Q3 2021 Hormel Foods Corp Earnings Call

Good day and welcome to the Hormel Foods third quarter 2021 earnings Conference call.

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Please note today's event is being recorded.

I'd now like to turn the conference over to Nathan Annis Director of Investor Relations. Please go ahead good morning welcome.

Welcome to the Hormel Foods conference call for the third quarter of fiscal 2021.

We released our results this morning before the market opened.

Round 630 am 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 investors 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 on each segment's performance for the quarter and a perspective on the balance of fiscal 2021.

Jim Sheehan will provide detailed financial results and commentary on the company's 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 daylight savings time.

The dial in number is 870.734 475 to nine and the access code is 10159436, it will 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.

Or implied by the statements we will be making.

Please refer to pages 28, $38.0 in the company's Form 10-Q for the fiscal quarter ended April 25, 2021, it can be accessed on our website.

I will now turn the call over to Jim Snee.

Thank you Nathan.

Good morning, everyone.

In the third quarter, our team delivered the highest quarterly sales in the company's 130 year history, while operating in an environment, which included inflationary pressures and industry wide supply chain challenges.

Our ability to deliver this performance demonstrates the strength of our balanced business model and a strong consumer demand.

As we grew sales in all four segments and all four sales channels on an organic basis.

Also in the third quarter, we completed the acquisition of the planters snack nuts business.

This brand fits perfectly into our vision for Hormel foods and is another step in our strategic evolution.

The integration has been smooth, which has allowed us to effectively operate the business with no disruptions.

These accomplishments were achieved by our team members. So never lost sight of our long term growth strategy in the face of unprecedented industry wide challenges.

To all our team members around the world, including our new planters team members. Thank you for your accomplishments and thank you for staying safe.

Now more than ever our investments across all areas of our business are paying off.

They have allowed us to reach even more consumers when and where they are eating.

Whether it is cooking a meal at home.

Snacking at work eating at a local restaurant hosting a gathering with family and friends or ordering food online.

A hormel foods branded product will likely be an option.

The proof is in our performance this quarter.

Sales increased 20% on a volume increase of 1%.

Compared to the third quarter of 2019 sales increased 25%.

This all time record performance was led by an acceleration in our foodservice business.

Sustained demand for our retail and deli products continued growth from our international business and pricing actions taken across the portfolio.

A partial quarter of the planters business organic sales increased 14% and volume declined 2%.

For the quarter.

We saw an acceleration in our foodservice business as sales grew 45% compared to last year.

What is even more impressive as sales increased 17% compared to 2019 pre pandemic levels.

Our enterprise foodservice portfolio remains perfectly positioned to meet the most pressing need of today's foodservice operators, which is labor.

Our products minimize labor.

Simplify food preparation and save time.

All while preserving the flexibility to add their own unique touch to their menus.

Hormel Bacon, one fully cooked bacon.

<unk> <unk> authentic Italian sausages, and Hormel fire braised meats are all excellent examples of products that are succeeding in today's environment.

Our retail business also showed a 9% growth compared to 2020.

Compared to pre pandemic levels in 2019, this business delivered outstanding growth of 31%.

Brands, such as spam Hormel Black label Applegate, Jennie O and air does continue to resonate with consumers.

Sales in the Deli channel increased 12% this quarter and are up 16% compared to pre pandemic levels.

Hormel gatherings party trays, and Columbus Charcuterie items showed another quarter of growth as consumers return to entertaining and spending time with family and friends.

An important component of our growth in retail and deli as our E Commerce performance.

We continue to invest in the digital space and we are seeing strong results compared to pre pandemic levels.

Our international channel delivered impressive growth of 36% compared to 2020.

And is 33% above 2019 levels.

Improvement was led by branded exports and strength from our multinational businesses in China and Brazil.

Again, I cannot stress enough how proud I am of our entire team for delivering these impressive results in the midst of an incredibly difficult operating environment.

Marked by significant inflation.

Labor challenges and supply chain disruptions.

This not only demonstrates the team's ability to execute our long term growth strategy.

But also reinforces the power of our brands.

On a consolidated basis diluted earnings per share were <unk> 32 cents.

14% decline compared to 2020.

The decrease was due to one time transaction costs and accounting adjustments related to the acquisition of the planters business.

Adjusted earnings per share were <unk> 39, a 5% increase.

Our team did an excellent job actively managing through inflationary pressures and supply chain challenges.

During the quarter, we continue to see inflation in labor rates.

Supplies raw materials, and many other inputs with an acceleration compared to the second quarter.

Of note, we saw a very high level of inflation and pork input costs.

To mitigate this inflationary pressure, we have taken pricing on almost every brand and product across our company.

This is a testament to our successful pricing strategy the power of our brands and the hard work of our entire team.

Especially our direct sales force.

As a reminder, there is a difference in how quickly pricing flows through by channel and this can shift profits to later quarters.

We have a track record of improving profitability through a market cycle, and we expect margins to improve in the coming quarters.

We also cite drastic step up in industry wide operational challenges caused by labor shortages.

This has impacted both our facilities and the operations of supplier and logistics partners.

<unk> has created a very complex operating environment, which led to an inability to fully meet customer demand.

To address labor availability in our facilities, we are taking swift actions to hire and retain team members implement automation across manufacturing facilities.

And simplify the portfolio.

Our entire team from operations to our direct sales force has done an excellent job adjusting prioritizing and managing through this dynamic environment.

Turning to the segments refrigerated foods volume decreased 2%.

Sales increased 19% and segment profit was flat.

Organic volume decreased 3% and organic sales increased 18%.

Volume was lower due to lower harvest levels and commodity sales compared to last year.

Our foodservice business accelerated compared to the second quarter with elevated levels of demand for all our branded products near.

Nearly every category grew volume and sales compare to last year.

Standout performances from products like Hormel, Bacon, one pizza toppings and sliced meats.

Bacon, one fire braised fashion, any applegate and pizza toppings were just some of the items that also grew volume in sales compared to 2019.

Similar to prior quarters, we saw excellent growth from premium prepared proteins, which are the cornerstone of our <unk> strategy.

Offering versatile and flavorful items that come primary need it pre sliced or pre cooked.

These items solved for the most pressing issues facing operators today.

Labor shortages.

Brands like Bacon, one Austin Blues fire Braised and Cafe H are designed to solve for this challenge and have never been as important or in higher demand than they are today.

We saw momentum continue for our retail and deli brands in refrigerated foods as well.

Products showing exceptional sales growth include Hormel gatherings party trays Hormel Black label Bacon.

<unk> fully cooked entrees and Lloyds barbecue.

The Columbus brand has shown no signs of slowing down as consumers look for premium authentic charcuterie.

I am pleased with the performance of our new Charcuterie plant in Omaha as the team is quickly filling up the new production lines.

We are excited about the upcoming holiday season, and expect a high level of demand for our innovative and premium Columbus product lines.

International delivered its sixth consecutive quarter of record earnings growth with volume up 2%.

Sales up 26% and segment profit up 18%.

Organic volume increased 1%.

And organic sales increased 24%.

Total branded in fresh pork exports grew during the quarter.

We continue to see strong growth from spam Skippy and many foodservice brands around the world.

Our business in China continues to perform well led by food service and from retail brands, such as spam and Skippy.

Our new item launches of beef jerky and Skippy snacking items have also been very successful.

Grocery products volume increased 4%.

Sales increased 20% and segment profit increased 1%.

Brands, including spam Hormel complete and wholly showed excellent growth during the quarter.

We continue to see strong growth relative to 2019 pre pandemic levels for brands, such as spam Hormel completes Dinty Moore, Mary kitchen and air does.

Yeah.

Organic volume decreased 6% and organic sales were flat.

Organic volumes faced difficult comparisons due to the extremely high levels of demand during the early parts of the pandemic.

Additionally, we have rationalized capacity on numerous contract manufacturing items to support growth of our branded business.

Our Mega mix joint venture delivered excellent results as equity and earnings increased 30%.

The growth from the air <unk> and wholly brands are being driven by the tremendous level of innovation from Mega mix with products such as air does Cray, most says <unk> guacamole salsa and wholly smashed avocado.

We are also extremely encouraged by our entry into the hot sauce space with their Dez avocado Hot sauce.

Jennie O volume increased 9% and sales increased 22% a combination of our foodservice recovery and higher whole bird and commodity volumes drove the volume increase.

Increased sales is due to higher volumes and pricing actions across the portfolio.

Jennie O Turkey store segment profit declined 17% driven by the impact from significantly higher feed and freight cost.

While spot grain markets remained elevated during the quarter. The hedging actions, we took stabilize the cost increases.

Looking to the balance of the year, we issued our full year net sales and earnings guidance to reflect the planters acquisition.

We expect net sales to be between 11 to $13.0 billion.

Four of diluted earnings per share to be between $66.0 to $70.0

This guidance reflects the addition of the planters business and includes the associated onetime transaction costs and accounting adjustments. In addition to the impact from inflationary pressures on our business.

We expect a strong finish to the year as pricing actions continue to take effect. The foodservice industry continues to recover and from the addition of planters.

Looking beyond the fourth quarter I feel very optimistic about the future.

Our balanced portfolio with diversification across raw materials channels and categories will allow us to perform well in many economic environments.

Further we never wavered on our commitment to employee safety, and making disciplined and strategic investments to ensure we are positioned to deliver long term sustainable growth.

Since the onset of the pandemic, we have made the following strategic investments.

We opened a new Columbus Charcuterie plant in Omaha, and we immediately invested in phase II, representing a major expansion of our pepperoni capacity.

We completed that pizza toppings expansion at our FERC plant in Iowa, which significantly increased our capacity for pizza toppings.

We have invested in R&D for plant based products and launched our plant based pepperoni and sausage crumble items at the Pizza Expo in mid August.

Additionally, we bolstered our innovation efforts by investing in new R&D centers, both domestically and in China.

We expanded our distribution network for both the shelf stable and refrigerated businesses.

We made further progress on building out our one supply chain by investing in systems people and processes.

We acquired Sadler smokehouse, which added capacity to support growth during the recovery in the foodservice industry.

We completed the HR and finance portions of project Orion and continue to work toward the multiphase implementation of our supply chain.

We continue to make investments in advertising for our leading brands.

And finally, we made the company's largest investment ever the acquisition of planters.

We are already seeing the benefits that a large iconic and well known brand can have on our business.

These are just some of the many investments we've made to further enhance our business and set us up for growth into the future.

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

Thank you Jim good morning.

Third quarter sales were $11.0 billion, an all time record for the company.

Net sales and organic net sales increased 20% and 14% respectively compared to last year.

Segment profit increased 2% for the quarter driven by strong results in the international segment Foodservice growth and the addition of planters.

Earnings per share were <unk> 32.

Adjusted earnings per share, excluding one time costs and accounting adjustments related to the acquisition of planters was 39.

A 5% increase.

Covid related expenses during the quarter were immaterial.

Adjusted SG&A was six 9% of sales compared to seven 6% last year.

Advertising for the quarter was $31 million an increase of 25%.

Adjusted operating margins for the quarter were eight 7% a decrease from 10, 5% last year.

We expect margins to show sequential improvement in the fourth quarter as the impact of pricing actions continue to take effect.

Net unallocated expenses decreased as a result of the one time acquisition related costs for planters and net interest expense.

Effective tax rate for the quarter was 13, 3%.

The primary driver of the decline was a large volume of stock options exercised during the quarter.

Any onetime foreign tax benefit.

The revised guidance range assumes a full year tax rate between 44%.

Operating cash flow declined compared to last year impacted by working capital from the planters acquisition and higher levels of inventory.

Inventory levels were unseasonably low last year during the third quarter.

We paid our 372nd consecutive quarterly dividend effective August 16th at an annual rate of 98 per share a 5% increase over 2020.

This completes the 90 <unk> consecutive year of uninterrupted dividend payments.

Capital expenditures were $54 million in the quarter.

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

Planters acquisition represents a change to the company's capital structure.

In June we issued $5.0 billion of notes and three 7% and 30 year tranches.

This debt was incremental to the $1 billion of 10 year notes, we issued in 2020.

Including the Treasury locks the weighted average cost of debt is one 6% and the weighted average maturity is two four years.

This attractive debt profile is an IPO balance for our business.

We will continue to use a disciplined waterfall approach to capital allocation, which includes three areas required strategic and opportunistic uses of cash.

No changes to dividend growth or our Capex strategy.

We are committed to an investment grade rating and plan to deleverage to one and a half to two times debt to EBITDA over the next two to three years.

The business experienced significant inflationary pressures on pork input costs during the quarter.

Dramatic increase in pork and hog prices continued in the third quarter.

<unk> prices were up 250% compared to 20 year lows last year.

Additionally, the prices support remained elevated caused by the recovery in the foodservice and the strong worldwide demand.

The USDA composite cutout was up 50% compared to last year, and 20% compared to the second quarter.

Driven belly prices also experienced inflationary pressure with significant volatility.

Compared to the prior year belly prices were 62% higher and trim prices were 27% higher.

The business benefited from the balanced approach to organ procurement as we purchased hogs.

Aggregate at prices lower than the market.

Forever.

The rate of the drastic rise as the total pork input costs negatively impacted profitability.

The latest estimates from the USDA indicate pork production for the year to decreased 2% compared to 2020.

Lower harvest levels lighter carcass weights and labor shortages across the industry support higher markets near term.

We are closely monitoring the discovery of African swine fever in the Caribbean and labor availability across the industry.

Both factors could impact input cost going forward.

Fundamentals in the Turkey industry improved during the third quarter higher prices for commodity items, including breast meat thighs and whole turkeys were a benefit to the quarter.

Additionally, egg sets and pulp placements to quiet.

Cold storage remains significantly below historical averages.

Higher operating costs offset the market benefits instead.

Inflationary pressure on corn and soybean meal have resulted in substantially higher feed costs.

The strategic hedges on corn and soybean meal.

We have stabilized feed cost.

We also absorbed higher costs for freight packaging supplies and labor.

We are actively managing our logistics networks and supplier partnerships to minimize cost increases.

Across the portfolio pricing actions were effective but from a timing standpoint trailed inflation during the quarter.

We expect to recover loss profitability due to inflation in the coming quarters as conditions normalize and pricing actions expand.

The strong demand for our key products during the price increases is a testament to the strength of our leading brands.

Guidance issued for the remainder of the year includes the impact of planters and the expectations of continued inflationary pressure and volatile market conditions.

Although the third quarter had its challenges, but also included significant financial milestones.

We closed the largest acquisition in the company's history.

We financed the transaction by leveraging the balance sheet through an attractive debt structure in both interest rates and <unk>.

Dinner, all while maintaining our investment grade rating.

We move into the future with a more efficient capital structure stronger brands and continued financial strength to invest in our business.

At this time I'll 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.

Asking the question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

Today's first question comes from Michael Library with Piper Sandler. Please go ahead.

Good morning, Thank you good morning.

Yes.

Elaborate on your pricing a bit and give a sense.

You said it's broad.

Maybe literally every brand and product but.

Maybe one just some of the order of magnitude and how you determined kind of what was appropriate then.

And if it might be enough or you think this covers you for well into next year as well as obviously, finishing this one.

Yes, good morning, Michael.

Yes.

That's a really complex question.

And you hit it right on the head when you say and we've said that the pricing is very very broad based across the portfolio.

And I think for us what we've been watching throughout the second quarter and the third quarter.

Is just to be prepared.

And making sure that as we're watching not only commodity markets, but packaging costs and freight rates is making sure that we're capturing those in that timeframe.

What's been different in this environment is obviously those costs have just continued to move away from us and no different than any other food company that you're that you are talking to what I do think is different though is that we have been ready we have taken broad based aggressive pricing.

But we've continued to have to do that and we will continue to have to do that.

We've seen these markets and costs continue to move away from us so.

Again, it's really broad based that can vary by product by category clearly, we're watching all of the category dynamics, we're watching what's happening with elasticity within our brands and categories and so it's obviously, a very complex dynamic, but the key takeaway though is that.

We're really pleased.

With the pricing actions that we've taken we're pleased with the brand performances and we know that we're ready to react with some additional pricing going forward.

Okay. That's helpful and maybe just to clarify.

What we see from this report in the third quarter would that pretty fully reflects the pricing or was it really just getting underway. So that we should expect it to accelerate.

Well I mean again it depends on brand and category, but we've got as you can tell a significant pricing that took place in the quarter. Some of that will carry over into the fourth quarter, but we also have pricing that is being prepared to go into effect that will take effect in the fourth.

As well so so it's really going to be a combination of spillover from Q3 into Q4, and then some new pricing actions in Q4.

Thank you. Our next question today comes from Ben <unk> with Stephens. Please go ahead.

Hey, Thanks, good morning.

Good morning.

I wanted to ask so in the adjusted results it looks like the implied impact from planters is about <unk> <unk> per share that's up towards the higher end of what you said the impact would be for the full year to planters. When you provided guidance last time on the deal can you give us some color on what you think the full year.

For the balance of this year net impact of planters is that's implied in your guidance. So we can get some clarity on kind of the core business.

Good morning, Ben.

<unk> that youre referencing is only related to those onetime events related to the transaction. So the closing costs.

And those accounting adjustments that were made there.

Obviously, some transitional expenses as we bring this business online.

Always occur with any type of.

Business transfer. So those are those are included we are still we still believe that the 2% to 7% dilution.

In 2021 is reasonable.

Okay great.

And then if I think about the.

I want to focus on the grocery products business, but if I think about the.

The margin recovery of the business you talked about taking price.

Working to take cost out of the system and drive efficiencies.

Can you give us some sense of kind of pace of recovery, obviously implied in the fourth quarter, we're seeing meaningful margin improvement sequentially from the third quarter.

But to the extent you could delineate between grocery products and the relative segment's contribution to that improvement in margins sequentially.

And kind of the trajectory from here that you would see based on the current market outlook that would be really helpful.

Sure. We can do that for you I mean, I think the first thing to start with is the grocery products portfolio.

Probably more than any other part of our business has that has the longest lag in pricing and so youll see.

We say on average 60 to 90 days in terms of how that how that pricing.

Passes through.

And for US I mean, we've taken pricing across that entire portfolio.

You think about 72 Corp trim and how that has been through the roof.

And so we've been very aggressive we have been.

We are ready to take additional price actions and so we've got a mix just like I said earlier, we've got a mix that I've taken effect in Q3.

And we will have a bigger impact in Q4, we have another round that will be coming in Q4 that will really have the impact in Q1 of 2022.

Thank you. Our next question today comes from Tom Palmer of Jpmorgan. Please go ahead.

Hi, Thanks for the question.

Hum.

Maybe circling back to planters. So you noted about 40 million nonrecurring charges in the third quarter.

Your guidance is on a GAAP basis. So it includes these charges and then as we look at the fourth quarter.

What's embedded for either charges or credits related to that planters business. I mean are there going to be additional nonrecurring considerations or is kind of $40 million of expense.

It's pretty clean going forward.

Well I think that you've seen the expenses related to the transaction.

<unk> and the $40 million and some accounting adjustments are included in the $40 million.

But until you complete your purchase accounting and make all of these.

Accounting adjustments, which we think will be.

Probably finished at the end of the fourth quarter, you can't say that all of the adjustments have taken place.

So we believe that this is the majority of the expenses the vast majority of the expenses, but there still could be some onetime expenses come through as we as we close the purchase accounting process that help you.

So just to clarify is there anything embedded in that guidance number or.

Yes, Adam at all at this point that is an all win number so that is a GAAP number that we.

We are basing on what we believe is the performance of planters and we're pleased with the transition into flavors we've been please.

Pleased with the sales rate is at this time period. The expenses that are called out and then those transactional or transitional expenses that occur anytime that you bring a business into your organization. So that is an all in number.

Thank you and our next question today comes from ground zero.

Please please go ahead.

Thank you very much good morning, Jim and Jim.

Just wanted to go back to the price increases and you've talked about obviously, you've done something Q3, you expect more to do in coming quarters.

On the very initial ones have you seen some sort of a reaction from consumers and customers in terms of sensitivity to the price increases and how has that been offset by the brand strength of some of your core brands, where you've introduced those price increases.

Yeah.

And I mean really we've been really pleased with the performance of all of the businesses in the face of the price increases.

The elasticity models that we typically use.

We're outperforming those and so we'll continue to watch the brands the categories. The elasticity is going forward, but I think the last point of your question is a really important one and one that we highlighted in our comments is that.

The brand strength that we have that we've invested in and built over time is as more important than it's ever been as we're faced with such an inflationary environment and making sure that consumers have brands that they recognize and that resonate with them on a day to day basis.

Is really in our mind, it's one of the one of the key drivers of our success for the sales growth.

Okay, and then planters of things being talked enough about how clean the fourth quarter is going to be but if we look into fiscal 2022.

Would you feel comfortable reiterating your initial guidance of accretion.

High teens range planters.

Yes at that point, then we would I mean it is early we've got maybe eight or nine weeks that.

We own the business in the third quarter, but.

We're very satisfied with the sales performance many of the assumptions that we've made in other parts of the business are all holding up we said we've already seen some of the benefits had an iconic brand like that can have on our business. We are experiencing that in the convenience channel. So yes.

At this point, although it's early we still feel very comfortable with that that range.

Thank you. Our next question today comes from refresh breweries with Oppenheimer. Please go ahead.

Good morning, and thanks for taking my question. So I guess just on your food service business just given that we are seeing Covid cases spiking number of markets. Just curious if you're starting to see any impact within that within that business.

We have not where Apache I mean honestly, our foodservice business. Just continues continues to accelerate and it really goes back to the challenge that these foodservice operators are facing in its flavor right and so as you think about how they.

We have to compensate for that shortage of labor our portfolio perfectly aligns with what they need to get done and so we're helping those operators overcome those challenges we're doing it with our direct selling force, which we've said is a competitive advantage and again more than ever it is hey does.

Stinker competency of this organization. So we haven't seen the foodservice business slow at all we're seeing is accelerating and we feel incredibly bullish.

Bullish on our portfolio and what we're going to be able to achieve going forward.

Okay, Great and then maybe just one follow up question and I'm not sure how much youre going to share, but as we look at 2020 is there any way you can share some of the building blocks as you see them right now for next fiscal year, I mean, clearly planters it sounds like that 72% to 20% accretion is still something thats in the range of possibilities, but just wondering if theres any other initial puts and takes you'd be.

Sure as we look out to next fiscal year.

Yes.

Great question.

Im going to quantify it or.

Our qualify it by saying it's early but.

What we just talked about our foodservice strength.

We expect labor to continue to be an incredible pain point for foodservice operators, but our portfolio is going to help us overcome that and we're going to help continue to help us foodservice operators, we do think.

That's some of the additional capacity that we have coming online.

In early 'twenty two for our pepperoni business expansion in our base business is going to serve US well you mentioned the impact of our planters business. We had we've had a great run with our Mega Max business, the authentic Mexican portfolio not only in the base business, but the innovation that we're generating.

I would expect some continued international strength as well.

And then as we talked earlier.

The impact from pricing actions will also come into play in that.

It's all the good news right at the offset to that will be what happens with inflation, what happens with labor that that will impact our business in our in our manufacturing facilities. So there's a lot of unknowns on that side, but I think we feel really good about how we built this portfolio and how we bill.

The business for the long term and we're optimistic about 2022.

Thank you. Our next question today comes from Ken Zaslow with Bank of Montreal. Please go ahead.

Hey, good morning, guys good morning.

Can you.

Let us know is supply chain challenges bigger or smaller than the inflationary pressure that you're feeling and what are you doing to change the supply chain challenges.

And when will they be mitigated.

Good morning, Ken.

Good question.

Inflation is one as we look at our gross margin change.

We certainly have had inflationary pressure, but when we look at our pricing action or improved VIX and some efficiencies. We've brought online we have really offset that inflation.

The pressure on the gross margin really relates to the labor shortages.

Not all the labor shortages that our facilities with labor shortages throughout the supply chain.

At times, we've had lines that.

Have not been running at full capacity that Australia some overheads.

Because we've had shortages at our plants at other times, we have been notified.

Let's say relatively late.

Our suppliers cannot provide us either packaging our input into our products.

So as we we.

Look at the third quarter. It was as we look forward.

Inflation, we think we've managed very well it's this labor issue.

That is creating the pressure right now so I'd say, it's more of a labor issue.

Ken I was just just to add onto that I mean really the key in all of this is like you said what are you doing about it.

And there is as you know strong linkage between the labor and inflationary issue. So labor is costing us the labor that we have is costing us a lot more than you have to deal with the missing labor.

No.

Pricing for the increased labor for the labor that we don't have clearly we're raising starting wages, we're being more aggressive in how we're finding employee pools to higher we have to be more aggressive and more disciplined on how we are retaining.

Our employees are finding ways to automate that doesn't happen overnight, but I would tell you that we've had successes in automation when we think about <unk>.

Package placement Pelletizing and how we can pivot and reallocate those those team members to more important manufacturing responsibilities and then throw it all is how do we simplify our operations and so all of those things go hand in hand, and the one thing that.

That.

This team has been able to do is not find themselves in a victim mentality, but really say what are we going to do about it because that's really our challenge.

Great.

I'm not a big fan of my next question, but I have to ask it just because you have.

To think about it this way.

What which division do you think we'll be able to have margins.

Just on par with year ago levels sourced and then how does that progress for the other divisions I know the dollars go into the bank is more important but I'm just trying to figure it out just because obviously the sales is distorted by pricing.

And I'm just trying to figure out when does the mark which divisions as a margin catch up.

Which is the first margin, which are the first divisions and then how long will it take just kind of framing that and I appreciate it.

Sure.

Hi.

It is.

I hate to give the answer but I'm going to is it really depends right.

We think our grocery products.

Division as we've seen some some moderation in raw materials.

<unk> has a really good opportunity.

To return to a more normalized margin structure.

So and it's a subset, but foodservice, obviously within refrigerated foods not only through the growth of the business, but also the <unk>.

Mix shift.

We're really going to provide margin enhancement for us over time, so again not a.

<unk>, Canada answer, but I've got to give that Ken the one thing that I would point you to is that.

Yes, it's early in the quarter, but we see relief on the pork side of the of the input costs for instance, hogs were averaging 118 in the third quarter. They are down to 93.

Bellies, even come off a little bit, but you would expect that leads to come off at this type of the year and we're seeing some relief and trimmed out.

The only other the only area outside of pork.

From a raw material input that we're seeing increases.

Beef.

Category <unk> started to go up in our second quarter and that trend has continued so we're seeing relief in the pork industry. Again. This will give you. The same warning that I did last quarter labor is a very important factor as to how these costs are going to.

Of trend.

In both the near and long term.

Thank you. Our next question today comes from Peter Galbo with bank of Oman shops in store.

Hey, Jim and Jim Good morning, Thanks for taking the question I was wondering Peter.

Jim I, just wanted to dive in a little bit deeper on on the labor situation.

A few of your peers have kind of talked about.

Vacancy rates are open requisitions that they have somewhere in the range of like 6% to 10% which is obviously.

Elevated versus versus normal I guess, just two questions. There one can you kind of give us a sense of where that stands for you in terms of open positions.

And then secondly, just.

As we look at kind of the volume number in <unk> I think it was at least on an organic basis.

1.15 billion pounds.

Is that a good kind of run rate number to use in terms of your your total volume that you can actually produce until the labor situation kind of correct just trying to understand that part.

Peter I would start with I mean, I think that rate that rate is a good range for us as well I mean, it ebbs and flows depending on the week to be to be honest with you, but I think if you operate with that number or that range in mind, you're in the ballpark.

<unk>.

I think theres always considerations, when we talked about our volume number.

We had lower harvest level.

This quarter, which does have a dramatic impact on volumes and so we've got to watch that closely.

But taking it to a higher level.

Yes, the idea of labor in our plants does have an impact on the volume and what we're what we're able to produce so.

That's why it is so important that we do take a very aggressive approach and hiring retain finding those areas to automate and how do you simplify your operations I mean, we absolutely have to get that done and theres not a higher priority in the organization from a.

Human resource perspective, and a supply chain perspective so.

It doesn't give you the specific number you are looking for but it does have a high level I'll say, yes labor is a driver for the volume that we're able to produce.

Got it no that's helpful. Thanks, Jim and Jim Sheehan, maybe just two cleanup questions.

On the gross margin for the fourth quarter I think you said improved sequentially, but should we still be expecting that to be down year over year.

Second part I just wanted to make sure the sales guide.

For the full year still includes the 50 <unk> week correct.

Yes, everything includes the 50 <unk> week and as we said that guidance is is it all in GAAP guidance.

There is still going to be pressure on margins in the fourth quarter, but again, we have additional pricing action that we're confident will will improve this process and again.

We have the same labor issues, we dealt with in the third quarter and we still have the same supply issues that we.

We have been dealing with so.

We know what our employment rate is but some of our suppliers, we have less visibility to and we've had surprises that are interrupted.

Operations and actually have increased our cost as we've had to go out and find alternative solutions. So it's an it's an improving situation.

But I would still expect trailed last year, the fourth quarter of last year had its own challenges but.

I think that would be the trend.

Thank you and our next question today comes from portion Barnes of consumer Edge Research. Please go ahead.

Good morning, Thanks for the question.

Can you talk a little bit about international pork demand, especially with respect to the African swine fever.

China and other countries worked through that are you seeing any changes in demand or a risk to the business moving forward.

We really haven't at this point Carson for us.

We've been really focused on shifting our international pork supply to a rack dopamine free supply and that's really allowed us to.

Open up some some new markets and price accordingly, so I mean thats for our business, that's really been the big driver on the supply side of the business. The other piece that we'd be remiss. If we didn't mentioned I was just afraid availability.

For for Park and other international exports, although the.

Some of our branded exports showed growth freight availability continues to be a risk in the supply chain going forward.

Okay.

Thanks, a lot that's helpful.

And our next question today comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Good morning, this is actually Arthur on for Adam.

I was hoping we could tackle the inflation question a bit differently.

Just looking at the updated guidance.

Take the midpoint of both ranges, it's about <unk> <unk> downward revision.

How much of that 9% is attributable to increased inflationary pressures as you can imagine that the 2% to seven diluted range.

Leaves that a bit wide for interpretation in terms of how much is actually impacting the business for this year and if you could also give some color as to what cost buckets. Those are in outside of feed and maybe by segment that would be really helpful. Thank you.

Well, we've talked about the inflationary pressure that.

Exists with the business of we think that.

Pork inputs will be above last year will moderate we believe from third quarter, but there will still be significant pressure on inflation.

Beef is going up as I stated, it's still continuing to grow.

Fourth quarter, the freight issue isn't going away, so there's going to be pressure on freight.

If anything we've seen increases in freight cost reset.

Recently, Jim has talked about the problems that were incurring with ocean freight and the additional expenses that it's taken to overcome those challenges.

The labor issue is an issue that is probably the hardest to read right now what is going to happen to labor how quickly will recover will recover at all.

And just the challenges of the supply chain and are putting pressure throughout the organization and those are the issues that we've addressed in our guidance and we think that we've taken a fair approach to that to those issues I think as far as how you categorize it I would look at the pork and beef inputs than I.

Identify that on the other hand, we're seeing tremendous recovery in the foodservice business and we're still seeing strong demand in the retail.

So the demand is there for our products.

We've priced appropriately it's a matter of having the labor that's available to produce the product into.

To meet the demand.

Thank you and I guess on that point with the labor shortages is there any way you could quantify the magnitude of it.

Some demand that you werent able to meet due to these labor shortages.

Well I think it's.

As Jim said it depends what we could is that where we're at.

Being challenged.

As we talked about earlier, it's not just the labor that we have available subtypes interruptions in the supply chain.

It's categories that we didn't think we were going to have a problem with a pop up so I would say that the constraint is significant it is across the.

I can't think of a single segment that haven't set impact that hasnt been impacted by this labor constraint.

Thank you and our next question today comes from Jacob <unk> with Credit Suisse. Please go ahead.

Hey, Thank you for everybody for the questions. Just one quick one on pricing, but a little bit of a longer term perspective here.

I'm talking about record sales here, but a lot of it is driven by pricing and I'm just trying to think once inflation, presumably does subside I know you guys have said in the past that pricing for you guys tends to be sticky. So I'm just trying to think once you place it does subside.

What does pricing look like when that time comes would we expect to see this kind of.

This pricing the full amount of pricing here snack or I guess, what are you guys thinking I guess when that when that scenario comes.

Yeah. Thanks Jacob.

The key takeaway from.

Our ability to price is.

Through these cycles.

We have demonstrated our ability to expand margins over time. So I think if you start with that is the premise youll get a good read on what were expecting to happen now.

Now as you go through each of the different businesses and channels it will be different.

You have our grocery products segment, which.

And it looks more like a consumer products organization, so that pricing will step.

You've got our refrigerated foods retail business that has more commodity elements tied to the pricing and so you will see that move up and down based on the raw material performance understanding of course going back to my original statement that we have a history.

We are being able to expand those margins and that's that's really what drives our stickiness comment does that mean that the pricing is going that current level is going to stay in effect, especially in refrigerated foods, but we are able to do though is expand that pricing over time as raw materials moderate that's how.

We think about stickiness and pricing for us.

Understood. Thank you.

And our next question comes from Rebecca sooner than with Morningstar. Please go ahead.

Good morning, and thanks for the question so when I kind of look at how your Q3.

Obviously gross margins are lower but also if you look at the SG&A line. Once you strip out those one time charges.

That came in more favorably than I had been expecting so I'm just kind of wondering like.

Or are these dynamic.

<unk>.

A reflection of the current environment or is there something about the planters business.

That has lower gross margins lower SG&A expense.

Well I think that you have both Rebecca first of all you do have.

The <unk> business coming down and as we've said from a promo for a long time since the acquisition.

We do that.

We'd be able to manage this business in a very efficient manner.

And I think youre starting to see some of the things that we've talked about when we did the acquisition that there is an efficiency here that we believe exists in the first quarter as is.

Given us confidence in that belief as Jim said.

We have a higher sales base sales base that we have not added.

SG&A at the same level so.

I think thats. The first thing to look at the other thing is is that there is an efficiency in the business that we've brought brought forward with we've talked about project Orion for a long time.

Adding efficiencies in our SG&A one quarter in SG&A doesn't make a trend, but we believe that we have a more efficient operation.

Coming out of 2021 that we had coming into it and we believe that that efficiency is going to provide a long term benefit to the company.

Okay, great. Thank you very much.

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.

Well, thank you all for joining us today.

Look forward to sharing more about our long term growth strategy at our Investor update on October 14.

In closing, it's clear that we have failed to portfolio and business for a long term <unk> for success and our team is operating in an incredibly complex business environment, yes, they've been able to deliver record sales results by continuing to execute our long term.

<unk> growth strategy.

We still have work to do I am incredibly grateful to and proud of all our team has accomplished in a difficult operating environment.

Have a happy and safe Labor day weekend.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.