due to the continued impacts of the pandemic on the industry.
We continue to see strength in our business within in important segments, such as pizzerias Tos ours.
And convenience stores.
Our direct sales force also made excellent progress pivoting to high growth areas, such as commissaries and ghost kitchens, as a secured new distribution with both distributors and operators.
Turning to the segments grocery products delivered very impressive results this quarter.
We saw top line strength across many of our brands.
<unk> spam, Skippy, Hormel completes and Eric <unk>, which led to volume increases of 4% and sales increases of 7%.
We implemented a price increase for our skippy business this quarter once again, demonstrating our ability to price in our categories.
We are also encouraged with the performance of our recent innovative new items, including skip basic ways.
<unk>, no sugar and skippy with added protein spreads.
Our <unk> joint venture had a strong performance this quarter as well.
But the equity in earnings increasing by 31% net.
This growth was led by our retail brands, such as wholly Eric des <unk> and lot of Victoria.
In addition to the <unk> results the 35% increase in segment profit was driven by higher sales and a favorable mix.
Refrigerated foods volume declined 2% and sales increased 1%.
Our retail and deli teams overcame eight year over year declines in our foodservice business to deliver growth for our value added business.
Applegate had a particularly strong quarter with growth fueled by both category momentum and share gains across core categories, such as frozen breaded chicken breakfast sausage Bacon and hotdogs.
Continue to be optimistic about the momentum we're building and the applegate business.
We also delivered excellent results in our Hormel pepperoni business, both in foodservice and retail.
Our teams continue to optimize the brand by focusing on our core products in the category and simultaneously leaning into our New Cup and Chris innovation.
We plan to maintain our advertising efforts for Hormel pepperoni to ensure we retain the households, we gained during the initial pandemic buying.
Refrigerated foods segment profit declined by 16% due to lower foodservice sales.
A significant decline in commodity profitability.
And increased supply chain expenses due to COVID-19.
Profitability was also impacted by onetime startup expenses related to our new plant in Omaha.
Jennie O volume decreased 2% and the sales increased 1%.
We saw exceptionally strong retail and whole bird sales, which overcame significant declines in foodservice and commodity.
Our retail business grew double digits this quarter with growth coming from almost every category in which we compete.
We have taken price increases across our portfolio and expect those to be effective late in the second quarter.
All per volumes increased by strong double digits due to a very positive holiday season.
Our foodservice business was impacted by lower K through 12, and college and University business. In addition to continued weakness in the foodservice industry.
Jennie O Turkey store segment profit declined 38%.
Our foodservice sales increased supply chain costs related to the COVID-19, pandemic and higher freight expenses were key drivers to the lower profitability.
Grain prices increased significantly during the quarter, but only had a modest effect on earnings we.
We expect the primary impact of higher grain prices to affect the coming quarters.
In addition to pricing action, we have taken additional actions to manage higher corn and soybean meal cost.
International volume decreased 5%.
Sales increased 13% and segment profit increased 61%.
Once again, the strong sales and earnings performance was led by our retail and foodservice business in China.
Spam, and Skippy and beef, Turkey, where all key drivers to growth in China.
We remain very positive about the short and long term prospects of our China business.
We also saw strong branded exports are brands like Skippy and spam.
Similar to prior quarters, our affiliated businesses in the Philippines, South Korea, and Europe continue to show high levels of growth.
Looking to the balance of the year.
Im increasingly optimistic about delivering sales and earnings growth as such we are establishing fiscal 2021 guidance for the full year at $1 70 to $1 82 per share.
As a reminder, this guidance range does not include the impact of the acquisition of planters.
Similar to prior quarters. We believe there are three key drivers to our near term and long term performance.
Retail dynamics.
The recovery in the foodservice industry.
And the performance of our supply chain.
Our retail deli and international teams need to maintain their momentum and outperform their respective categories.
Our brands continue to gain new households, and our repeat rates remain very strong.
The depth of rupee.
Those consumers purchasing our brands multiple times is incredibly positive with almost all new buyers for our brands maintain two or more repeat purchases during the first quarter.
As a whole our brands continue to make household penetration gains with brands like air des <unk>.
Victoria, and Columbus, increasing household penetration by over 20%.
For the foodservice channel, we are optimistic about our foodservice recovery and are confident in our ability to gain share during the recovery.
During the pandemic operators have been looking for products to simplify their food preparation.
Save time and minimize labor.
While preserving the flexibility to add their own unique touch to a menu item.
Our direct sales force continues to meet their needs with products like Hormel fire braised meats.
Sadler as authentic smoked barbecue and Hormel Bacon one.
The recent trends we are seeing in our foodservice businesses are positive.
<unk> been able to react quickly to increase demand as cities and states have eased dining restrictions, allowing patrons to return to their favorite restaurants.
We also anticipate our non commercial business such as K through 12 schools colleges and universities and health care to recover as the pandemic subsides.
The most encouraging signs we are seeing are in our supply chain.
We made excellent progress on increasing capacity to meet the high levels of demand from our customers.
Steady week over week improvements lower levels of absenteeism, new capacity and a continued vaccine rollout are all reasons, we have a positive outlook.
Our supply chain team has two major milestones this quarter with the opening of our new dry sausage production facility in Omaha, Nebraska.
And the opening of our pizza toppings expansion FERC.
Both projects, we're on time and on budget, which is truly amazing considering both projects were constructed primarily during the pandemic.
Our plant teams have made progress on labor availability and in almost every location our labor situation has improved.
We expect that trend to continue into the second quarter and beyond as the vaccine becomes widely available for our team members.
We now have a higher level of visibility into the coming quarters and remain confident in our team's ability to deliver our sales and earnings guidance. This year.
At this time I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter.
As an update on our financial position and provide commentary regarding key input cost markets.
Thank you Jim good morning.
Record sales for the first quarter were $2 5 billion, an increase of 3%.
Covid related direct expenses of $15 million were the primary driver to pretax earnings declining $13 million or 5%.
Absent the Covid expenses pre tax earnings would have increased total COVID-19 expenses have started to decline from the prior quarterly run rate of $20 million. This was driven by higher volumes through our production facilities and improved efficiencies in our logistics network.
Earnings per share for the first quarter was <unk> 41, compared to <unk> 45 last year.
On an after tax basis first quarter results reflected approximately <unk> <unk> per share in incremental COVID-19 related costs and higher tax expense.
SG&A, excluding advertising was six 6% of sales down slightly compared to the prior year.
Advertising spend for the quarter was $34 million compared to $35 million last year.
We continue to invest in our leading brands, including spam Skippy Hormel Pepperoni Black label and Judeo.
Operating margin for the quarter were 10, 9% compared to 11, 8% last year.
It was driven by Covid related expenses and the continued impact from lower foodservice earnings.
Unallocated expenses include a deferred compensation expenses related to tax settlement and deal fees.
Our effective tax rate for the quarter was 19, 7% last years rate of 16, 3% was affected by the large volume of stock options exercised in the quarter.
Excluding the impact from the <unk> acquisition, we expect our full year tax rate to be between 20 and 21, 5% cash.
Cash from operations was $206 million during the quarter, a 9% increase.
Even with record sales inventory levels continued to gradually improve throughout the quarter due to improvements in operations labor availability internal capacity expansions and increased use of strategic manufacturing partners. We expect inventories to continue to build throughout the second quarter.
There is a risk per inflationary pressure on freight expense, both domestically and internationally. However, we expect improved efficiency factors to offset some of the higher freight costs.
We paid our 378 consecutive quarterly dividend effective February 16 at an annual rate of 98.
5% increase over the prior year.
During the quarter the company repurchased 200000 shares for $9 million.
Capital expenditures were $40 million from the quarter, we opened the pizza topping expansion of FERC and the new dry sausage facility in Omaha.
Work is also underway to expand our pepperoni capacity.
The company's target from our capital expenditures in 2021 is $260 million.
Last Thursday, we announced the definitive agreement to acquire the play per stacked up portfolio for an effective purchase price of $2 $79 billion.
The transaction was structured as an asset purchase and included a $560 million tax benefit.
Adjusted 2020, EBITDA multiple on the effective purchase price of $2 79 billion.
Was 12 five times.
This acquisition is financially attractive our disciplined approach to valuation allowed us to secure a leading brand at a multiple below the industry average take advantage of historically low rates increase our company sales by 10%.
The profitability of the portfolio with accretive margins and responsibly leverage for our balance sheet.
We expect to finance the transaction with cash on hand, and a combination of long term and short term debt.
We will be able to borrow the funds at approximately one 5%.
And expect to be able to significantly deleverage the debt an 18 to 24 months.
We are targeting a one five times leverage by 2023 and are very focused on retaining a strong investment grade rating.
Free cash flows from our existing business.
Along with planters allows us to maintain our long term capital allocation strategy.
We will continue to prioritize returning cash to shareholders in the form of annual dividend growth.
Industry operating efficiencies labor availability and production levels continued to improve during the first quarter driving less volatility in the hog market compared to the back half of 2020.
Weights are currently at historically high levels, which has led to a balanced market conditions in 2021, the USDA is projecting pork production to increase 1%.
With an expected recovery in the foodservice industry and higher grain prices for the balance of the year, we anticipate hog costs to increase our balanced mix of hog and pork supply contracts will help us manage the risk of higher prices.
The USDA composite cutout was in line with last year during the first quarter recently, we have seen strength in the cutoff supported by strong demand for pork domestically and internationally.
We continue to monitor export demand and ASF in China, Southeast Asia, and Europe a O.
<unk> continues to be a risk and reported history.
We have seen the disease can be successfully managed and areas with modern agricultural practices.
We expect higher prices for pork with less volatility than last year, the strength of our brands and balanced approach to procurement continue to be a competitive advantage.
Pork trim markets are expected to remain higher during the second quarter of 2021 and decline in the back half is labor availability and processing plants improves base.
Beef trim prices are expected to be lower in 2021, we anticipate belly prices to be volatile in the near term driven by strong demand and foodservice industry growth.
Strong Chinese demand and drought conditions in South America continued to generate higher grain prices.
Which is expected to negatively impact Jennie O Turkey store.
Like the pork industry, we are closely watching the fundamentals for Grand.
The primary factor, we are watching our global demand planting intentions for the coming season and weather conditions in South America.
We manage brine costs through a combination of spot volume derivatives and adjusting feed formulas. Additionally, we have announced pricing action across all Jennie O products to protect our profitability.
We are prepared to take additional actions.
As conditions change.
Fundamentals in the Turkey industry remained mixed excess pulp placements and cold storage or below year ago levels log prices for commodity breast and thigh meat remained depressed poult placements have been declining recently, which will likely lead to lower levels of supply.
Because the foodservice industry is a key outlook for breast meat as.
As the foodservice industry recovers breastfeed pricing is expected to improve.
We are finalizing the implementation plans for the <unk> business we.
We will have the HR and payroll functions integrated by the closing date, the finance and supply chain will be fully implemented within one year of closing.
At this time I'll turn the call over the operator for the question and answer portion of the call.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before questions boutiques to withdraw your question. Please press Star then two.
Please ask that you limit yourself to one question and one follow up if you have additional questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Ben.
In venue with Stephens. Please go ahead.
Hey, Thanks, Good morning, everybody good morning <unk>.
I wanted to start you called out the comments related to grain plus cost pressures and Jennie O and I want to focus there if we could from my first question.
You talked about your <unk>.
Your actions around pricing I'm wondering.
Extent that you're able to talk about how severe or meaningful.
The higher costs are expected to be for for you and as you think about pricing increases.
What you think the receptivity from the market is of higher prices and how meaningful that offset could be to the higher prices.
Yes, Thanks Ben.
This is a high priority for us at Jennie O Turkey store team.
Going forward, but they've been they've been working over really the last month or so to implement pricing and while they're not entirely darn.
I'd tell you that there's been a lot of a lot of success in terms of getting pricing through obviously the rationale that we have in terms of what's happened in the grain market.
Imports very strong underlying support so.
The team has done a nice job there and as we go forward.
The idea of elasticity with pricing is something that has been difficult to measure given the pandemic, but we do know as we've continued to see exceptional demand for the Jennie O Turkey store retail products. So we remain very optimistic on the success that this business can have.
For the balance of the year.
So Ben just to give you some type of scope.
Corners up about 40%, while soybean meal is up about 15% net we have.
A significant position that's less than half of our core and hedged at a lower price than the current markets.
And we have the ability to change the formula. So as you can imagine we're moving the formula to more of a soybean meal based formula away from corn that will offset a portion of the costs. So really there's multiple approaches we've taken to mitigate the risk from these increases Jim talked about a very effective approach.
Price increases.
Along with the shifting of the feed formula and the positions that we've taken and we took these positions probably six more than six months ago.
Okay. That's very helpful. Thank you.
My second question is related to.
The supply chain and obviously, you've made a number of investments over the last several years, you've gotten a few capacity expansions stood up here in this first quarter.
Jim Sheehan you made some comments that you expect some of the freight higher free headwinds to be offset by supply chain improvements can you talk about the.
As you get through some of these enhancements that you've made with Orion some of the capacity expansion starting to mature in terms of fixed cost absorption.
The benefit that a forward view on the supply chain cost equation relative to any cost inflation, you might see that'd be helpful.
And I'll go ahead and start on the freight costs and I'll, let <unk>.
Let Jim finish with project Orion.
But one of the things that we have been challenged with is our supply chain is as battled over last year and early this year is that we've had a number of any efficiencies in terms of how we're how we have been able to shift trucks and so.
Because of that we've had some higher freight costs and haven't had the opportunity to optimize our loads like we typically do so we have seen some higher freight costs.
And while there are expectations that freight rates will increase.
We see a pretty significant opportunity for us to be able to offset a good portion of those as our supply chain continues to pick up momentum and we're able to fill trucks in a more optimized manner. So yes, there will be some flip freight inflation, but again, we think there's going to be a really good opportunity for us to.
Offset that with some internal efficiencies.
Then I'll talk a little bit about your second portion of your question and Thats, How project Orion will benefit us.
In this area first of all we have visibility across all of the businesses under one platform and that's given us great insight as to where our costs are coming from and how we can manage those costs from our purchasing.
We expect the heavy know purchasing done under one platform, giving visibility into the into the cost.
The other thing is is that on freight we're able to do some significant analysis as to where we can.
Provide benefits on freight and how we could improve our load levels, what our load levels are actually running across our business organizations. So it is providing a significant benefit as we go through and it is very timely as where we're hitting the probably a bit of a period of inflation going forward to understand what our actual costs are.
And what levers, we can pull to manage those costs.
Okay. Thanks, so much for all the color and best of luck this year.
Thank you.
The next question will be from cash flow.
Mark.
Oppenheimer. Please go ahead.
Good morning. This is actually Erica eiler on for cash thanks for taking our question Eric. Thank you wanted to quickly follow up on last week's acquisition I was just hoping maybe you could give us some more insight into the private label dynamics from planters categories and the gross margin there and then lastly, Kraft also made reference to claims.
So how do you think about its categories in terms of being a commodity.
Yeah. Good morning, Eric I'll go ahead, and I'll take that one I think the other thing that we talked about last week was the items that you just mentioned I mean those were those were at the top of our list in the due diligence process.
Our team did a phenomenal job not not just identifying those risks, but really putting together an action plan for when we do own the business, how we can offset that.
When we think about private label.
When we cross our existing categories private label shares can range.
Across the board and right now what we're seeing is the average center store range is about 20%.
And the plan occurs.
Brand as they face private label, they're seeing about the same percentage of private label and again thats across the board there's different subcategories.
<unk>.
The idea of a private label being a risk or threat or competitor.
It's not new to us at all so.
Obviously, we're prepared to manage our business accordingly.
From a.
From a gross margin perspective, I think what we had talked about.
Last week was probably a little lower down in terms of profitability, but without giving too many specifics it safe to say that planners gross margins are well above our total company average and they are also above our grocery products average so.
And then the other thing just in terms of the category now we know how to manage brands, we've said that multiple times and so when.
When we think about commodities and pricing and price elasticity.
This brand is very similar to all of our other large brands so that not new to US we know how to manage it and when you roll all those things up.
From our perspective.
This business is not a commodity business.
It goes so far as to say again from our perspective.
Our commodity business when we see one and this is not a commodity business. So hopefully that's helpful.
Yeah, No that's very helpful and then.
Switching gears to grocery products I mean, you're obviously facing some challenging comparisons here. The next couple of quarters can you maybe again just talk a little bit more about your confidence lapping Ms growth you know any puts and takes you can share with it.
Yeah.
How youre thinking about these labs I think would be really helpful.
Sure.
Theres going to be a lot of a lot of puts and takes across the entire portfolio for the balance of per year.
We know in the second quarter, we saw a significant run up in grocery products.
We also saw the significant collapse of our foodservice business and so and.
And then in Q4, if you recall, we talked about the difficulties we were having in our supply chain and meeting the absolute demand that we're getting from our customers.
So there's a lot a lot of give and take for the remaining three quarters and all as we've laid out the business with our business units.
Alan reviewed how we think the business is going to flow.
Is there optimism net obviously fuels my optimism and then also the results that we're seeing in the supply chain.
And all of this do not discount the impact of the supply chain.
And allowing us to achieve our goal this year so as they've run so much better it's really made a difference in our business. So all those things together Erika is really what what has allowed us to reinstate our guidance and become increasingly optimistic about the business for the balance of the year.
Okay, great. Thank you so much I'll pass it on.
The next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.
Hey, good morning, everyone. Good morning, Tim.
Wanted to take you up on the capacity side of it and can explore that a little bit can you talk about what products were capacity constraints, which products are not capacity constrained now and which ones wont be capacity constrained in the future.
And then.
What you think was the scope.
Of the cost that was associated with that.
Well I'll take the first part and then I'll, let the CFO take the numbers part day.
The biggest constraints that we saw and we talked about this in Q4 as we're early in our in our grocery products business.
Spam at the time was one that was capacity constrained we knew that we had a capacity expansion that we are in the process up and we saw that capacity come online in Q1.
And that's really helped our spam business, what we call our general Canning business, which would be chili's to hash.
That is one where we most recently identified.
Co Packer opportunities.
And we expect we're still not meeting demand, but we expect that to continue to improve over the balance of the year.
I think we did also talk about pepperoni and in Q4.
That we had a new line that was getting up to speed and that has done just that and thats really afforded us the opportunity to expand both our retail and foodservice pepperoni business. So.
As we look to the future.
Part of the optimism as we were far less capacity constrained.
Clearly, we're not out of the woods, we've got to meet customer demand, but I think everything that we said we were going to do and that we knew that we needed to do in Q4 as happened Jim I don't know from a cost perspective sure good morning, Kevin.
Good.
The last half of 2020 was as Jim said, a tremendously impacted by supply chain challenges.
So as we look at it from a financial standpoint, the first area that we should talk about is foodservice.
We've seen some very interesting trends over the last let's say few weeks on foodservice and.
We have idled capacity in foodservice. So we have no problem filling that foodservice need so any growth in the foodservice category is.
Memory strength.
And a great opportunity for us as that business, we're confident that's going to continue to improve.
On the grocery products category, we talked about a tremendous Q2 that we had for Q3 and Q4 I think is safe to say were crippled by supply chain challenges that really are not existing anymore.
The availability of labor is much better than it was last year.
And so that's going to be able to allow us to grow.
Grocery products in the back half of the year Jim.
<unk> talked about refrigerated foods. So we've had some constraints in the pepperoni business and that we have.
It'll capacity that's come online their inventory.
Very nice job of recovering the pepperoni business and actually seeing some very significant growth and pepperoni and the food service category.
So I think it's hard to underestimate how much of an impact.
The constraint had in 2020 and the opportunity that we have net 2021, one of the other things that we haven't talked a lot about is that during this time of constraint.
Some very significant efficiencies in our operations net.
I have helped us produce products, even in a difficult time period now.
Now as we increase it will be able to take those efficiencies and actually drive.
Drive cost issues to have efficiency issues throughout the operations.
Ics underestimate the capacity can you give us some dimension to that.
How we think of how that could actually add not just this year, but really into 2022 and 2023.
Leave it there and I appreciate it.
I think as you've seen.
The growth in some categories.
You see our ability that if we could fill that full.
Demand there would be some sort of important improvements I think as I've talked about in grocery products I think is a good a good.
Good benchmark.
Where we see growth in.
In the back half of 2021 in grocery products.
Strictly based on improvements in supply chain.
The supply chain.
And Kevin I would just add I mean, the other net.
Their factor that is unknown at this point are really the channel dynamics.
So as.
As perhaps retail sales.
As people are looking to get away from home and eat out as Jim mentioned, our foodservice capacity.
Is ready willing and able to meet that demand. So I think that's going to be an even more an important part of our story as we get to the back half of 'twenty, one and into 'twenty two as we receive foodservice recovery continue.
Great. Thank you guys.
And the next question will be from Eric Larson with Seaport Global. Please go ahead.
Yeah. Thank you everyone.
Thanks for taking the question so.
Jim quick question for you you talk about the financing rates for planters and just for clarification is that is that wanted to ask just on the.
The incremental debt that youre going to borrow or is it the blended rate between the.
Percentage of cash and debt youre going to use to finance the transaction.
It's a blended rate of the debt, including the $1 billion that I took out in June of last year.
For instance.
We will be retiring $250 million worth of debt in April.
That has a four and a quarter rate.
So if you think about net interest.
The current interest rates.
He will be retiring some reasonably.
High level of interest rate debt and replace it with.
Much lower interest rates.
Okay got it thank you.
My second my second question is for Mr. Snee, Jim.
No.
Yeah, and Delek has obviously impacted the foodservice, Turkey market pretty significantly.
Yeah.
The oversupply that industry has done pretty significant for a while we just haven't seen that.
Industry recover like I thought we would have a long time ago.
Yeah.
Maybe you rationalize the industry a little bit more what will you come out of the back end of this potentially with a stronger with a stronger maybe lower supply structurally supplied industry.
Yes, Eric I mean, I don't know and wouldn't want to comment on on what some of our competitors might do.
From from our perspective.
We feel really good about the work that we had done leading into the pandemic. If you go back to some of the stumbles we had but then the effort and the strategic focus on growing distribution in lean ground, Turkey right.
Before the pandemic hit.
Believe that a lot of the success we've had on our retail side is directly attributed to that expanded distribution that the team was able to achieve.
In terms of.
What what inventories look like I mean, clearly a lot of breast meat.
Breast meat is used in the foodservice industry and so that collapse has had a dramatic impact and obviously there are are implications to that across the entire industry.
What we've seen is continued strength in our retail business. Some recent increase in our Jennie O foodservice business and.
And so we believe that there is.
There is a lot to be positive about with our Jennie O Turkey store business heading forward.
Eric the items that I would add would be that.
We have been.
Looking at the fundamentals of this industry for a long time and reminding others that thats, probably the best indication of where the.
The business is going we've seen decreases in pulp placements for several months now that in January.
Placements are down 9% in pulp placements were down 12%.
That's a strong indication of where the industry is going from a capacity standpoint.
Yeah I agree thanks, guys I appreciate the comments.
Okay.
And our next question will be from Peter Galbo with Bank of America. Please go ahead.
Hey, Jim and Jim Good morning.
For taking the question.
Jim.
First question I wanted to ask about.
The color you gave around pork inflation and maybe it's a bit of a two parter.
The first part of that being I guess, the inflation that youre seeing now.
What appear to be more I guess tangible versus 2019, when it seemed like it was more speculative around ASF and whether or not you.
There was going to be a lot more shipments of pork on the U S.
I just wanted to you've got the a.
A fair statement or.
Or at least how you're thinking about it internally and then b.
You mentioned a bit around consumer elasticity on Turkey, but just is there anything from your consumer insight team you know on the pork side.
That you are seeing any changes in consumer behavior that would make you feel more confident than maybe this time around in your ability to get pricing on bacon pepperoni those types of items.
Well I think the first issue Peter is.
Part of this is going to depend on the recovery in foodservice. So if you take the bellies bellies were up 195 right now they had been running in the one mid $1 30 range I think thats an indication that there is some recovery in the foodservice that there is an expectation that that demand is going to pick up.
<unk>.
We expect these these prices for the full year to Robyn.
Mid $1 40 somewhere in that range, which is above last year.
Above last year's levels, what are the other things that you are seeing though is that they are going to have some probably pressure taken off of certain markets truck market store in the 90 day right now with I still take that.
A component of the fact that there's not enough labor to do the volume.
As you know.
Labour returns into these facilities those prices are going to go down that's just a labor issue.
So we think the bellies are going to be volatile as we go through.
The band is going to to have be impacted by the foodservice recovery.
And Peter I mean, we remain very confident in our our ability to price.
<unk> already.
This year, we've we've taken price on skippy.
I talked about the Jennie O Turkey store pricing.
We've had we've had bacon pricing Columbus, and really our total daily business has taken pricing as well so.
As we as we obviously.
Follow the inflationary factors and see what's happening in the business.
We feel very confident in our ability to price.
Okay. Thank you both that's that's very helpful I.
I guess, just two quick clarifying questions here, one on grocery products.
So it wasn't acceleration right from that would be.
Kathy unlock but I just wanted to make sure was there any inventory like retailer inventory rebuild.
That first quarter number and then on the on the investment income from the Rabbi Trust.
It was up quite a bit how do we think about that maybe in <unk> and from the rest of the year does it reverse just you know we have to put something in the model. Thanks very much.
Yes, Peter I would say that no there really hasnt been any retailer inventory rebuild and I say that just based on the demand, we're seeing and our ability to fulfill that demand and so.
I do think it obviously there is still very strong consumer demand, but then it also speaks to the fact that at some point, we're going to have had the opportunity to fill the pipeline as well.
Thanks for the question on the <unk>.
Interest income.
It's coming from our Rabbi trusts, which backs up our deferred.
Compensation program.
Any gain that we have an interest expense if you look at our corporate unallocated line Thats up so much this quarter.
That is an expense that offsets the gain in interest expense. So when you look at that net of the additional deferred comp expense site incurred in unallocated and the game that I've seen and the interest income.
They offset each other they appearing to different spots.
The financial statements, but there is an offset there. So there is still benefit on an EPS basis of the increase in investment income.
Offsetting the above the line.
Unallocated line does that help you at all.
Yes, yes, no it does.
I guess, just as we think about that that number going forward it can be pretty volatile from quarter to quarter and so I guess just.
What's the best way to think about it sure the best way to think about announces it has no impact on the on the company's results because whatever gain or losses. Our current interest income are offset by gains with losses in corporate unallocated.
So it has it has no impact on my P&L got it got it no. Thanks, thanks very much that's helpful.
And the next question comes from Tom Palmer with Jpmorgan. Please go ahead.
Hi, good morning, Thanks for the question Tom.
Firstly I just wanted to ask on the Capex side.
Your outlook by $90 million. This morning, just curious what drove the reduction is this to free up some some capex for planners are there other specific projects that maybe were halted are pushed into 2022.
Yes, great Great question, Tom It is its one one big project that we've gone ahead and pushed back later later in the year and we expect the majority of that expense to fall into into next year. So it's not a cancellation, it's not a need for additional capital. It's just a delay in a project that we will still.
Complete.
Can you disclose what that project is.
No, we haven't announced that yet it hasn't it hasn't been approved.
Okay.
And then on the on the Jennie O side I, just wanted to make sure I understood the timing of cost versus pricing should we think about the second quarter as being the toughest margin quarter, just given the pricing is being instituted during the quarter and we're seeing that input cost inflation now and then.
A quarter ago, you mentioned, Jim Sheehan.
9% EBIT margin is that maybe an outlook for this year do you have an updated outlook, how we should maybe be thinking about that full year.
Sure.
Youre exactly right Tom the second quarter is going to be the biggest challenge for Jennie O as they absorb the cost but as you know when you break price feed auditors, there's a ramp up period and a wait period for that pricing to be effective. So that we will have an impact in Q2 and it will.
Slightly a pact.
What we talked about previously as far as margins, but not.
Not significantly but it will have.
A minor impact on my expectations for Jennie O.
Okay. Thank you.
I'll leave it at that.
Thanks Tyler.
The next question will come from Robert Moskow with Credit Suisse. Please go ahead.
Yeah.
Hey, Thanks, a couple questions.
Kevin Jamie you mentioned some interesting trends in foodservice demand over the last few weeks and I think you mentioned pepperoni being one of them can you give us a little more color on what type of restaurant chains Youre seeing that from and do you think that's just a response to declining COVID-19 rates and then secondly.
You know theres a lot of pricing in the international Division during the quarter can you give more specifics as to what that pricing was poor and mathematically is that should we expect that level of pricing throughout the year.
Yeah, Rob I'll go ahead and start I mean from a from a foodservice perspective.
It is your more traditional restaurants fast casual pizza re as we mentioned <unk>.
Where we're seeing strength in the business now we haven't seen a pickup in some of the travel venues in terms of hotels.
But as we've weighted.
As we've seen that business continue to improve.
Towards the end of the first quarter into second quarter really some of our best weeks since the since the pandemic began so we had also seen some.
From some increased business.
Would have been probably end of October early November before the second wave to begin. So so we know that it's not new in that trend.
Trends are real and we believe that.
We're going to be able to sustain this going forward and then the pepperoni business has really been ongoing through throughout the pandemic because that is an area that really never slowed down.
Any slowdown for US was just capacity driven and which now we have our new line up to speed and we're meeting those expectations.
Good morning, Rob.
Regarding our international business.
It is a broad based improvement in our business. There is in that area of this business that hasn't improved and it's certainly not a result of pricing.
Better results.
Our our operations in Brazil and in China.
More profitability within our exports, both branded and fresh pork.
An improved mix, but it's really.
No.
Pricing is what the driver here.
This is just a broad based improvement business internationally in all aspects of international.
And we expect our international business to remain strong for the balance of the year rough.
Okay, but maybe if I could.
Am I reading this wrong I thought volume was down in international.
But sales are up 13% so is it a mix driver.
So next issue.
Okay.
What what's what's driving the mix isn't it skippy and spam drives the mix positive.
Yes, yes.
It's the brand of products that are that have a high demand internationally that is driving a better mix.
Yes.
Okay. Thank you.
Thanks, Rob.
And the next question is from Michael Library with Piper Sandler. Please go ahead.
Good morning, Thank you.
Good morning, Michael.
Just wanted to make sure I understand some of the trajectory for refrigerated foods and the margins you've called out some of the headwinds and those are clear.
But it looks like the margin might've been the lowest since around <unk> 15, and I know you mentioned some of the.
The second half catalysts or benefits that should come through.
Does it get worse before it gets better or are we should we expect an upswing already from here with some of the puts and takes maybe between now and into the second half.
Yes, I mean, the positive for refrigerated foods, obviously are the best strength in the foodservice recovery and so if we expect to continue on the path, we're on and that will be a very positive impact.
Refrigerated foods also gets hit the hardest and.
With COVID-19 costs, and so as we see COVID-19 costs, hopefully mitigate over the balance of the year that will continue to be had or have a positive impact on refrigerated foods as well.
Okay. Thanks.
A follow up on.
The second quarter to date, what you've seen just any any color maybe you can give us.
Is there sort of in the moment, but any maybe weather watch outs or any impact on sandler's production and then we've also seen some reports about.
Maybe some risks that things like cattle, but it doesn't seem like maybe hogs are affected so just.
Any update on maybe ever.
I think what youre watching now.
Yeah, I mean, obviously this week was a it was a difficult week for a lot of people.
We saw a large spike in spot prices for natural gas.
<unk> made some quick decisions to mitigate fee increase and then the other thing is not all of our locations are are impacted so.
Any of any of the impact Michael is really really a short term.
Im not saying thats going to have a broad base longer term impact on the business.
Okay, great. Thanks, so much.
The next question will be from Ben Theurer with Barclays. Please go ahead.
Okay.
Hey, good morning, Jim and Jim just one and a half quick ones. So first of all could you elaborate a little bit on how organic growth was versus inorganic because if I remember right still the first quarter benefits from Sandler you used to give those data points in past earnings release.
But I couldn't find it in this one so just to understand like the underlying dynamic without Sadler how was the performance here.
Well without Sandler's, and obviously Sadler says as data a large sales volume business, but it's still up without without samplers.
So on an organic basis, our sales are up.
Okay.
Okay Perfect and then just following up quickly on the commentary around the international piece I think you've mentioned earlier.
As well as some of the headwinds on the freight side. So just to understand what your expectations are when it comes to freight on the international business just to serve those markets because clearly international has been.
A surprisingly good market in most recent quarters, but obviously there needs to be the delivery of products as well, but just to understand what you're seeing on the freight side of the international context.
Yes, I mean.
The most difficult part fan is really just making sure that we secure the containers for that business and so that's really been the focus of our team.
When we talk about overall freight we talked about low single digits I mean that that's inclusive of international So that's our total company per view of how we're thinking about free.
Okay.
Okay perfect. Thank you very much.
Thank you.
The next question will be from Adam Samuelson with Goldman Sachs. Please go ahead.
Hi, Good morning. This is Sarah Davis on for Adam just a quick question around the guidance from me I guess thinking about the ranges.
So on the sales side kind of in play you know between one and 7% growth year over year. So I guess anything you can provide just helping us think about what state of the world.
High versus low end of the range.
Would be super helpful. I appreciate it.
Yeah, It's a great question Sara.
It really is as long as there are significant downturns in any of the channels. I mean, you might expect some softness as one picks up it's going to have an offsetting impact to another but.
We believe that our foodservice business is really going to be the key driver for us for the balance of the year and so what that recovery actually it looks like I think is going to play a large part and where we fall in the range.
But we also do expect to see our retail business, whether it's grocery products or a refrigerated foods retail businesses still provide some growth.
<unk>.
And I said I think the biggest thing for US is what happens with foodservice. We do believe it's going to recover it's going to improve the rate and the scale at which that happens is really going to have a big impact on net outlook.
Super Helpful. I'll go ahead and pass it on.
Yes.
And the next question is a follow up from Ken Zaslow with Bank of Montreal. Please go ahead.
Hey, guys I appreciate the follow up.
Two parts one is when you are taking the pricing increase is it covering the current <unk>.
<unk> or is it anticipatory and the increase in volume from Jennie O was it any sort of pre buying ahead of the price increase.
Thank you.
Yes, no great question, Kevin, Yes that that pricing is too.
To cover the current environment.
No.
The performance at Jennie O would've been up by it.
Great. Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Jim Snee for any closing remarks.
Yes.
I want to thank all of you for joining us this morning.
As we discussed there is a lot of momentum across all parts of our business.
We also know there is work to do to deliver our sales and earnings guidance. This year.
But we also know that we have the right people the right portfolio to deliver the results that we need.
Thanks, again for joining us stay warm and stay safe.
And thank you Sir.
France has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Right.
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Okay.
Okay.
Okay.