Q4 2021 Hormel Foods Corp Earnings Call
Yes.
Good morning, everyone and welcome to the Hormel Foods fourth quarter 2021 earnings webcast.
All participants will be in a listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Nathan Annis director of Investor Relations.
Sure.
Please go ahead.
Good morning, welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2021, we released our results. This morning before the market opened around 630, a M. Eastern if you did not receive a copy of the release you can find it on our website at Hormel foods Dot com under the investors.
Section.
On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer.
Jim Sheehan Executive Vice President and Chief Financial Officer, and just since Smiley Group, Vice President of corporate strategy.
Becomes executive Vice President and Chief Financial Officer on January one.
Jim Snee will provide a review of the company's current and future operating conditions any perspective on fiscal 2022.
Sheehan will provide detailed financial results and commentary on the fourth quarter and just since my Lee will provide commentary on the company's fiscal 2022 outlook.
As a reminder, the fourth quarter of fiscal 2021 contained an extra week compared to fiscal 2020.
The line will be opened for questions. Following just sense remarks, as a courtesy to the other analysts please limit yourself to one question with one follow up.
Additional questions you are welcome to get back in the queue.
An audio replay of this call will be available beginning at noon today central time.
Dial in number is 870 734 475 to nine and the access code is 10161 982.
It will also be posted on our website and archived for one year.
Before we get started I need to reference the safe Harbor statement. Some of the comments made today will be forward looking and actual results may differ materially from those expressed in or implied by the statements we will be making please.
Please refer to pages 35 to <unk> 41 in the company's Form 10-Q for the fiscal quarter ended July 25, 2021, it can be accessed on our website.
Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance. These non-GAAP measures include organic volume organic sales and adjusted diluted earnings per share discussed.
Discussion on non-GAAP information is detailed in our press release located on our corporate website.
I'll now turn the call over to Jim Snee.
Thank you Nathan good morning, everyone.
I wanted to start this morning by congratulating Jim Sheehan.
Retirement.
Jim will be retiring as CFO at the end of the calendar year. So this will be his last earnings call.
Jim has over four decades with our company and under his tenure has built a world class finance accounting and technology organization.
Jim was the guiding force behind project Orion and initiatives that will benefit our company for decades to come.
For over 43 years with the last five years as CFO, Jim has been a trusted partner to me and many of my predecessors.
Jim help completed over $5 billion into strategic acquisitions, including Justin's Botany, Suraj Columbus Sadler.
And our largest acquisition ever planters.
Equally impressive was generous contribution to re shaping our portfolio as he was also a guiding force behind many of the divestitures, we made to transform our company.
Jim its oversight to our evolution puts us on a solid foundation for the future growth of our company.
Additionally, Jim has overseen the distribution of over $2 billion in dividends to our shareholders in.
In addition to his business accolades, Jim was the key voice behind our game changing inspired pathways program, which provides free college education for children of our team members.
Jim will be missed and we wish him well in retirement, along with his wife Jean.
Just self Smiley succeeds, Jim and brings a wealth of experience from outside Hormel foods.
She has deep and broad domestic and international experience in areas, such as corporate finance public accounting and compliance.
Most recently she served as the group Vice President of corporate strategy.
Hormel Foods is fortunate to have just served as CFO and Im looking forward to her leadership in her new role.
My sincere congratulations to both Jim and Jesse.
Yes.
In an incredibly difficult and rapidly changing operating environment, our team delivered outstanding top line results.
We achieved record sales in fiscal 2021 exceeding both 10 billion and $11 billion in sales for the first time for.
For the full year sales were 11, four 1 billion.
Representing 19% sales growth on an organic basis sales increased 14%.
Our top line growth was incredibly balanced as each of our go to market sales channels and business segments posted strong double digit sales gains underpinned by value added volume growth pricing.
And a better mix.
Adjusted diluted earnings per share for the full year increased 4% to $1 73 in spite of inflationary pressure and supply chain challenges.
Diluted earnings per share was $1 66.
We had an excellent fourth quarter and posted numerous records, including a fourth consecutive quarter of record sales.
Record diluted earnings per share.
And record cash flow from operations.
I want to commend our entire team for delivering this impressive performance and the numerous fourth quarter Records.
Sales increased 43% and organic sales increased 32%.
<unk> increased 14% and organic volume increased 8%.
We grew sales in every segment and every channel for the quarter.
Compared to pre pandemic levels in 2019, all channels grew by over 25% driven by strong demand and pricing actions in almost every category.
This all time record performance was led by further acceleration in our foodservice businesses.
Our foodservice teams across the organization posted 72% sales growth for the quarter.
33% higher than pre pandemic levels. Thus.
This followed second quarter growth of 28% and third quarter growth of 45%.
<unk> was broad based with significant contributions from refrigerated foods, Jennie O, Turkey store and Mega mix.
We also saw a strong recovery in our noncommercial segments, including college and University and K through 12 institutions.
Our foodservice portfolio remains perfectly positioned to meet the needs of today's foodservice operators with labor and time saving products.
I believe our growth in foodservice is a function of our differentiated value proposition in the industry as well as our dedication during the pandemic.
We have grown with our distributor and operator partners during the recovery strengthening many of our partnerships and decades long relationships.
The top line performances from our other channels were equally impressive.
Retail deli and international each delivered a second consecutive year of growth rates.
Retail and international sales, both increased 34% and daily sales increased 24%.
On an organic basis, each channel posted strong double digit growth.
Growth came from numerous brands across all areas of our portfolio, including spam Applegate Columbus, Hormel Black label wholly Hormel completes gatherings and many more.
We continue to see very positive trends for consumer takeaway at retail.
According to IRI key metrics for our brands such as buy rate and trips per buyer remain favorable which indicate elevated consumer spending on our products has remained.
We also continued to grow share in many important categories, including Hormel gatherings Party trays, Hormel, pepperoni spam luncheon meat and Hormel chili.
Our one supply chain team has done an excellent job operating in and navigating constant supply chain disruptions.
We are also seeing the positive impact of their strategic actions.
Namely, we're starting to see an increasing number of our open positions being filled.
More automation being implemented in our facilities and a more simplified product portfolio and.
In total these actions are allowing us to maximize our throughput to meet the continued strong demand of our customers.
From a bottomline perspective fourth quarter earnings were a record 51 cents per share.
19% increase compared to 2020.
And acceleration in our topline results and the addition of the planters business led to the earnings growth.
As we said in the third quarter, we expected margins to improve as pricing actions took effect.
<unk> margins improved sequentially in all four segments.
Pricing actions improved promotional effectiveness and a more profitable mix.
Contributed to the improvement.
We started to see relief in key raw materials in the fourth quarter compared to prior quarters, However, labor rates freight supplies and raw material costs remain above year ago levels and in the case of freight increased further.
Looking at the segments grocery products refrigerated foods and international segments, each posted double digit segment profit growth.
Jennie O Turkey store profits declined due to higher feed costs.
A few highlights from the quarter included the following.
Refrigerated foods delivered strong volume sales and profit growth.
The team was able to leverage the numerous capacity expansion projects since the start of the pandemic for categories, such as pizza toppings, Bacon and dry sausage.
Within grocery products are simple meals and Mexican portfolios generated excellent growth. In addition to contributions from the planters snack nuts business.
Notably the.
The spam brand delivered its seventh consecutive year of record growth.
And we recently announced plans for additional capacity to support future growth.
Our international team.
Cheap a seventh consecutive quarter of record earnings growth with strong results from all of their businesses.
The momentum of this business has generated over the last two years supports our plans to aggressively expand internationally.
Lastly, planters made a positive impact, especially in the fast growing snacking and entertaining space.
And within the convenience store channel.
This quarter's results were outstanding and we intend to build on this momentum going into 2022.
Over the past decade, Hormel foods has deliberately evolved from a meat centric commodity driven company with a heavy focus on the retail floor and Turkey to a global branded food company with leading brands across numerous channels.
Our company today is more food forward than ever with a sharp focus on the needs of our customers consumers and operators.
As we began fiscal 2022, we plan to continue our evolution.
First we.
We will complete the full integration of the planters business across all functions.
The first of three production facilities was successfully integrated in the fourth quarter and the remaining two facilities are scheduled to be fully integrated in our first quarter.
Yes.
Since acquiring the plant or six months ago, our sales marketing innovation and R&D teams have been hard at work developing new and innovative products and flavors, many of which will be rolled out this coming year.
<unk> also been working on refreshing the branding and packaging, which will also be launched in 2022.
Team the great work of our teams has me even more confident about where we are able to take this brand in the future and further strengthens our conviction of the potential for planters.
From a financial standpoint.
Planters business is performing at the top end of our expectations and we expect that trend to continue in fiscal 'twenty two.
Second we are also taking a series of actions at Jennie O Turkey store.
Over time, we expect these actions to result in a more demand oriented and optimized Turkey portfolio that is better aligned to the changing needs of our customers consumers and operators that will result in long term growth improved profitability.
<unk>.
Lower earnings volatility.
The transformation starts with accelerating our efforts to shift from commodity to branded value added products.
This is similar to the successful strategy, we have executed in refrigerated foods over the past 15 years.
As a result, we will close the Benson Avenue plant located in Walmart, Minnesota, and the first half of fiscal 2022.
This plant is an older inefficient facility, which produces numerous commodity items.
Value added products will be consolidated into multiple other facilities.
<unk> members will transition to our newer and larger facility also located in wilmar, which will supplement staffing levels.
Finally, we will continue to integrate business functions into the Hormel foods parent organization.
Over the past two years, we have successfully integrated services finance and accounting and HR into the Hormel organization through project Orion.
And we will continue these efforts for other functions.
By doing so we will bring the deep Turkey expertise and competitive advantages of the Jennie O team to the broader organization.
I want to be very clear that Turkey will continue to play an important role in our company for many brands, including Columbus Applegate Hormel Natural choice. In addition to Jennie O.
Turkey is vital to our balanced business model serves to diversify our portfolio and it's important to consumers who are looking for high protein lean and versatile offerings.
We will provide a further update and details on the financial components and timing on our first quarter call.
Finally, we made additional progress on optimizing our pork supply chain by signing a new five year raw material supply agreement with our supplier and our Fremont Nebraska.
This new agreement are closely matches, our pork supply with the needs of our value added businesses, while simultaneously, reducing the amount of commodity pork we sell.
Similar to the rationale for selling the Fremont plant in 2018. This new agreement further diversifies us away from commodity sales.
Increases our flexibility within our supply chain.
And decreases our earnings volatility.
This agreement should result in a reduction of approximately $350 million of commodity fresh pork sales at very low margins.
The impact is split between the refrigerated foods and international segments there.
The contract will be effective at the start of calendar year 2022.
Yes.
The success, we are having with planters. The actions we are taking at Jennie O Turkey store and the continued progress we are making on our pork supply chain all provide great insights into how we are continuing to evolve hormel foods for next year and beyond.
And not only have we evolved our portfolio, but we will continue to evolve how we operate as a company with initiatives such as one supply chain project Orion and our digital experience group.
Looking at fiscal 2022, we expect net sales to be between 11, seven and $12 5 billion and four of diluted earnings per share to be between $1 87 and $2 <unk>.
Per share.
We expect growth in excess of our long term goals due to organic growth across each of our segments and strengthen our planters business.
Confidence in our ability to achieve our guidance with all four segments delivering growth.
Just had a smiley will provide more color regarding key drivers to our fiscal 2022 outlook.
At this time I will turn the call over to Jim Sheehan to discuss financial information relating to the quarter.
Thank you Jim good morning.
The company achieved record fourth quarter and full year sales of $3 $5 billion at 11 4 billion respectively.
Organic sales increased 32% for the quarter and 14% for the full year.
Planters contributed $411 million in sales for the full year.
Earnings before taxes increased 26% for the fourth quarter strong results in refrigerated international and the inclusion of planters led to the strong finish to the year despite ongoing inflationary pressures.
Earnings before taxes increased 1% for the full year compared to fiscal 2020.
Diluted earnings per share of 51 was a record.
This was a 19% increase over last year adjusted.
Adjusted diluted earnings per share for the full year was $1 73.
A 4% increase from last year diluted earnings per share was $1 66.
SG&A as a percentage of sales was seven 5% compared to seven 9% last year strong sales growth and disciplined cost management contributed to the improvement.
Advertising investments increased 12% compared to last year.
As anticipated operating margins in the fourth quarter increased compared to the third quarter as a result of effective pricing action.
Segment margins expanded from last quarter by 136 basis points to 10, 7% with increases in each segment.
In 2021 inflation labor shortages and planters deal cost old negatively impacted margins the fourth quarter results, including the continued strong demand of our products are an indication of improved market conditions as we exit the year.
Net unallocated expenses in 2021 increased primarily as a result of one time acquisition costs.
Planters and higher interest expense.
The effective tax rate for the year was 19, 3% compared to 18, 5% last year.
Operating cash flow for the fourth quarter was a record resulting from strong earnings and disciplined working capital management.
Our balanced business model and consistent cash flow provided protection against the complex and challenging business dynamics, we navigated during the year, allowing us to invest in numerous capital projects acquire playfirst and grow the dividend.
We paid our 370 <unk> third consecutive quarterly dividend effective November 15th at an annual rate of 98 per share. We also announced a 6% increase for 2022, marking the 56th consecutive year of dividend increases.
During 2021, the company repurchased 500000 shares for $20 million capital expenditures were $232 million.
The company ended 2021 with $3 3 billion in debt for approximately two five times EBITDA, although no mandatory debt repayments required until 2024 based on our strong cash flow, we expect to make incremental payments as soon as the second half of 2022.
We remain.
Committed to maintaining our investment grade rating and deleveraging to one five to two times EBITDA by 2023.
Market conditions for pork input costs remained elevated during the fourth quarter. The USDA composite cutout averaged 33% higher compared to last year supported by strong demand for port and historically low cold storage levels hog prices averaged 62% higher than last year, but were down.
27% compared to the third quarter.
Belly pork trim and beef trim markets were also significantly higher for the quarter compared to last year.
The latest estimates from the USDA indicate pork production for the year to decreased 2% compared to 2020 and remained relatively flat in 2022 labor shortages may continue to be a significant factor affecting industry production.
Turkey industry fundamentals were strong the whole Turkey in five markets reached all time highs during the fourth quarter with breast meat prices above a year ago.
Supporting these prices were historically low cold storage levels lower pulp placements.
And decline in egg sets.
Higher feed cost and labor shortages continue did negatively impact Jennie O b cost increased over 60% from last year in the fourth quarter and.
In 2022, we anticipate pork beef, Turkey and feed prices to remain above historical levels.
We delivered strong results in the fourth quarter as the team overcame challenging operating conditions and volatile markets. The performance is a testament to the strength of our brands pricing power balanced model and the team's ability to execute in a dynamic market environment.
On a personal note as I reached the end of my career at <unk> Mill.
Full for the privilege of working for this great company for the past 43 years.
I appreciate the support of Jim Steve The board of Directors and my team.
Over my tenure as CFO.
Take great pride in the evolution and accomplishments of the company during my career at <unk>.
Leave with the greatest confidence in the future.
I've enjoyed my interactions with the shareholders.
And the analyst community and I wish you well.
At this time I'll turn the call over to just smiling.
The company is in excellent hands with <unk> Ziff and you will have an opportunity to get to know her better in the coming months.
We will provide an overview of the fiscal 2022 guidance.
And further context on our expectations for next year.
Thank you Jim for your kind words, good morning, everyone for analysts and the investment community on the call I look forward to meeting you in the coming weeks and months.
I am excited to be stepping into the chief financial officer role at Hormel Foods, a company known for its financial strength, it's powerhouse.
Powerhouse brand and its commitment to employees and communities and.
At the time I have been at the company.
One that the Hormel food is innovative and has a results driven focus for all stakeholders as.
As Jim mentioned allow me to share a bit more commentary regarding key drivers to our fiscal 2022 outlook.
Building on the momentum we established during the second half of the year and the strategic investments. We have made throughout the pandemic, we expect to generate sales and earnings growth in fiscal 2022 above the long term goals, we announced at our Investor update in October we.
We anticipate growth from all four segments driven by continued elevated demand for our products the impact from our pricing actions improved production throughput new capacity for key categories, such as pizza toppings, and dry sausage and the full year contribution of the planters business.
We also expect operating margins to show improvement throughout the year similar to the dynamic we experienced in the fourth quarter. It is important to note that rapid changes in raw material input costs can shift profitability between quarters.
In addition to generating strong sales and earnings growth, we will continue to invest in our leading brand through increases in strategic marketing and advertising.
The expansions for high growth platforms and capabilities to drive industry, leading innovation.
The company started and for capital expenditures in 2000 $20 million to $310 million.
We are scheduled to open in pepperoni expansion to our newest facility in Omaha during the second quarter, which will provide the needed capacity to meet growing demand in our retail and foodservice businesses.
We are also beginning work on another expansion for the spam family of products scheduled to be operational in 2023.
In addition to these larger projects, we are continuing to invest in cost savings technology and automation projects to drive long term savings and efficiency.
Pivoting to innovation, we achieved our 15% goal in 2021, we have strong innovation platforms for brands, such as planters Skippy Justin's year Dan.
And Hormel Black label at retail as well as the Jennie O and happy little plants brands in the Foodservice channel. These platforms. In addition to our continuous process.
<unk> product improvement initiatives give us the confidence going forward to consistently achieve our stated innovation goal.
And we want to speak for a moment about the complexities of our operating environment.
The operating environment is expected to remain complex and fiscal 2022, and our guidance accounts for the near term impacts from labor shortages higher cost and supply chain disruption.
Our entire team has done an excellent job executing our business strategies in this dynamic environment.
In many ways, we have enhanced our competency for solving the day to day challenges inherent to our industry.
We have increased our efforts to hire and maintain key members and have developed many strategy to mitigate the effect of labor shortages to meet elevated demand.
This includes maximizing our flexibility to produce the items that are most in demand and leveraging our manufacturing partnerships to increase throughput wherever possible.
Our one supply chain team allows us to continue to actively manage our raw material procurement logistics network and supply partnerships to minimize the impact of further inflation and supply chain disruption.
We will also benefit from our expanded logistics network, which has added capacity for both the refrigerated and grocery products.
As a result of these actions, we expect improved fill rate and load factors in fiscal 2022.
The announcement of the Jennie O Turkey store transformation is another step in our evolution to become a stronger global branded food company.
Consistent with our long term strategy, we are continuing our efforts to actively shift away from commodity businesses towards branded value added businesses.
We expect to strategic and intentional actions to create a better more profitable and sustainable business model.
Taking all of these factors into account as Jim has mentioned, we are setting our full year sales guidance at $11 seven to $12 $5 billion and our diluted earnings per share guidance at a $1 87.
Two $2 and three.
Additionally, this guidance reflects the Benson Avenue facility closure.
Our new pork raw material supply agreement and an effective tax rate between.
<unk> 25, and 22, 5%.
Fiscal 2022 will be 52 week.
As we move forward to execute against our strategic imperatives in 2022 and beyond I am pleased to be with a company that continues to evolve as a global branded food company.
Jim often says we are uncommon.
I've seen that first hand in my time with the company thus far.
This starts with our unwavering commitment to employee safety.
And remaining an employer of choice in the communities, we live and work.
We're taking purposeful actions to transform our company as we embark on our most ambitious corporate responsibility journey, yet our 20 Bank 30 challenge, which is certainly important from an ESG standpoint.
Our experienced management team.
Tireless work of our team members around the world and the product need to implement the project Orion and one supply chain initiative gives us added confidence in our ability to deliver growth in fiscal 2022.
And beyond.
Im excited to be with Hormel foods and be part of it.
Its continued success.
At this time I will turn the call over to the operator for the question and answer portion of the call.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one on your Touchtone telephone.
If you are using a speaker phone, we do ask that you. Please pick up the handset before pressing the keys.
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To withdraw your question you May press Star two.
Once again that is star and then one.
He joined the question queue.
Pause momentarily to assemble the roster.
Our first question today comes from <unk> <unk>.
Rick from Oppenheimer. Please go ahead with your question.
Good morning, Thanks for taking my questions and Jim Sheehan Congrats on your retirement as well thank you refresh.
So I guess I guess, just starting up maybe just on the pricing Brian If you could just remind us where you guys are with the pricing front at this point have you guys seen any anything I guess.
Different versus expectations on the <unk> front. So just curious just how you are pricing actions have played out so far versus your expectations.
Yes, good morning <unk>.
We have not seen the elasticity that we typically would have seen pre pandemic. The demand has held up really well across the entire portfolio.
And really where we are in our pricing journey.
We've got another round of pricing in our grocery products portfolio.
That is in the <unk>.
<unk> being implemented executed right now.
On the refrigerated side.
That's a pricing model that ebbs and flows and so we've seen some relief in commodity markets.
We're watching it closely but at this point in time don't have any additional pricing scheduled for that part of our business.
But in grocery products, we do have have another round, that's getting implemented right now.
Okay, Great and then maybe just a follow up question just on guidance I was curious I guess the latest in terms of what you guys are incorporating for planters as accretion is that still in that 17 to 22 range for this year.
Is there anything you can share on the cadence of operating your EPS growth, maybe first half versus second half for this year.
Well the first part of the question is where we are still in that range and we're expecting to be on the high end of the range just like we were in fiscal 2021.
As you think about just the business throughout the course of 2022.
Youre going to see sales earnings and margin so it's really improving through throughout the year.
As <unk> mentioned in her comments, we do expect to have continual improvement in the supply chain that will help with fill rates and load factors.
Our organic growth will be will be driven in large part by that improvement so.
Now that we have to be on the lookout for as we were in 'twenty. One is just the volatility in markets or supply chain that really can shift profits between quarters.
Okay, great. Thank you.
Our next question comes from Tom Palmer from Jpmorgan. Please go ahead with your question.
Hi, Good morning, Thanks for the question and Jim. Thank you for your help over the years and congratulations on your retirement thank.
Thank you Tim.
From what we can see pork costs have eased a bit in the past couple of months at least on a spot basis feed costs are lower than they were earlier this year.
At what point do these costs begin to flow through the P&L.
I think you saw some momentum.
Especially near the end of our fourth quarter that that helped with these declining prices I mean, you've seen.
You've seen today for instance, hogs are down to mid sixties.
They averaged $86.
In the fourth quarter, you've seen trim ease off.
Certainly <unk> seen that easing in bellies so.
Youre starting to see the advantage already and you did see as I said in the fourth quarter you saw that momentum will start to pick up near the end of the fourth quarter. So I think that we're in a good position as we go into the first quarter and into the new year.
And just on the feed side also.
We've locked in our cost.
We're under market for wed liked it about 80% of our core and its under the current market. So our feed cost will be stabilized for next year, we have a good handle on the feed cost.
Obviously, you always have the basis risk that exists but basis has been.
Fairly neutral.
So the last few months.
Okay. Thanks, Thank you and if I can follow up just on <unk>.
That translates to so you've talked about earnings growth in all four segments.
In the coming year should we expect to see that starting in the first quarter. So essentially in the first quarter should we look for growth in all segments.
Yes, Tom we would and as Jim has been describing in the markets.
In his prepared remarks.
We're seeing some lower markets right now in the first quarter, but on average over the full year, we do expect them to be fairly flat to 2021.
You are obviously youre going to have some moves up throughout the year.
But we do expect.
All segments to show that growth starting in Q1.
And Tom as you look at yes, Tom as you look at 2020 to remember.
You have planters, we didn't pick up play interest until the third quarter of last year. So youll see the significant improvement in the first half of the year.
Understood. Thank you again.
Yes.
Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.
Yes, Thank you and good morning, everyone.
No.
Let me Echo everyone's congratulations Jim on the retirement.
So my mic.
My first question is on Jennie O and I was hoping maybe to get a little bit more color on the decision to close the plant in.
Jim Snee.
Maybe just elaborate a little bit on <unk>.
How this changes the sales mix.
Margin structure potential of the Jennie O business.
Moving forward.
Kind of a corollary to that is just help us think about costs associated with these actions on a cash basis.
Over the course of the next 12 months.
Sure. So the first thing Adam is.
We're going to come back to you in Q1 and give you.
A more detailed report on some of the things that you. Just just described so we will be getting that information to you.
Big thing in all of this the strategic actions that we're thinking about is Turkey is not going away in our portfolio right. It's going to continue to be an important part of our company across many different segments many different brands.
We've seen the evolution of our company, whether it was project Orion our one supply chain effort really this opportunity to move away from duplication of resources. That's the first thing.
The second thing is when we're honest with ourselves that business has underperformed in recent years and that's that's not through a lack of effort on our teams part.
That's dealing with a significant oversupply situation that's created a lot of volatility for us and so as you think about how we manage other parts of the business.
Kind of flew in the face of really what we're what we've been trying to achieve.
So really this announcement today is a bigger step in that evolution to make sure that we're moving from a commodity driven or supply driven business to a more demand consumer driven business. It also allows us to move towards a more fully integrated supply chain.
So there is still a lot of work to be done will be coming back to this group with more information in Q1, but feel like it's the right and proper first step on that journey to make Jennie O really a lot more long term sustainable growth engine for the company.
Alright.
Helpful Color and then just.
A follow up.
On some of the labor challenges that you called out both in the press release and that adds in the script and I was wondering if you could frame.
The impact of Labor has had on your production volume is it customers who were unable to accept orders because of labor.
Any way to Dimensionalize kind of the costs.
Any comments you have on wage rates, just trying to get flavor for where we are in terms of managing labor issues in the operations and the supply chain sure I mean, we're not we're not new to the story I mean, we've taken.
Wage rates across our entire.
Hourly plant structure and.
We've had to become and maintain our very competitive wage rates. So.
That has added costs.
The other thing to really understand is just the labor pool in general and the idea of where youre going to retire rely on the traditional labor pool that you've always had it's not going to get you where you need to be so our team has done a really nice job of sourcing non traditional labor pools being creative in how.
We're staffing our facilities.
To make sure that we are becoming more employee friendly and we've seen an improvement.
Spike the football here and say that we're over the hump, but we have seen some improvement in our in our labor rates and.
And even more importantly, as we have seen some some improvement in key plants for us So Keith key plants, meaning two of our larger refrigerated foods plants.
Have seen dramatic improvements in labor rates two of our grocery product plants have seen improvements in labor rates. So that's been really helpful. As we've progressed throughout the fourth quarter and then head into 2022.
No.
The staffing levels that we're talking about are really helpful. We still have work to do.
But it is setting us up for a better 2022.
Alright, that's all really helpful color I'll pass it on thank you.
Our next.
<unk> comes from Eric Larson from Seaport Research Partners. Please go ahead with your question.
Yes, good morning, everyone and my congratulations to Jim. Thank you for all of your help them.
And congratulations to you, it's a very coveted executive position in the food industry and I'm sure that it's very well earn so congrats.
My my.
My first my question really comes down to.
Your input costs last year baked in.
Trim et cetera.
I think <unk> talked about the uncommon and I've been doing since group for a long time and I can't remember the volatility that we've seen in the last year. So your pricing is going to reflect a lot of what the volatility is but.
Much of a headwind or tail, even potentially tailwind.
Could you or input costs be for for pork.
'twenty two.
Well, Eric I mean, it really is more of a timing issue. So you think about where we are right now in Q1.
And so we have priced to those uncommon market that you described.
And I think we have we will watch the market and see what happens.
And if the buyer.
The commodity markets become volatile again.
We will be prepared to react if we need to.
The other thing to remember in all of this that we've talked about many times.
Our grocery products pricing.
Is very sticky and so the pricing that we've taken and that we're in the midst of executing the additional price increase that pricing will will by and large to stay.
On the refrigerated side.
Underlying pricing commodity we do track that more closely both in retail and foodservice.
So well react accordingly, there, but I think your comment is a fair one that says where we sit today.
It's a tailwind for the organization. We just obviously, we will be watching the volatility over the course of the year, Yes, Eric the term you used volatility is the key word.
The volatility as we've talked before it can move earnings between quarters, depending on the timing, but if you take out the spike and you just look at the trends of the increased costs that we've been faced.
With over the last what last year, we've done a remarkable job of price seed input into those rising markets.
The demand for our products really haven't failed.
So I think we've done a great job with our pricing I think it's been very effective.
We will have times that volatility will help you. It hurts you at times, but you really have to look at this as a long term trend over the long term trend. It really shows that the value of hormel products are well accepted by the consumer and that we are able to price effectively into the marketplace. So I think.
It's been a great success.
Okay. Thanks.
Jim just on that note.
Yeah.
New contract with the with Fremont.
I think you disclosed it was about $350 million worth of commodity pork sales annually.
Uh huh.
What what might be the delta for that either positive or negative.
For for 'twenty, two if you want to just give us a rough range on that.
Well I mean, Eric you've been in this business long enough to know that it depends on what day. It is.
Right overall, its very significant to the business. Some days it would be positive, but theres a lot of days that it is very negative and in fact some of this product that will no longer take will no longer be was never profitable so it.
It gave us a little bit of lift in 2021, but it's really not that significant to the performance of the company and we've talked for a long time about eliminating the volatility around commodity products. So whatever the difference is.
It's so small the lack of volatility is the success here, we've talked for a long time about selling less of less commodity products. The first step was turned it over the Fremont facility, which was an old facility that needed a lot of capital. Our goal was always to get to a point where the amount of prop.
We took matched our value added products and our value added needs. So this is an evolution of the process.
Okay.
And just one little quick follow up the industry the packaged food industry literally in the last several weeks I think probably the new news is that.
We have not taken pricing.
And we're seeing rounds coming from everybody.
Right.
General Mills, others have announced that so so.
When you look at your fiscal year for now and the pricing is going to be effective I'm, assuming it's like around January one.
Affect won't kind of probably take place until your second half.
Is that.
Is that the way is it more second half.
The gross profit margins the way to look at it.
We kind of look at that at the industry's new round of pricing.
The impact on margins.
Yeah, So Eric a couple of fans Feraheme, we feel really good as Jim said about the pricing that we've taken so far.
And we're always ready to take additional pricing actions as market conditions warrant.
Yes.
All of this we still have to be very aware of consumer retention right. We want to make sure that we're not losing consumers through all of this.
Terms of the pricing that I described earlier really think about it as a second quarter on affect that.
It's being again timing varies but think about it from the second quarter on.
For the GDP portfolio.
And our next question comes from Ben <unk> from Stephens. Please go ahead with your question.
Hey, Thanks, good morning.
Jim Sheehan, congrats enjoy retirement well earned.
Okay I wanted to ask.
<unk>.
As you think about the labor dynamics in the business that exist in the opportunity or an opportunity to further automate in terms of what you can automate how much have you and.
How do you think about how the current and kind of more sustained tight labor environment.
The environment has informed your thoughts around what you might think about automating and the returns that you can achieve by doing so.
Yes, I mean, we've got a number of examples of our of the automation that we've been able to put in place and we've got.
Both ends of the spectrum. So when you think about our newer facility in.
Omaha.
I mean, we started out with a blueprint that had more automation built into it than we've had in our other facilities. So that's been very very helpful. Whether it's been racking loaders. The transfer vehicles I mean, it's an incredibly automated facility.
But you are starting with a more recent blueprint.
And some of our existing facilities.
<unk> always talked about the need for automation and have looked to find those opportunities, but I would say that the.
The opportunity.
Projects have accelerated over the last 12 to 18 months and so we've got a number of projects across multiple facilities, where we've we've talked about the package placement.
We've talked about a lot of the.
The Fox <unk> and other packaging opportunities.
Coffee did a really nice job and as one of the supply chain video during our investor update.
Demonstrating that but I think the other part and you mentioned it is how we think about automation going forward and then how do you factor in that labor component, which maybe wasn't as important to factor in.
Previous years, but I do think that's going to be part of that opportunity cost that has to be figured into the automation equation as we go forward.
As we think about it from an engineering perspective.
We are allocating resources in our engineering organization that we've never had before to make sure that not only are we identifying existing automation, but really helping to support and develop automation that isn't even out there yet that we believe we need in our in our operations. So I mean, there is still.
A long way to go a lot of work to be done, but there is a very very keen to focus in our organization to get us there.
Yeah. Okay. Thank you for that my second question is related to Jennie O and I know youll come back with more details in the first quarter, but.
Should we understand this to mean that.
By taking these actions.
We kind of reset the base of volume off of which you grow and enhance margins going forward or is this just the consolidation of capacity on the existing volume.
And as a result, you kind of get rid of.
Unused capacity in the facility that you have today.
Yes.
Our vendors both right I mean, I think when we come back to you we'll be talking about what the business is able to generate in terms of growth going forward.
The second part of your question, it's really really important just as we think about how do we fully utilize all of our facilities in our network to make sure that we're optimizing those opportunities for capacity expansion and so through this integration into our <unk>.
<unk> supply chain network, and you're going to see Hormel lines, perhaps a bacon line being what would traditionally have been our Jennie O Turkey facility. So it's really leveraging the resources leveraging the parent company to make sure that we are truly optimizing the ad.
Assets that we have employed in our business.
Our next question comes from Ben Theurer from Barclays. Please go ahead with your question.
Good morning, and thanks for taking my question as well Jim all the best in retirement Hope you can enjoy.
So I wanted to follow up quickly on planters.
You said, you're you've been seen that youre basically coming from an accretion point closer to the high end of the range, but if we look into two the profitability in the quarter and closed three products. I mean, it was clearly was down on a year over year basis, and I guess, there was still some of the integration costs.
Can you give us a feeling of how you think planters over time is going to be accretive into 2022 from a margin perspective in grocery products.
I think the best answer there Ben as you know the the accretion model that we gave you at time of acquisition was at 17 to 20 range.
Through our comments, we've indicated that we expect to perform at the high end of that range and of course that is a mix in grocery products and in our foodservice or convenience store channel, which is switches part of refrigerated foods.
So.
The business itself.
<unk> has been operating really really well meeting our expectations. The integrations have gone smoothly, we talked about already integrating one facility. The other two are right behind it. So I mean, the business is doing everything that we thought it would do so far but then the opportunities going forward.
In terms of what we're going to be able to do from <unk>.
Branding flavors innovation I mean, there is still a lot to come and that's why we're so excited about what it has contributed and will contribute in the future.
Okay, perfect and then.
My follow up question is really more around.
The products and I remember you've talked a lot about <unk>.
Potential youre seeing within <unk>.
Creating new product innovation.
Planters as an opportunity to leverage some of the other categories within snacking.
If you would have to take a look at the first couple of months of operations is that something.
You continue to be very positive on <unk> have you seen have you seen any incremental opportunities to to grow that business and to kind of combine it with existing snacking opportunities.
And where do you think this is going to turn out in a more of a medium term timeframe.
Sure.
There's two parts to that I mean on the retail front.
We are having.
Different more fruitful conversations with retailers in regards to snacking as a category and how we approach that as an organization and Thats exactly what we expected on the retail side.
The foodservice our convenience store channel the same thing is happening.
Having much different conversations with convenience store operators in the past everything we did was the back of the house when you're waiting to get food for sandwiches are pizza.
Now that retail section of the convenience stores have been opened up because now we have something to talk about with planters and we're able to follow on with other parts of our portfolio and so those are the new things for US there were some basics blocking and tackling that we.
New we'd be able to get done as well in terms of filling distribution gaps just like we did when we acquired the skippy business. So again you start.
Piecing this all together and Thats why we remain so optimistic about the acquisition and what it holds for us going forward.
And our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.
Hi, Thanks for the question Jim Best wishes in your retirement I hope to never have to talk about trim or belly prices ever again.
My favorite thing to do Rob I get up in the morning to hope it to Doug.
This was.
Why are you why are you retiring debt.
Yeah.
But I would like to know about the guidance the earnings guidance. So.
If I just assume 20 of accretion from planters.
That then I don't get much growth from the core business.
And you are forecasting growth across your core business. So.
It is the trick here to take the earnings base for 'twenty, one and reduce it for.
The extra week and if so how much should I reduce it and then I suppose I should also strip out.
The acquisition integration costs that you had which I think are maybe four cents in 2021, maybe you can help me with the math on that and then a quick follow up.
So as we explained before.
My prepared comments, and then Jim and Jim We do expect to have.
Both sales and earnings growth through all segments for next year, we definitely do have some puts and takes of the 50 <unk> week is about.
<unk>. So we would we would pull that piece out and again planters is at the top end of our range that we gave with 17 cents to <unk>. So that's a piece of it.
And so I think with that it should really get it you get you to showing.
Sales and earnings growth and margin go throughout throughout the year.
Certainly I mean, it will vary as we talked about.
From quarter to quarter, but we do expect to see.
Organic growth, especially with them new capacity coming on and really sit in the range of our long term goals that we have established and talked about at Investor day.
Hey, Rob the only other thing I would add just as a point of clarification. As you had mentioned four cents as deal costs. We've talked about that is <unk>. So there is another two cents there that you want to put into your model.
Okay.
Guarding the deal costs did you have 30 billion year to date pretax or.
How much how much in 2021, so far it's closer to $40 million when you take it.
All of the issues.
Okay.
Hey.
Okay.
I guess with your with your sales up so dramatically in the last couple of quarters I would think you would also have.
Your biggest sales gains in first quarter and second quarter, just because of the commodity pricing.
So is.
Is it fair to say that first and second quarter strongest sales growth will be there, but maybe margin.
Margins will be kind of compromise because of just the mathematics of.
The profit flow through.
I guess I would say again it depends right.
There is that volatility and being so commodity driven that can really flip at any point in time and so that's why we continue to stress.
Just that shift from quarter to quarter is something that we need to watch out for I mean, but we do feel good about the full year and ended growth.
We're expecting.
Both from the organic piece of it and then what planters is adding.
Hey, Rob.
Your assessment on the first two quarters of correct, because youre going to have.
A big part of that will be planters, which will be six to 700 million for the full year, but basically.
Again zero last year in the first two quarters.
Great Okay.
Yeah.
Thank you.
Our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead with your question.
Hey, good morning, everyone relative my joke as well, so but Jim best of luck and good luck in your retirement and it is well deserved.
Yes.
Let me just ask how much have your margin structure inhibited by labor and low utilization rates over the last year.
And do you think you will regain them majority of that in 2022.
Yeah, Kenneth there's been there's been a <unk>.
Impact that is probably easily quantifiable when we think about commodity.
Commodity costs packaging costs freight costs all of those things that you see there.
There are other costs that.
<unk> have been built into this crazy volatile year.
And the idea of all of a sudden one week you might have fill marine great answer things that arent showing up as planned and having to react as our supply chain to make sure that you're sourcing those and when you are looking to source those it's about supply not cost and so.
There are a lot of those examples on a week to week basis in the environment. We're in right now I think as the entire supply chain backwards and forward starts to moderate throughout the year, we'll be able to capture more of those or have those go away. So it will be less of a less of it.
The impact and I think it will just happen throughout 'twenty, two and probably I mean, we're hoping that there is just more normalcy as we head into 2023.
Okay.
Then with your Turkey actions.
Do you think that will structurally enhance your Turkey margins not talking about the.
The industry, but your actions is that worth about 100 basis points 150, <unk>, how do you kind of contextualize the margin enhancement based on your actions in Turkey, and then that will be my last question I'll leave it to two questions.
Yes, Thanks, Ken.
Two things there I mean, the first driver through all of this for the <unk> piece is really.
Moving away from that commodity nature of the business, creating less volatility that we've seen over the last five years and will be like I said, we'll come back to you in Q1 and give you a lot more color in terms of what you can expect from that from that business going forward.
Great. Thank you guys.
Yes.
Yes.
Our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.
Hey, Jim and Jim and just good morning, Thanks for taking the question I'll keep it to one because I know, we're a bit over time.
I guess, just just on the new pork supply contract.
I think historically you disclosed that you buy about 10000 hog carcasses of de from wholesale.
Kind of at the caught out price and I just wanted to understand it in the new contract because you're not buying all of all of the cuts now.
Just how we should think about it if that's priced differently are you buying only yet belly prices or trim prices is it still that scene.
10000 equivalent a day.
Just any more detail there to help us understand kind of some of that some of the port costs.
Sure Peter.
If you think about it bellies trim, obviously you are in high demand, but <unk> for example, we.
We sell haven't out onto the market.
And so we just pass through and so that would be an item that we wouldn't take theres multiple items that that we take during certain parts of the season for instance, ribs. So it basically allows us to.
Agree to take the products that we need for our value added production.
And is that is that 10000 equivalent.
Cause or whatever the number was like is that still a good baseline to use at the contract yes.
Yes. It is a good baseline so for instance.
Also their lines, we would take all of their hogs, we would take the trim.
We would take various other cuts of beef that.
But we needed our production and that there are certain types of things.
We would not we may not take any of them.
Because we just.
As I said, it's just a commodity product that's being passed through.
<unk>.
If commodity margins, whether they're positive or negative so when you look at the critical inputs.
Think about $10000.
Got it thanks very much Jim.
Our next question comes from Michael elaborate from Piper Sandler. Please go ahead with your question.
Thank you and good morning.
And then.
I'll, let you all the congrats Jim and.
Welcome to Zim.
But wanted to just touch on.
The capacity piece and maybe two things one is for the pepperoni expansion into Q.
Any sense of when within <unk> that might come should we really just count on any bump up there in the second half.
But I guess, maybe a bigger question is how does the guidance.
The capacity expansion fit in guidance.
Maybe getting at if theres any delays would that potentially impact what the outlook might be.
Yes.
Still thinking about it being operational in the second quarter, So you're really going to see the ramp up in Q3 back half of 2022.
We've got it modeled in right now Michael I mean, there is no indication that we're going to have any any delays getting the plant up and running so I mean, we were very very confident in our ability to.
To meet the numbers that we've put into our plan for 2022.
Okay great.
Just on the margin side.
You've got some mix lift from the new Fremont contract, you've touched on pricing and productivity and certainly looks like some of the costs are turning more favorably as you build out your plan can you just point out maybe what's the most critical as it is at the cost moderation is it the pricing piece are they.
Similar in a way how do we just think about that.
The mix.
<unk>.
Margin piece that you're seeing.
Yeah, I mean, what Youre, describing Michael is exactly right I mean, we will get the benefit of some of the raw material declines that we've seen.
<unk> here is key so our ability to get the pricing through when we did was very very important I think we've demonstrated a track record of being able to expand margins on the other side of this these market declines, which we expect to be able to do again. So it is.
A combination of both of those things.
Okay, great. Thanks, so much.
And our next question comes from Carson Barnes from consumer Edge Research. Please go ahead with your question.
Good morning, Thanks for the question.
In terms of cost what do you see as the biggest risk in 2022, it sounds like the costs are hedged for the most part you.
Do you see the transportation or packaging.
Our wages just curious how you think about how you're thinking about that and where you are the most exposed.
Thanks, guys for asked Carson is our is the volatility.
We expect freight to continue to show increases we know that packaging is going to have some increases in 2022, and we've built that into into our plan already.
Really where you get caught in it is more of that quarter to quarter thing is the volatility like we saw in 2021, so from our perspective as we sit here today on December nine.
The volatility throughout the year that really poses the biggest risk of them this year.
Makes sense. Thanks for the question Okay.
And ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the floor back over to the management team for any closing remarks.
Well, thank you for joining us this morning.
It's clear that we have a lot of momentum in our business as we head into 2022.
This momentum didn't happen by accident. It's a result of a lot of hard work by our team members around the globe and I am incredibly thankful for all this great work that has put our company in this enviable position.
Wish all of you a very safe and happy holiday season, and have a great day.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining you may now disconnect your lines.