Q2 2021 Hormel Foods Corp Earnings Call

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Good day and welcome to the Hormel Foods second quarter 2021 earnings webcast and conference call. All participants will be in a listen only mode should you need assistance from an operator, please signal and your conference specialist by pressing Star then zero.

After todays presentation, there will be and opportunity to ask questions to ask a question you May Press Star then 1 on your Touchtone phone.

Withdraw your question. Please press Star then 2 please note. This event is being recorded.

Now I'd like to turn the conference over to Nathan Annis Director of Investor Relations. Please go ahead.

Good morning, welcome to the Hormel Foods conference call for the second quarter of fiscal 2021.

And we released our results. This morning before the market opened around 630 am eastern.

And you did not receive a copy of the release you can find it on our website at Hormel foods Dot com under the investors section.

On our call today is Jim Snee, Chairman and the Board, President and Chief Executive Officer, and Jim Sheehan Executive Vice President and Chief Financial Officer.

James will provide a review of the company's current and future operating conditions commentary regarding each segment's performance for the quarter and our perspective on the balance of fiscal 2021.

And she and 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 1 question with 1 follow up.

Have additional questions you're welcome to get back into the queue and.

An audio replay of the call will be available beginning at noon today Central standard time, the dial in number is 877, 3 and 4.475 to 9 and the access code is 101 and 5550.

It will also be posted on our website and archived for 1 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'll be making.

Please refer to pages 26 through 32, and the Companys form 10-Q for the fiscal quarter ended January 24, 2021, it can be accessed on our website.

I will now turn the call over to Jim Snee.

Thank you Nathan.

Hey, everyone.

Once again this quarter I want to recognize the heroic work of our production team members.

Team deserves much of the credit for our record sales results this quarter.

And continued working to produce safe high quality food for millions of consumers and customers.

Our number 1 priority has been to keep our team members safe and our cross functional COVID-19 leadership team.

<unk>, we are on the leading edge of the country's vaccination efforts to.

To date, we have fully vaccinated over 51% of our domestic workforce, which is well ahead of the country's vaccination rates.

We are encouraged by the rapid decline in cases and our communities.

And our top line perspective, our balanced business model has again proven to be a winning formula as our team delivered record sales for the second quarter and.

And first half and <unk>.

Total sales for the quarter increased 8% compared to last year and sales increased over 5% for the first half of the year.

A key driver of our sales performance and it's a rebound and our foodservice business.

As expected our foodservice team experienced a strong recovery and took numerous actions to properly position our organization to capitalize on the industry recovery.

For the quarter foodservice sales increased 28%.

This reflects an increase of 1% over 2019 pre pandemic levels.

It is a significant accomplishment.

Especially knowing where the industry was just a few short months ago.

Since the beginning of the pandemic, our foodservice teams have been doing their part to support the industry.

And within days of the crisis, we worked closely with our distributor and operator partners to assess their businesses and many different ways, whether it was a rebate program to offset food cost extending payment leniency, helping adjust to the new takeout and delivery and pickup and environment.

And are simply being available to personally check in with the restaurant tour to see how they are doing.

Our confidence and the industry recovery and never wavered.

We know these actions benefit and our distributor and operator partners and are playing a part and our outperformance of the broader industry trends.

During this difficult labor environment are experienced and tenured direct sales force is helping operators and meet their accelerating demand with products that simplify their food preparation and save time and minimize labor.

All while preserving the flexibility to add their own unique touch tone and menu items.

Products like Hormel fire braised meats Sadler as authentic smoked barbecue sauce.

And Amy authentic Italian meats, Hormel Bacon, 1 fully cooked bacon.

Wholly guacamole and Jennie O, Turkey are uniquely positioned to meet this need.

The brightest spot and our foodservice portfolio has been our pizza toppings business.

Prior to the pandemic, we capitalized on the continued growth in this category, especially for premium products and invested heavily and capacity to meet future demand.

We've also been investing and plant based offerings and are seeing growth from our plant based pepperoni and crumbles products.

We're excited to leverage our expertise and our pizza toppings category to drive growth and plant based topics.

With our new capacity expansion at FERC and.

And with additional pepperoni capacity is set to open at the beginning of fiscal 2022.

We're set up nicely to meet the consistent growth we have seen in this space.

With the foodservice industry recovery, well underway, we will continue to strengthen our relationships with our valued partners and <unk>.

<unk> and our direct sales team and support the industries return to growth with innovative convenience and a flavor full product solutions.

In addition, and the foodservice growth.

Retail and Deli businesses also remained healthy with demand elevated compared to pre pandemic levels.

Total retail sales this quarter were flat to last year and as we lapped some months when consumers were stocking their pantries and anticipation of the pandemic.

Sales finished up 16% compared to the second quarter of 2019.

And we continue to see strength from our leading brands such as spam Applegate, Jennie O black label and as and wholly.

As a reminder.

We experienced and immediate and sustained demand surge for our shelf stable products and the grocery products segment.

Onset of the pandemic.

The second wave of demand that impacted our perishable and refrigerated items have and weeks later in the third fiscal quarter.

Sales and the Deli channel increased 4% this quarter and are up 9% over pre pandemic levels Hormel.

Hormel gatherings party trays delivered strong growth as consumers start to spend more time with family and friends and consequently are purchasing more products to entertain their guests.

The Columbus brand remains a cornerstone for our deli business and.

And is now benefiting from the opening of our new plants and Omaha.

Which is providing much needed capacity.

Columbus is a leader and charcuterie and we now have the capacity to continue expanding distribution.

Across the retail and deli space, our consumer takeaway and metrics continue to be positive according to IRI.

Many of our brands have made large gains and household penetration.

Overall buy rates are improving and we are seeing and expansion and cross purchasing across our brands.

E Commerce sales grew double digits and the last 12 weeks. According to IRI, and we are gaining share and important categories.

We will continue to increase our investments and this important channel.

Throughout the quarter, our supply chain continued to improve as we were able to increase production levels through a combination of gaining efficiencies, increasing capacities and and leveraging our strategic supply chain partners.

Another area, we have made great strides and our distribution network.

Over the last year, we have opened a new grocery product distribution center and in recent weeks have opened a refrigerated distribution Center survey and the West coast.

These strategic investments will reduce overall freight miles and cost and.

Prove our customer service levels support growth for our value added businesses and reduce greenhouse emissions.

From a bottom line perspective operating income showed a slight decline.

We saw raw material and feed prices rapidly increased throughout the quarter.

We have taken pricing actions and many categories, but did not see the full benefit of these actions during the quarter.

As we have previously discussed and a volatile market conditions pricing will lag the market, which will shift profits to subsequent quarters.

Net earnings and diluted earnings per share were flat to last year.

A higher tax rate negatively impact earnings by <unk> <unk> per share compared to last year.

Turning to the segments refrigerated foods volume increased 3% and sales increased 17% with growth coming from almost every division.

Value added sales increased 18% driven by a significant recovery and the foodservice businesses.

As anticipated, we saw a rapid increase and foodservice demand as the quarter progressed.

Almost all categories within the foodservice grew sales led by our pizza toppings portfolio and brands, such as <unk> and Bacon 1.

And in fact, pepperoni pizza, toppings, and Bacon, 1 and Fox and any authentic Italian meats, all showed growth compared to the second quarter of 2019.

We also experienced a recovery and the premium breakfast portfolio with growth from our old smokehouse brand.

Additionally, we saw excellent growth from our premium prepared proteins, which include brands such as off simple is fire braised cafe H and settlers phase.

These items are key to our pre strategy.

Items at our premier and create cooked pre sliced and fully prepared.

And as the industry recovery accelerates into the summer and labor remains the predominant challenge for most operators our line of products offer convenient safe versatile and flavor full solutions.

Our retail and deli teams delivered a strong quarter on the topline.

With growth coming from products, such as Black label, Bacon, and Hormel gatherings, Applegate, Lloyds barbecue Hormel, pepperoni, and Columbus prepared foods items.

Refrigerated foods segment profit increased 32% due to higher foodservice sales and higher retail fresh pork profitability and decreased operational expenses due to abating COVID-19 cost pressures.

International delivered its fifth consecutive quarter of record earnings growth.

And with sales, increasing 17% and <unk>.

Net profit increasing 6%.

The performance of the team and China remains impressive foods.

<unk> service volumes have recovered to pre pandemic levels, driven by growth from Skippy Pizza toppings and Bacon items.

Retail demand for the spam and Skippy brands has also been outstanding.

The company is innovative offerings, including beef jerky skippy snacking items and 2 new spam varieties are providing additional avenues for growth and <unk>.

And we remain confident and the long term prospects for our China business.

Branded exports also grew with growth coming from the Skippy and spam brands higher foodservice sales and improved margins on our fresh pork items.

In addition, our partners and the Philippines, South Korea, and Europe continued to experience elevated demand for shelf stable products.

Grocery products results were strong given the difficult comparison to last year due to the extremely high levels of demand experienced at the onset of the pandemic.

Even though volume declined 14% sales declined 8% and segment profit declined 23%. We are encouraged by this segment's performance.

We have seen sustained consumer demand for many of our brands compared to pre pandemic levels.

Sales for center store brands, such as spam, Hormel, Chili completes and Mary kitchen hash and we're all over 20% higher compared to our second quarter of 2019.

We will continue to support our leading brands, including Skippy and spam complaints per day is wholly justin's and a formula Chile.

And we are resuming promotional activity as inventory levels normalize.

Our Mega Max joint venture performed well and as equity and earnings increased 26%.

Both the year des and wholly brands crew as consumers look for authentic and convenient and Mexican products to enhance their at home eating occasions.

They are data brand continues to outperform the salsa category.

This brand has grown and households by $3 million.

Since the start of the pandemic and has introduced industry, leading innovation to the marketplace and recent years.

Following a highly successful performance of air <unk> Guacamole, salsa, and we continue to expand distribution and grow share with 2 new product lines.

<unk> Taqueria Street sauces, and their Dev salsa and <unk> <unk>.

Recently <unk> also entered the hot sauce market with the introduction of their Dev avocado Hot sauce, another versatile offering that can enhance any meal.

The wholly brand had a strong quarter as well as it continues to target consumers looking for convenient solutions to enjoy avocado offerings.

And our recent innovations, including wholly smashed and wholly dice avocado products solve for that consumer need.

And as we saw across many of our refrigerated foods service businesses demand for avocado products and that channel started to return during the quarter.

Jennie O volume decreased 3% and sales increased 2%.

The recovery and the foodservice business and higher Hulbard sales drove the sales increase.

Foodservice volumes were up double digits compared to last year.

Demand for Jennie O retail products, such as lean ground, Turkey remained above pre pandemic levels.

Jennie O Turkey store segment profit declined 54% due to the impact from higher feed costs.

Grain prices continue to increase significantly during the quarter.

And while pricing action had yet to be fully reflected in the marketplace.

And Jim Sheehan will provide further commentary on the actions, we have taken to manage higher corn and soybean meal cost.

Looking to the balance of the year, we are increasing our full year sales guidance range to 10.2 to $10.8 billion and reaffirming our earnings per share guidance range of $1.70 to $1.82 per share.

As a reminder, this guidance range does not include the estimated impact of the pending acquisition of the planters snacks net business.

Our diversified and balanced business model gives us confidence, we can perform well and many different economic scenarios and market conditions.

We have a very positive outlook on the foodservice business as we head into the second half of the year.

We are well positioned from an inventory and capacity standpoint to meet the demand from our distributor partners and operators and are confident and our ability to gain share throughout the recovery.

Additionally, we are increasingly confident that K 12 schools and colleges and universities will open and operate and a more traditional manner. This fall.

This should benefit both refrigerated foods, and Jennie O Turkey store.

We continue to see elevated demand and the retail deli and international channels, we expect to further benefit from pricing actions increased capacities on key product lines and continued improvements and our supply chain.

This year, we have seen rapid increases in key input costs across our businesses.

And we expect to operate and a high cost environment for the remainder of the year.

Our experienced management team has a proven ability to navigate and grow our business and volatile and inflationary and market conditions.

And once again, we will be leveraging our direct sales force to partner with our customers to mutually grow our businesses.

As a reminder, our operations were heavily impacted by plant shutdowns and supply shortages and lower production throughput caused by the effects of the pandemic and the back half of fiscal 2020.

This ultimately led to lower levels of inventory, which negatively affected the third and fourth quarters.

Further the strategic actions, we have taken to improve all facets of our operations and based on our record first half performance, we expect to benefit from more normalized operations and the back half of fiscal 2021.

I am confident and our ability to continue growing and.

And looking forward to closing the acquisition of planters next month.

At this time I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter and update on our financial position and provide commentary regarding key and input cost markets.

Thank you Jim good morning.

Record sales for the second quarter were $2.6 billion.

And increase of 8% first half sales increased 5% to $5.1 billion.

And so a record.

Pre tax earnings increased 2% for the quarter compared to last year.

Diluted earnings per share for the quarter was <unk> 42 per share flat to last year.

Second quarter results reflected approximately <unk> <unk> per share and incremental COVID-19 related costs and <unk>.

And higher tax expense.

SG&A, excluding advertising was 6.5% of sales down slightly to last year and.

Advertising spend for the quarter was $31 million.

Operating margins for the quarter were 11, 1% compared to 12, 1% last year higher raw material and feed costs negatively impacted margins as pricing lagged input cost increases we have taken numerous pricing actions across the portfolio to protect profitability.

<unk> will take place early in the third quarter with additional pricing actions likely.

Covid related expenses were $6 billion.

The impact of Covid expenses.

<unk> to decline.

Net unallocated expenses decreased due to higher investment income.

The effective tax rate for the quarter was 22, 1% compared to 26% last year, excluding the impact from the <unk> acquisition, we estimate the full year tax rate to be between 2020, 1 and 5%.

We built inventory during the quarter and preparation for higher demand and to support continued growth for the remainder of the year, our strategic action to build inventory was the primary driver of lower operating cash flow during the quarter.

We paid our 371 consecutive quarterly dividend effective may 17, and an annual rate of <unk> 98.

A 5% increase over the prior year.

Share repurchases were minimal during the quarter.

Capital expenditures were $45 million and the quarter.

The company's target for capital expenditures in 2021 is $260 million.

During the second quarter, we saw dramatic increases in pork and hog prices.

SDA composite cutout prices since January have increased more than $30 with all primarily contributing to the increase.

Ian and puts such as bellies and trim increased 57% and 76% respectively during the quarter.

Pork exports also set an all time record in March due to African swine fever, outbreaks, and China Southeast Asia and Europe.

We anticipate strength and pork markets due to continued export demand and a foodservice recovery domestically USDA and is now projected and pork production for the year to be slightly lower than 2020.

Industry operating efficiencies are expected to improve as COVID-19 pressures abate.

However, labor availability tighter hog supplies and reductions and the sow herd support higher markets.

Our balanced approach to hog and pork procurement mitigated cost volatility during the quarter.

And high cost and volatile environments, the strength of our leading brands and balanced approach to procurement continues to be a competitive advantage.

The guidance range assumes elevated and volatile market conditions for the balance of the year with some moderation heading into the fall.

And I talk prices and the USDA composite cutout to remain well above year ago levels due to strong domestic and export demand along with tighter hog supplies, we anticipate prices to peak during the summer and good.

Gradually decline in the fall consistent with the seasonal increase and harvest.

Belly prices are projected to remain higher than last year and historical averages.

We anticipate markets to stabilize near the current levels.

<unk> due to low cold storage levels, and strong demand and the foodservice channel could cause inflationary pressure.

Corp term prices are expected to moderate from the current levels, but labor shortages across the industry remains a key risk to trim prices is limited bone and capacity directly impacts trim supply and pricing.

Due to the higher beef harvest levels in the summer months beef prices are anticipated to be lower and the back half of 2021.

And response to global supply and demand imbalances, and corn and soybean meal, we have taken strategic hedges to fully cover grain costs for the remainder of the year.

The physicians also provide a benefit if markets decline.

These hedges.

And with the previously announced pricing actions are expected to protect Jennie O and profitability.

Turkey, Poult placements and egg sets of decline.

Inventory levels are lower compared to last year.

Tightening of supply has led to higher hold Turkey and <unk> markets.

We have also recently seen an increase and breast meat prices and recovery in the foodservice industry remains the key driver for higher prices for this important market.

We anticipate inflationary pressure on freight and the back half of the year.

The tactical action.

<unk> is our distribution network with 2 new Dcs.

Bind with improvements and load efficiencies will help mitigate a portion of the increase.

We have obtained the required regulatory approvals for the acquisition of those players snack nut business.

The scheduled close date is in June.

At this time I will turn the call over to 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 1 on your Touchtone phone.

We are using a speakerphone please pick up your handset before pressing the keys, but anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then 2.

First question stay will come from Peter Galbo with Bank of America. Please go ahead.

Hey, guys. Good morning, Thank you for taking the question good morning, Jim.

And thank you for all of the commentary.

Jim.

Yes.

Thinking about the guide and and the move in <unk> and.

And sales relative to kind of keeping EPS flat, we were just take the midpoint.

But the sales guide and you kind of implied that Youll see.

Relatively decent acceleration and gross margins and the back half of the year something and the magnitude of 60 to 70 basis points kind of versus what you did in the front half.

And I just wanted to see if that that's kind of how directionally, you're thinking about it and just given all the headwinds you called out understanding that the pricing actions that are coming through what would drive kind of that sequential improvement in gross margin.

Yes, good morning, Peter Thanks for the question and really what we're talking about here is the timing the volatility the magnitude of the inflation that we're seeing and so.

No.

The pricing actions that we've taken and didn't happen all right at the beginning of the second quarter and quite frankly, we're not done with all the pricing actions that we need to take so we've got a lot of activity on that front and so just the sequential action and our pricing.

And is what will lead to that sequential improvement and margins and so as you think about Q3.

And you'll see improvement, but probably some slightly lower margin as pricing hasnt quite caught up Q.

Q4, really start to see more normalized margins as full pricing takes effect across the board and I think it's important to note that we have either taken or will take price across almost all of our business.

No. That's helpful. Maybe just to clarify there Jim on the third quarter is that.

Lower margin sequentially versus last year versus versus normal and then just the second question.

As we think about Jennie O and obviously you've locked in some of the cost of the remainder of the year, Jim Jim Sheehan and talk.

Cost out a 9% operating margin bogey.

Target maybe for this year is that timeline kind of pushed out to 'twenty 2 'twenty 3 at this point. Thank you very much I'll start on Q3, and I think youre quite the first question is thats relative to last year, so slightly slightly lower margin for last year, just as pricing hasnt fully caught up.

Yeah, I'll touch on the jobs issue Peter first of all as we've talked about their pricing is now in place to cover that first ramp ramp up of our grain costs.

And as we talked about we've protected the grain cost for the rest of the year and yet.

And with also having the downside protection on that so we're 100% covered on on grain and the other thing is that we talk about is what's happening in the markets. When you think about Jennie O the fundamentals, which we keep pointing towards that over the last few years are better.

<unk> sets and egg sets and pull placements are both down 3% to 4%.

And youre starting to see that with the with the cold storage levels continue to be at 26 below 46% below the 5 year average what youre starting to see now is some nice improvements and the commodity markets around.

Turkey for instance, yesterday, you saw breast meat at $2, a 11 and sets.

The.

There are a lot of watch outs on jobs, but there's also a fair amount of upside and we're starting to see that upside come through we've watched these.

Fundamentals point towards better markets for probably a year now.

Really haven't taken place.

And what they do seem to be taking place as we go forward.

As far as the <unk>, 9%.

These and the drastic jump up and freight and cost obviously delayed that.

So we look at the full year margin of 9% that's really been pushed out.

A bit.

Got it that's very helpful. Thank you.

The next question today will come from Adam Samuelson and with Goldman Sachs. Please go ahead.

Yes, thanks, good morning, everyone.

Hi, Jim Sheehan maybe.

Continuing on some of the Johns questions and any in your last response, you referenced kind of a whole bunch of some positives, but a bunch of watch out.

And from grain cost and I'd love to hear kind of the key things that are still in your mind is is it.

And the demand growth and kind of.

Your performance in retail sales.

Self penetration as well.

What are you kind of focused on there besides the grain cost and keep watch out.

I'll start I'll start with a little bit on the watch outs and I'll turn it over to Jim to talk about the.

Performance.

I think as you look at the inflation that we've seen recently and as you look forward.

Obviously, you have the grain is impacting inflation.

For that you've got the demand and we know the demand is very solid.

Weather conditions look pretty goods plays even catch and seem to be maybe a little bit.

I understand it if the USDA.

So that looks okay. It looks looks good at this point obviously of June we'll have a better read of that but as I would look at things I think the other thing that's impacting and inflation is labor availability.

And getting people back into their jobs will.

I think alleviate some of the labor pressure.

From a COVID-19 standpoint, we're in really good shape.

And it's getting new hires it's getting people back to the job that <unk>.

Probably just to watch out for me not only of jobs, but.

Across the industry and <unk>.

And I would say more from a business perspective.

I think our retail business has performed well.

Again, its hard and the year over year environment, but if we go back to pre pandemic, especially on our lean ground, Turkey very very strong performance pleased with distribution gains and household penetration the velocities that we're seeing.

And from a foodservice perspective.

And they're a little bit more exposed or the K 12 business the school business, which obviously didn't come back and full strength, we do expect to see that in the fall and then spillover into 2022.

And we think about it from a retail and foodservice perspective.

There is optimism on the business front.

Alright that color is really helpful. And then my second question was really just thinking about trajectory of foodservice.

As we go into the back half of the year, you kind of gave some color where the second quarter was up versus 19 levels.

How do you think the industry performed or I guess the relevant.

<unk> for you.

On a similar metric and just areas, where you think you are maybe gaining some outsize share and giving you some some optimism.

And I think it's fair to say and Im.

Really broad based so we outperformed the industry here and the second quarter and that that's not new right. I mean is even pre pandemic, we talked about our foodservice business typically growing at double the industry rate and so.

We're confident that we've outgrown our growing faster than the industry.

For us, where we see future opportunities and a number of our segments.

We haven't seen lodging come back we really haven't seen college and University fully come back, which is a big part of our Hormel foodservice business and I referenced K through 12 for the Jennie O foodservice business. So.

And Theres still a lot of dynamics at play.

And so even as these other segments. These other channels really start to reopen those are going to have a favorable impact on our foodservice business as well.

Alright, I really I appreciate that color I'll pass it on and thanks. Thank you.

Yeah.

The next question today will come from refresh per week with Oppenheimer. Please go ahead.

Good morning, and thanks for taking my question.

I guess just given what we saw in Q2 food service now Bob.

Where you were in 2019 grocery is still very strong so as you exit the pandemic I mean do you guys think now that youll have a much higher foodservice and grocery business going forward.

And I think pashmina.

We've always felt very confident and all of our business. Obviously, we've talked a lot about the strength of our business and particular in center of the store and so we think it will continue to be strong post pandemic, you're going to have some moving parts and some volatility and year over year quarter to quarter, but I wont.

I believe once things settle down and we'll see our continued strength and center of the store grocery business and continued strength and our refrigerated retail business.

And then we've always talked about our relative competitive advantage and the foodservice space and and I think that's playing out right now and will continue to play out this year and and into the future.

Great and then maybe 1 follow up question. So as you look at grocery products and I was curious how you guys are thinking about that segment for the balance of the year and then sales trends have turned negative for other players as well how would you characterize the current promotional backdrop.

Yes, the biggest driver for US right now repurchase is getting some of those tier 2 and tier 3 items back on shelf and Thats really what retailers need as we want to provide more promotional activity and the back half of the year and into 'twenty..2 you can't just have 1 variety and have a promotion so as our supply.

And a chain has recovered and we've been able to focus on those varieties, we're seeing retailers being a lot more willing to engage and promotional discussions which will be very very helpful for the business and the balance of 'twenty 1 into 'twenty 2.

And I think I'd add to that repurchase that remember our fourth quarter and GP was significantly constrained by capacity issues and our operations.

Great. Thank you for all the color of basketball and.

Okay.

The next question will come from Tom Palmer with Jpmorgan. Please go ahead.

Hi, Thanks for the question Tom.

You mentioned on the earnings call that more prices expected to flow through and the second half of the year.

Price mix, 11% this quarter highest and years I know you typically don't provide this but just given the magnitude of the price mix figure could you help with some detail on how much mix really contributed to that number and the second quarter and then how much maybe pricing we should expect to really ramp as we look at.

The second half of the year.

You're putting up all of them and now I mean.

Throw and 5% on top of that are some sizable number.

Yes, it's a great question Thomas as you think about our business and that price mix, I mean, and really a key driver and.

And the second quarter was our foodservice business, which tends to track markets more closely than the retail business.

We have we did have some impact of retail pricing and the quarter, but again it wasn't for the entire quarter.

But the big driver and the quarter was foodservice.

Okay. Thank you.

And then in the prepared remarks, Jim Sheehan, you noted the magnitude of hog and pork price increases.

Last year saw some weaker hog pricing you've called out hedging losses.

And I know there'll be more color and the 10-Q, but just any detail on on hedging this quarter, such as maybe gains that flow through sure Tom.

I appreciate the question remember our accounting method is 1 that we do not mark to market our positions but.

We run them through the cost of goods at the time and the product is sold.

So as you look at our.

The realized gains and losses are in the quarter.

Unrealized or in other comprehensive income.

And those will be and the $45 million range of unrealized gains and losses and that would be 4 hogs and grain and our interest positions.

Okay. Thanks for that diesel and just to confirm not not a factor this quarter.

I recognize that.

It didn't give us much helped this quarter it was a pretty immaterial amount.

Okay. Thank you.

And the next question will come from Robert Moskow with Credit Suisse. Please go ahead.

Hi, I guess, a couple of clarity questions.

Just on that Jim the 45 million I guess those are hedging gains and so those will flow through.

And a positive way to your P&L as you sell the product.

But it's also there's also higher and.

Input costs flowing through wall. So so theyre kind of fighting against each other for the next couple of quarters.

Unrealized gains are gains based on the market close.

It would be what would be affected and we also as I stated before we also have our interest hedges in there too. So those are more related to the debt that we will be issued.

And have a longer tail that obviously, the gray and or the hog markets. So it's a mixture okay.

Okay I'll follow up on that regarding the 6% pricing and grocery in the quarter can you give a little color on what kind of product lines.

You raised the pricing on it.

Is that gonna accelerator as well or is that kind of like a new normal for a while because of actions you took and <unk>.

<unk>.

Yes price is the biggest driver to the pricing and the front part of the year, Rob was the Skippy price increase that we took earlier in the year.

And GP and we still have additional pricing action to come whether it's spam are Eric as I made a number of different GP items. So we did have some and the first half, but there's still more to come and in the back half of the year.

Okay.

Okay. That's my questions. Thanks, Thank you.

And the next question will come from Michael Lavery with Piper Sandler. Please go ahead.

Thank you and good morning.

Just wanted to go back to the share gains.

Kind of broadly and maybe try to understand a little bit the landscape and a high level I guess just looking at.

And of your foodservice growth.

Versus 2019 and.

The strong retail growth versus 2019.

Assuming.

People aren't just eating more.

There is clearly some momentum there that it's coming from somewhere.

And I suppose there's a chance there's maybe a permanent reset of pantry inventory, but even that probably is small. So can you just give a sense of.

Who you're gaining share from or are there. Some smaller competitors that are suppliers that have gone out of business or just how do you kind of understanding how you're sourcing your share gains.

Yes.

It's a mix again, depending on which category you're talking about I mean and in some cases.

We are in line with category, So whether you think bacon and our spam or peanut butter.

I think we've seen some outpacing and some of our our meal.

Offerings as you mentioned I think we've seen it and our Mexican portfolio, which really is taking that share from competitors.

So I think as you go across the portfolio Michael It really is a mixed bag.

Are those share gains are coming from.

Okay, Thanks and.

Just following up on the foodservice piece.

And you called out.

The boost it gave partly from the pass through pricing there can you give us a sense of.

How much pricing is pass through and your portfolio versus just.

And what requires a list increase.

Oh I mean.

The majority of the foodservice business is ill call. It off of traditional priceless. So that gets adjusted on a weekly basis, and we tend to see that pricing reflected and we've always said within 30 days. So a significant portion of our business has still done that way.

We do have some other pricing arrangements, obviously with larger national accounts.

But just think about it where the majority more than the majority of the business is on a pass through basis.

And on the retail side.

Well I mean, we've always said that's more of a 90 day price action in terms of having a discussion with the customer getting and accepted and then getting it implemented really the only difference there would be retail fresh pork.

Which I mean does play a role and still has a significant part of our portfolio, but that is priced on a weekly basis.

Okay, great. Thanks, so much.

And the next question will come from Eric Larson with E Sport and Global Securities. Please go ahead.

Yes, good morning, everyone. Thanks for taking my question.

So the first question is and I think Jim Sheehan kind of referred to some of this but.

Can you talk a little bit about hog supplies were not going to see a huge increase to production this year.

High grain prices, probably are a disincentive, yet we have hog prices are light purchased well over $100.

100 weighted right now.

Supply constraints on your biggest raw material is that is that a possibility going forward here and it looks like grain prices could be high for a while so.

How do you look at maybe the next couple of years, just not just this year, but maybe next in terms of.

Hog production and the U S and what our farmer's doing out there.

Well as we've talked about in the past, Eric we do long term contracts with our producers and.

And as you are aware of these producers are.

Large.

Operators with a high level of capital and and tend to keep their barns filled we also get a large portion of our production from our contracted.

Facility, the Fremont facility, which is made up of.

Producers they tend to like to keep their own plants full and so I'm very confident that we will have the supply that we need both short term and long term. We go through these cycles all the time.

Hog prices have increased rapidly.

The prices have gone up a lot youre right grain prices are are high right now, we'll see how the growing season.

What the results are from the growing season to see what what impact it has on prices but.

And these are long term agreements and we're not having anybody get into the.

Negotiations about taking down their volume so I'm highly confident.

Okay. Then my follow up question is on your on your supply chain conversion and all your efforts that you've done on that and would have been quite remarkable and and I think we even alluded to the to the benefits of your improved supply chain and your in the press release, but I believe if we go back I think.

At 1 point, you said that supply chain was going to.

And you have this number and correct. So correct me, if I'm wrong, but bought $75 million of supply chain cost benefits, but that was a while back can you give us.

Quick update on <unk>.

And how the supply chain is helping you here and it's got to be helping your cost structure and then obviously it.

And it keeps you from having to price too aggressively as well. So can you share that dynamic with us and give us a little update there.

Sure. That's a great question, Eric and we have spent a lot of time and effort over the last 3 plus years, putting together are 1 and supply chain and it's really been our initiative to take this fragmented approach throughout the supply chain and really and capitalize on the efficiencies and take cost out.

And.

And so we've done a lot of great work and our operations and our logistics as we mentioned.

Some of the warehousing initiatives that we still had going on and you are right.

Probably the first 2 years of supply chain and even going into.

And the pre pandemic, we talked about our ability to have cost savings of $75 million.

Last year, obviously was a bit of disruption, but that didn't stop the good work that was happening behind the scenes and I think you'll see that play through and we talk about our ability to open up new new warehouses.

To help.

Mitigate some of the cost pressure on GP and now on our refrigerated portfolio, so and and.

The other thing is for me personally I can't imagine and us having gone through the pandemic with a fragmented supply chain, having 1 voice from the top setting direction and making sure that the entire team was aligned was very very powerful and necessary for the organization.

So the benefits to the organization have far outweighed the financial returns and we are in a significantly better place today as a result of our efforts on and on 1 supply chain.

Okay, great. Thanks, and have a great memorial holiday and thank you to share.

And the next question will come from Ben Bienvenu with Stephens. Please go ahead.

Okay.

Hi, Good morning. This is Ron on for Ben I, just had 1 quick question.

What is the ramp and foodservice sales and the corresponding capacity utilization improvement contributed to margin.

Oh, Yes, I mean, I think there's obviously a day.

So they go hand in hand and.

We've talked about some are coming out of it or I should say and amidst the pandemic the underutilized capacity and which of course led to some of our increased COVID-19 COVID-19 costs. So there has there has been a benefit but really the big driver and the way you should think about the foodservice business.

Is the volume that we've been able to drive and the in the marketplace and really it's the reopening the reengagement with distributors and operators and then I mentioned earlier with a number of different segments that really havent opened yet or hit their stride. So not only do we feel good.

About where we are today, but the opportunities that are yet to come.

Great Great and May.

And if I could just squeeze 1 more in.

Alright.

Just regarding your price increases.

Do you think that you'll be able to hang on to some of these increases after this period of cost inflation and abates and maybe you can just help us think through.

What will be easier versus harder to achieve.

Yes, that's a great question and it's something that we we talked about a lot because.

And nobody likes to be in the midst of the inflationary period with all the market volatility, but it's not new to us.

We've managed through multiple inflationary periods over the course of our business and.

And our management team our leadership.

Well established plan for how we take pricing.

How we appropriately promote and really to your point about how and how we work hard to maintain net pricing over time. So yes, we do believe that we'll be able to do that as we've demonstrated in the past.

Yeah.

Thank you for the questions Thats It for me and thank you.

And the next question will come from Antonio Hernandez with Barclays. Please go ahead.

And good morning, Thanks for taking my question.

International segment and statements.

Statements and explorer.

<unk>.

Thank you.

Yes.

James just a little bit more guidance and what you've seen there and Jamie difference.

Expenses and cold spring.

And that's unusual.

Yes, I would say the big issue the big difference between the international and domestic right now is the whole ocean freight issue, including containers, that's creating some additional cost and the system.

Freight we've been able to free up a little bit domestically, we have been able to manage that as we've improved our supply chain, but.

Ocean containers freight availability goes back to this issue around labor.

And that's created some not only higher cost, but also some shipping interruption.

And I think Thats probably.

And going to last for the rest of the year.

The optimism that we have and our international segment and it is broad based but certainly with a high level of focus on that.

And that continued growth and the continued success.

And that we're seeing and China from both our retail and foodservice businesses and.

And I mentioned, it and my remarks, but where we're really excited about the performance of spam and how we've been able to really gain distribution and the acceptance of that brand and how we're launching innovative new flavors. The skippy business continues to be very very strong.

Non traditional innovation with our hormel beef jerky and so we continue to expect growth coming out of that business and across all areas other multinational exports and partnerships.

Okay. Thanks, and then.

Okay.

And this will conclude today's question and answer session I would now like to turn the conference back over to management for any closing remarks.

Yes, well thank you all for joining us today.

Our strong performance this quarter once again demonstrated the resilience of our entire team and the strength of our balanced portfolio.

We know that we still have work to do for the balance of the year, but we remain very optimistic about the future and we look forward to bringing the planters business and the planters team onboard and share. Thanks.

Again and for joining us.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

And 3.

<unk> foods.

Welcome ladies and gentlemen.

Okay.