Q1 2022 Hormel Foods Corp Earnings Call

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Good morning, and welcome to the Hormel Foods third quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the dark he followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Nathan Annis Director of Investor Relations. Please go ahead.

Good morning, welcome to the Hormel Foods conference call for the first quarter of fiscal 2022.

We released our results. This morning before the market opened around 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, Andrew <unk>, Smiley Executive Vice President and Chief Financial Officer.

Jim Snee will provide a review of the company's first quarter results strategic initiatives and a perspective on the rest of 2022.

Just since May we will provide detailed financial results and further commentary on the first quarter and our outlook.

The line will be open for questions. Following <unk> remarks, as a courtesy to the other analysts please limit yourself to one question with one follow up if.

If you have additional questions.

Welcome to get back into the queue.

An audio replay of this call will be available beginning at noon today Central standard time.

The dial in number is 877.

344, 75 to nine and the access code is 3905859. It will also be posted to 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 make it.

Please refer to pages five through 10 in the company's Form 10-K for the fiscal year ended October 31, 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 Companys operating performance.

non-GAAP measures include organic volume and organic sales.

Discussion on non-GAAP information is detailed in our press release located on our corporate website.

We've also posted supplemental information on the first quarter and outlook. This can be found on our investor website.

I'll now turn the call over to Jim Snee.

Thank you Nathan good morning, everyone.

Wanted to start off by thanking our dedicated team members around the world for once again, achieving strong results in a complex and dynamic environment.

The combination of our execution and balanced business model allowed us to deliver a strong first quarter results.

And Thats on track to achieve our sales and earnings guidance for the year.

These results further demonstrate the importance of our strategy.

Positive impact of our actions and our team's ability to perform in challenging operating conditions, our entire team can be proud of our accomplishments this quarter.

In the first quarter, our team delivered its fifth consecutive quarter of record sales and achieved high quality earnings growth.

Net sales surpassed $3 billion for the second consecutive quarter.

24% increase.

Operating income also increased significantly.

19%.

Most importantly demand for our products remained elevated across all our business segments and go to market channels.

We increased advertising investments during the quarter to sustain our momentum.

Our one supply chain team once again demonstrated their resiliency and allowed us to deliver organic growth in our domestic value added businesses for the quarter.

From late December through January our team experienced some of the heaviest operational impacts that we have seen since the start of the pandemic.

These impacts stemming from significant labor shortages due to the omicron Varian.

Severe upstream and downstream disruptions and industry wide operational challenges.

I wanted to again, thank our one supply chain team for their tireless work and their unwavering commitment to employees safety in these challenging times.

Fiscal 2022 is an important year as we return to top and bottom line growth.

Our path forward, which we detailed at our virtual Investor day in October represents the six strategic imperatives that will guide our actions over the next few years.

These include <unk>.

Expanding our leadership in foodservice.

Texting and growing our core brands aggressively developing our global presence.

Amplifying our scale in snacking and entertaining.

Enhancing growth of our ethnic and food forward portfolios.

And continuing to transform our company.

To provide added color on the quarter as well as our long term views on the business I'd like to give an update on the progress we have made since October .

In the first quarter, we again demonstrated our leadership position in the foodservice channel.

Sales were 51% ahead of last year.

We continue to benefit from our direct sales force and differentiated portfolio, which is perfectly positioned to meet the needs of today's foodservice operators with labor and time saving products.

We saw improvement in almost every category across our portfolio of foodservice businesses.

Consumer demand for food away from home has been very strong.

And according to recently published government and Technomic data conditions are improving across the foodservice industry to help meet this demand.

Foodservice sales have risen at an average rate of approximately 25% over the trailing 12 month period accelerating through the close of calendar year 2021.

Operator sentiment also continues to improve from pandemic Lowes foods.

Service industry employment has made steady gains.

These factors coupled with the demand we're seeing for our products across all geographies in the U S support our positive views on the near term and long term health of the industry.

As we look forward, we plan to further expand our leadership position in areas like restaurants hotels colleges and universities and use the scale of the planters brand to grow our company's presence in the emerging growth spaces, such as convenience stores.

We also expect to protect and grow our core brands in fiscal 2022 and into the future.

Our retail businesses grew sales, 17% during the first quarter.

We have leading positions in over 40 categories.

With brands, such as Hormel Black label spam, Skippy wholly and Jennie O.

Elevated demand for many of these core brands over the last two years has surpassed our ability to fully supply.

And then these highly inflationary times, having waiting brands that connect to consumers in meaningful ways is vital to success.

I understand the importance of brand stewardship and in the first quarter, we increased advertising investments in each business segment to ensure our brands remain well supported collectively increasing advertising investments by 38%.

With strong brand equity we have built over decades has allowed us to simultaneously increase our household penetration.

The size and our share in many of the categories in which we compete and implement strategic pricing actions to help offset inflationary pressures.

We have made excellent strides connecting with consumers in the E Commerce channel as well.

During the quarter, we exceeded overall category growth with more than 12% of our IRI track retail sales now coming from this particularly important and fast growing channel.

Transitioning to our third priority, we need to aggressively develop and expand our global presence.

Our international business is healthy and position for long term growth despite issues affecting the first quarter.

Similar to the broader industry in China, we experienced some demand softness predominantly in foodservice due to that country's COVID-19 related restrictions.

Additionally, limited railcar availability and U S port congestion negatively affected our export business.

We look ahead, our export business is expected to benefit from demand for our global brands, such as spam and skippy.

Our China business is expected to see growth from its scalable foodservice business as well as from retail with momentum behind the spam brand an innovative snacking items, such as beef jerky and Skippy funkiness.

And we have made considerable progress growing our global presence through our partnerships in the Philippines, South Korea, Europe and Indonesia.

We have great partners in these geographies, who share our growth mindset.

To further support growth we plan to continue to make many investments into our international business. This year.

During the first quarter, we increased brand investments in advertising.

Later this year, we will open a new Asia Pacific Research and development facility, which will support our operations in China and throughout Southeast Asia.

And we have plans to further build out our infrastructure in the important Chinese market, we expect to bring meaningful scale to other select global markets as well and we are making the necessary investments to succeed long term.

Our fourth priority focuses on our next growth platform snacking and entertaining.

Stacking and entertaining cuts across all segments and channels and we are ideally positioned to leverage our powerful and complementary portfolio of brands across salsa guacamole.

Nuts and premium Deli meats.

Planters is a cornerstone to our snacking platform.

And that business continues to perform at the high end of our expectations.

We completed the supply chain integration of the planters and coordinates businesses in February .

As a result, we expect continued synergies and improved customer service levels going forward.

As we discussed when we announced the acquisition of the planters business. We are on track to launch many new innovative items, including planters sweet and spicy dry roasted peanuts and introduced a refresh to the branding and packaging.

We're also investing in the brand, including our newest campaign all or one.

Seeing the great work of our teams has made me even more confident about where we can take this brand in the future and further strengthens our belief in the potential for planters.

Our first initiative is to enhance the growth of our ethnic and food forward portfolios.

Our Mega Max and Applegate businesses have been growing and we are evolving our portfolio at a rapid pace to meet the changing needs of today's consumers.

Our <unk> business grew volume in sales during the first quarter led by strong demand for our wholly products at retail.

Applegate delivered another outstanding quarter with growth across the portfolio from products, such as breaded chicken breakfast sausage and sliced meats.

Applegate has given us a clear competitive advantage in the natural and organic meat space and has provided a platform for some of our most important environmental work such as regenerative agriculture.

Finally, we need to continue to transform our company to enable future growth by modernizing our organization.

Initiatives like project Orion, one supply chain and our automation efforts are all focus areas as is the work we are doing to transform the Jennie O Turkey store business.

Has promise from our fourth quarter call, we want to give you an update on our Jennie O Turkey store transformation.

Our priority has been to build a more demand oriented and optimize 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 and lower earnings volatility.

And we have taken numerous actions and we will take many more actions to optimize our business model.

During the first quarter, we started to see the benefits of our actions of shifting from commodity to branded value added products for an example, as an industry leader in Turkey, we are investing behind the Jennie O brand to drive greater growth in our most profitable high growth.

Product lines in retail and foodservice.

In conjunction with driving improvement in our value added products. We are also taking aggressive actions to optimize our portfolio.

Combined with increased pricing, our brand investments and SKU rationalization are leading to a healthier business.

From a supply chain perspective, we remain on track to close defense and Avenue facility in Wilmar, Minnesota in the second quarter our.

Benson Avenue team members are currently transitioning to our newer and larger facility in wilmar, which will supplement our staffing levels.

To date.

The Jennie O supply chain has largely been run separately from the rest of our supply chain due to it being vertically integrated.

By the start of fiscal 2023, we will leverage our one supply chain capabilities to integrate all facilities into the broader Hormel foods network.

As we integrate these plants into the Hormel foods network and rationalize commodity Skus, we will free up plant space for additional production capacity of many product lines that will service any brand in the Hormel foods portfolio.

This is a monumental step and one that will make our entire company more efficient.

Similar to the integration of the supply chain, we will integrate key business functions more deeply into the Hormel foods organization.

In addition to integrating services finance and accounting and HR, we integrated the R&D organization into Hormel foods R&D during the first quarter.

Looking to the remainder of the fiscal year, we will start the process to integrate other business functions, such as our selling organization and marketing teams into the broader organization.

This integration will leverage the strengths of the parent company and the knowledge of Turkey to create a better business model.

Over time, we expect that Jennie O, Turkey store business to achieve higher more stable growth and improved profitability.

We also expect other financial gains including increased asset efficiency.

Higher manufacturing throughput.

Better labor utilization and Capex avoidance.

We expect these changes will drive selling general and administrative cost synergies of approximately $20 million to $30 million annually by fiscal 2023.

In addition to the progress we have made on our 2022 path forward, we continue to invest in our people our partners and our communities to deliver on our ESG commitments.

During the first quarter.

We distributed our annual profit sharing for the <unk> third consecutive year.

We continued our environmental stewardship work with investments in additional wind energy projects, which strengthens our position in renewable energy.

Waste supply donations to many causes responded to crises, where we could help and supported many local communities.

Additionally, our inspired pathways community College program continue to receive accolades and was awarded an anthem award for the most impactful corporate initiative in education Arts and culture.

And because of our good work, we continue to be recognized.

We were recently named one of America's most responsible companies by Newsweek.

One of the world's top female friendly companies by Forbes and as our best FERC best employer for the ninth consecutive year by the military times.

Our strong start to the year in the face of challenging operating conditions, we are reaffirming our sales and earnings guidance for 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.

Our outlook for the remainder of the year assumes among other things.

<unk> levels of demand across our go to market channels.

Margin improvement from our efforts to combat inflation, including pricing actions and a positive shift in mix.

Strength from our high growth brands and businesses, including Columbus, Applegate and foodservice.

Continued planters performance at the high end of our expectations.

Improved supply chain performance as labor pressures ease.

And the benefit of new capacity for dry sausage pizza toppings, Bacon and other value added products.

I believe our team has always had a keen competency to evolve and adapt as conditions change.

We have certainly improved upon this competency over the last two years and we were able to leverage it again to drive growth in the first quarter.

I expect our team will continue to navigate and overcome the challenging operating environment to deliver our growth goals. This year.

Our results focused mentality is just another factor that makes our company and our inspire team members uncovered.

At this time I will turn the call over to just send Smiley to discuss financial information relating to the quarter and provide more color on key drivers to our outlook.

Thank you Jim good morning, everyone.

I want to Echo Jim's comments, and how proud I am of our entire team and how we collectively rose above the challenges we encountered in the first quarter.

During the first quarter, we delivered record sales of $3 billion.

At 24% increase organic sales increased 13% for the quarter.

Gross profit increased 8% to $9 million compared to last year at 20% increase.

This improvement was driven by strength in refrigerated food <unk>.

Jenny O Turkey store.

And the addition of the planters snack nuts business.

Gross profit margin was 17, 7% compared to 18, 3% last year.

Pricing actions across all businesses did not fully offset double digit increases in freight expenses and continued supply chain disruptions.

We are encouraged by the quarter over quarter improvement in gross margins as our pricing initiatives catch up with the dramatic inflation, we have seen over the past year.

We increased advertising investments in all four segments to support the planters spam and Jennie O and skippy brands as well as the Hormel Pepperoni and Hormel Chili product line.

For the quarter advertising expense increased by 38%.

Approximately two cents per share.

Yes.

SG&A expenses increased 15% compared to last year due to the addition of the planter snack nuts business.

And higher advertising investments for our brands.

SG&A as a percentage of sales decreased to seven 4% from 8% last year.

This speaks to our strong sales growth and disciplined cost management.

Operating income increased 19% to $320 million.

Operating margins were 10, 5% compared to 10, 9% last year.

Operating margin increased sequentially from 10, 4% in the fourth quarter.

Interest expense increased $6 million compared to last year driven by the debt. We took out in June to fund the acquisition of the planters snack nut business.

We expect a similar amount of interest expense for each quarter during fiscal 2022.

Our effective tax rate increased to 22, 4% from 19, 7% last year at 270 basis points increase.

Last year's tax rate benefited from a state tax settlement.

Active tax rate guidance of 25% to 22, 5% is unchanged from our prior outlook.

The net result of all these factors was diluted earnings per share of <unk> 44.

A 7% increase over 41 since last year.

Turning to our segment results three of our four segments delivered sales and profit growth, which is a testament to our balanced business model.

In total segment profit increased by 13% as growth in refrigerated foods grocery products and Jennie O, Turkey store more than offset the decline in international.

Frigerator foods volume decreased 4% and organic volume decreased 5%.

The decline in volume was due to our strategic decision to restructure our pork supply agreement to reduce our exposure to low margin commodity business.

Sales increased 19% and organic sales increased 17%.

Refrigerated foods segment profit increased 15% led by the strength in our foodservice business and decisive pricing actions, we took across many of our branded businesses.

The team was able to overcome double digit increases in freight rates and significant supply chain challenges to deliver this impressive results.

Like prior quarters refrigerated foods continues to be negatively affected by production constraints due to labor challenges.

Market conditions for key inputs, such as hogs and bellies trim.

Trim and beef trim remained elevated and above year ago levels.

Further most markets increased throughout the quarter, which can cause margins to narrow as our pricing catches up with input costs.

Looking at the first month of the second quarter, we continued to see increases in hug cutout and belly prices.

Elevated levels of domestic and international demand low levels of cold storage and industrial I'd labor shortages continue to be material factors affecting protein production.

Grocery products volume increased 22% and sales increased 48% due to the addition of the plant or snack nuts business.

Organic volume increased 1% and organic sales increased 7%.

Segment profit increased 8% due primarily to the addition of the plant or snack nuts business.

This more than offset a decline at our Mega mix joint venture due to steep increases in avocado prices and significant increases in freight steel aluminum and other supply chain costs across the business.

Production constraints also limited our growth in volume sales and segment profit.

Jennie O Turkey store had an excellent quarter with sales up 15% and segment profit up 62% improve.

Improvement in foodservice increased whole bird shipments and pricing actions across all categories contributed to the performance.

Like our other businesses Jennie O, Turkey store also absorbed higher logistics and supply chain costs.

Feed costs increased by over 35% compared to last year.

We took decisive action last year to hedge most of our green costs, which protects us from major shifts in market prices during the fiscal year.

The International segment had a challenging first quarter caused by COVID-19 related restrictions in China and U S exports logistic challenges.

Volume decreased 17% and organic volume decreased 19%.

Sales decreased 3% and organic sales decreased 6%.

Segment profit declined 19% due to lower sales and logistics challenges.

We see the current challenges as more transient in nature and remain optimistic about our international growth opportunities.

Turning to cash flows.

Operating cash flow from the first quarter increased 87% to $384 million.

Capital expenditures were $50 million compared to $40 million last year.

Our target for capital expenditures in 2022 is unchanged at $310 million.

We paid our 374th consecutive quarterly dividend effective February 16th at an annual rate of $1 <unk> per share a 6% increase over last year.

Dividend growth remains a high priority.

We did not repurchase any shares during the quarter, we will repurchase shares opportunistically based on our internal valuation.

We ended the first quarter with $3 $3 billion in debt or approximately two three times EBITDA.

Although no mandatory debt repayments are required until 2024 based on our strong and consistent cash flow, we expect to make incremental payments as soon as the second half of 2022.

We remain committed to maintaining an investment grade rating and deleveraging to one five to two times EBITDA by 2023.

As Jim mentioned, we are reaffirming our sales and earnings guidance for fiscal 2022.

A key factor in our outlook is the ongoing complexity of the current operating environment. We are managing several key factors, including input cost inflation and the performance of our upstream and downstream supply chain.

We see elevated demand both domestically and abroad.

But disruptions from both suppliers and logistics partners are impacting our ability to fully meet the demand.

Our one supply chain team continues to improve the hiring and retention of team members and has developed many innovative strategies.

Mitigate the effects of labor shortages.

With the strong demand that we continue to see across all our businesses. We are maximizing our production flexibility to produce the items that are most in demand increasing internal capacity.

Leveraging our co manufacturing partnerships to increase throughput and making improvements to transportation load factors.

We have been combating extreme input cost volatility and inflation over the past two years, our experienced management team has done an excellent job managing profitability through multiple rounds of pricing actions effective management of promotional expenses strategic.

Sifts in product mix and disciplined management of SG&A.

Financially the actions our team is taking should result in quarter over quarter improvement in operating margins throughout fiscal 2022.

During my first quarter as Chief Financial Officer, I have been incredibly impressed with the accountability.

Fitment to results and pride IC across our entire company. This gives me even more confidence in our ability to deliver growth in fiscal 2022 and beyond.

At this time I will turn the call over to the operator for the question and answer portion of this call.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw from the question queue. Please press Star then two please limit yourself to one question and one follow up if you have additional questions you may reenter the queue.

The first question is from Ken Zaslow of Bank of Montreal. Please go ahead.

Okay.

Good morning, guys.

Yes.

Can you talk about elasticity of where youre seeing it where youre not seeing it.

And how you're thinking about it for the next six to 12 months.

Yes, I mean really we haven't seen any elasticity across any of the portfolio.

Had really strong demand across all channels and all categories and for US right now I mean, there's just so much noise and distribution and then fill rates demand being strong and we just haven't seen that elasticity yet.

As you would expect we're continuing to monitor all the various dynamics.

But just just haven't seen it yet and it's really really hard with all of that noise to draw a line in the sand to say when we're going to start to see it.

<unk> com, but it's just really hard to project when that's going to happen.

Given all the other issues I described.

And then my follow up question is when you think about your capability to supply products and your production supply chain can you talk about.

From a time periods of last year, now and now Youre forward.

Have you seen the most supply constraints in your production where are you now relative to that and where will you be in a year from that.

How does that change or help your sales and operating profit and I'll leave it there and I appreciate it sure. Thanks, Canada actually I'm on I'm going to start with the last part in.

Obviously, a year from now we expect to be in a much better position.

And when we think about not only the continued improvement with labor that we're seeing across the entire supply chain.

Added capacity that we've recently completed projects that we have in the Q that we've talked about and then lots of other small project as well as continuing to build out our co manufacturing network.

A year from now we will be in a much better position as we progress throughout the balance of this year.

We expect to be incrementally better as we go along and so the biggest driver right now is our ability to continue to add labor to our facilities.

I'd say right now we've got about a third of our plants that are fully staffed and have made progress across all of our plants. If you remember in our last conversation and talked about how we had made progress in some select plants now.

Now we've made progress in all of our facilities and all of that is going to lead us to be in an incrementally better position throughout the year.

The next question is from Tom Palmer of Jpmorgan. Please go ahead.

Hi, Thank you for the question.

Maybe to kick off I just want to clarify.

EBIT margin.

Outlook I think you said expect it to improve sequentially throughout the year.

If I look though on EBIT margin it looks like the second quarter on a just kind of a seasonal basis is typically one of the stronger ones of the year and then you see the second half a bit weaker so is it even looking past seasonality you expect to kind of have a linear progression of increases as the year progresses.

Okay.

Yes, so Tom it's a great question and as we've talked about we are starting to see margins improved quarter over quarter and really the driver is our pricing right and so our pricing.

Is catching up with inflation, but of course inflation continues to to move further and further away from us.

And as you think about pricing there is really in my mind three ways to think about it there's the pricing thats fully implemented there is pricing that we currently have in process and then there is pricing that's really yet to come and so that's what's going to drive the margin improvement and we do for the rest of it.

For the year because of that pricing strong demand expect continued quarter over quarter improvements.

Okay. Thank you for that and I guess, the follow up would be on kind of the gross margin side I think a quarter ago. The talk with gross margin expansion for the year I assume that still in place just given the guidance, but maybe for the second quarter should we look for gross margin to expand year over year or is that more.

Sure.

A second half event. Thank you.

So the expectation Tom is exactly that that will continue to see that expansion.

For the second quarter, but also continuing through the rest of the year as well.

The next question is from Peter Galbo of Bank of America. Please go ahead.

Hey, guys. Good morning, Thanks for taking the question.

Jim in your prepared remarks and in the press release. This morning, you spoke pretty positively about about planters.

It seems like in some of the Nielsen data, though.

Maybe been a bit of a disconnect that I don't know if that's around service level issues.

Or on track channels. So I was just hoping.

And service levels improve do you expect to see the scanner data start to get better can you just give us a more full picture on exactly what you were seeing in planters that might be disconnected from the data.

Yes, I would say, it's a <unk>.

Great question, Peter and you've hit it right on the head I mean now we are optimistic about the planners business and Theres a couple of things to consider.

The IRI data only covers a portion of the business, albeit a large portion there is still a significant portion.

Our foodservice our convenience channel, that's really off to a good start as well, but your comment is exactly right is that we have had service level issues in Q1.

It's fair to say that we've had a disproportionate.

Amount of lower fill rates across the board.

We talked about how we now have this business under our full control as of Q2.

In the first period of Q2, and we've already seen improvements in fill rates and so the.

Team has done a really nice job with with planners and doing what we said we were going to do in terms of how we.

We invest in the advertising of course, we had our Super Bowl AD that we ran the work that we're doing in innovation, introducing new sweet and spicy flavor with packaging innovation yet to come our sales team now that they've got their arms around the business are doing a nice job expanding distribution and then I mentioned the foodservice.

Channel with convenience stores really have an impact there as well. So that's why we're so optimistic but your read through in terms of service levels and fill rates in Q1 is exactly the issue in the short term.

And just to add to that with all that Jim has just mentioned, we expect planters to continue to perform at the top end of the guidance that we have given.

Okay. No. That's helpful. Thank you for that.

And maybe just on Jennie O.

<unk> will detail around.

The SG&A savings for 'twenty three I was just curious, though I think last quarter. You had mentioned maybe we'd get a more detailed breakout this quarter on an upfront costs related to shutting down the plant.

And some of the other transitional costs, and then as well on Jennie O. The comment on on feed costs up 35%.

Is that inclusive of your hedging or is that.

Yeah.

Just what costs would be up if you werent hedged I guess, thanks very much.

Yeah, So what we'll probably tag team this one Peter.

As we think about what's happened in the Jennie O operating environment, obviously, it's become an incredibly dynamic this quarter. When you see what's happened with some of the fundamentals all of which are favorable.

And so it's really hard to go through line by line in such a volatile environment.

Key takeaway remains so that.

There is a long term strategy here that will alter this business to become more demand oriented and thats really the most important takeaway and all of this and so the team has done a lot of great work in terms of how we are going to optimize this business over the long term how we.

We're going to leverage the strengths of both Jennie O, Turkey store and the parent company.

Obviously, we talked more about the integration of some of the sales and marketing efforts going forward and.

Those are the things that are going to get us to the long term strategy of that demand for key value added products over the long term.

And so thats really the key takeaway I'll, let just sense, maybe talk a bit more about the grain prices, yes, as it relates to the grain prices certainly.

Costs that youre seeing in the prices that we're seeing is included in them and what we have hedged and so we are more hedged than normal. So we feel good about being able to just.

Cover down and some of that headwind from a green green price perspective.

The next question is from <unk> Parikh.

Oppenheimer. Please go ahead.

Good morning, Thanks for taking my question. So just given your exposure both foodservice and retail I was just curious how you guys think about maybe normalization of the food at home demand in the coming quarters, especially with Covid cases.

Downtown.

Yeah.

It's really hard again for Apache to say when that when that's going to happen what behaviors have changed.

What we do know is from from a foodservice perspective.

There is pent up demand this has been a bit of a roller coaster ride over the last two years in terms of starting and stopping.

Tumors being able to get out and travel go on vacation that actually after retreat back to the home and so again, it's hard to project exactly when and how those shifts are going to take place. The important part here is how we built this portfolio.

The balance that we have across the organization in both foodservice and retail so.

As that as that shift occurs we're going to be well prepared to take advantage of it but I do think again.

In the foodservice business has obviously demonstrated incredible growth and we really don't see any signs of slowing down because of that pent up demand that I described in addition to that as the great work that our direct sales team is doing to connect with operators, who even though there.

Seeing improvements in labor, they still have challenges and so all of that again leads us to be very optimistic about the entire portfolio and the intentional balance that we've built across the portfolio over the years.

Okay, Great and then maybe just one follow up question. So on <unk> I know, there's a smaller contribution this quarter due to some of the cost pressures do you expect that contribution to improve in the future quarters.

Yes, I do think the avocado situation was a bit out of the ordinary for this time of year and so we do expect that business to get better throughout the year.

The next question is from Ben Theurer of Barclays. Please go ahead.

Yes.

Yes, good morning.

Thanks for that actually wanted to follow up on Mega makes ethylene can one moment.

Can you elaborate how the situation has now turned out in terms of the supply of someone who will be coming.

They received the big disruption are you are you, having some inventory issues here and when do you think it's going to be resolved that would be my first question. Thank you.

Yeah, we don't have any any supply issues.

The product is a lot of the product is actually produced in Mexico.

While we are I mean, what we have is obviously the run up in the cost of the avocado sets that's impacted the performance of the business in the short term.

<unk>.

Okay, perfect and then.

We're looking to Jennie O.

Obviously, it was a significantly better quarter and thank you lunch. Thank you very much for elaborating on that now if we look forward. The strategic initiatives you talked about how should we think about profitability for Jennie O going forward is it.

About <unk>.

Getting back to a more branded SKU level in the low to mid teens or is there still going to be some of them.

Just because of the commodity piece, you won't be able to get completely.

Yes.

Great question.

<unk>.

Our plant a few.

The work that we're doing is being done to eliminate the volatility in the earnings and so by doing this we know that we're going to be able to improve the quality of earnings over time and reduce the volatility and so really thats. How you should should think about it.

As we're sitting here today.

Scott, obviously breast meat prices at significantly higher prices you've got core.

Corn and soy at very high prices. So there's just a lot of moving parts and a lot of volatility, but the big driver again. The most important thing to takeaway is that this is going to be a demand oriented businesses demand oriented business that will have less volatile earnings overtime.

The next question is from Michael Lavery Piper Sandler. Please go ahead.

Oh.

Thank you good morning, Michael.

Michael.

Hugh you mentioned.

This lease and how theyre holding up I, just want to come back to that and see if you can elaborate on what your assumptions are going forward.

Do you expect that to continue or do you.

At least for modeling purposes and guidance.

Assume it reverts back to more normal levels or something in between.

Yeah, right right now Michael I mean, we expect it to continue because it really is all about supply.

And just it goes back to the point about the all the noise that's out there any distribution fill rates strong demand.

And really until some of those issues work themselves out.

It's going to be hard to prognosticate about the elasticities do we expect there to never be elasticities again no.

But what we do know is that we've got to solve continue to solve the supply side of the business and then we'll have a better view on elasticities over overtime.

Okay. That's that's helpful and just also following up on planters.

I appreciate there is some supply disruptions our service levels, you called that out pretty broadly, but I want to make sure I understand.

That would seem to impact your shipments and make those worse than this.

Sales growth, we see in the scanner data but.

Our numbers are showing this kind of high single digit declines or even slightly more in January .

U C selectively where some regions are retailers are performing better than that on a sell through basis that you would point to the supply disruptions.

What how the business is doing better than you think or what are your expectations for this level on the high side.

And it's coming through where you would've expected.

Yes, it's a combination of all those things I mean, we are seeing some retailers who are continuing to perform better.

And the other part of the business in Foodservice and then.

Until we had total control of the business, we were expecting some of these disproportionately lower fill rates and then that came to fruition. So it is it's a little bit of everything.

We do know and what we're so optimistic about us having this business under our control.

Paul control operationally total supply chain, obviously the sales part.

It just allows us to be able to run the business the way that that we want to run the business and then.

I talked about C stores and foodservice, but you've also got the club channel. That's not included in the scanner data either so so there are parts that arent in there and you add that to the supply chain issues. We.

We feel like we've got it under our control we are ready to to continue to drive this business forward.

The next question is from Robert Moskow of Credit Suisse. Please go ahead.

Hi, there Tim.

A couple of questions.

This is more backward looking but the decision to have a Super Bowl AD probably wasn't yours and he was probably what prior management.

But typically you do those ads when you know that retailers can merchandise aggressively around it you know you do it for the retailers, but you did at this time at the time of supply chain challenges.

Can you talk about whether this AD created the goodwill with retailers you hoped it would or did it did it cause any issues.

And then secondly regarding the assumption on margins getting progressively better does that assume that your cost kind of level out as the year goes on or have you included an assumption of continued inflation throughout the year.

Yeah.

Thanks, Rob.

And Youre right on the Super Bowl AD, obviously, we had a there is a commitment to to that work.

But I would say that it didn't build any elwell with with retailers supply disruptions are so broad based in today's environment, but that wasn't that wasn't an issue.

It did accomplish exactly what we wanted it to do in terms of brand building, making sure that we were getting the impressions in the marketplace that we wanted to get to your point, we were able to get still a lot of display activity.

But yes, we would consider the Super Bowl AD a success and then <unk>.

In regards to margins.

<unk> sales and continued inflation throughout the year. We've also built in some continued pricing as I said, we've got pricing that's both in process and pricing that's yet to come.

To contribute to that margin improvement.

Okay, and just a follow up does it also assume that your labor labor issues get sequentially better.

During the course of the year too yeah.

Yes.

Sure Rob.

We've seen some improvement, but we expect that to continue throughout the year.

The next question is from Ben <unk> of Stephens. Please go ahead.

Hey, Thanks, good morning.

So I wanted to ask about the international business.

Specific to the M&A strategy, a strategy that you expect to deploy there.

That business has.

No.

<unk> a prominent piece of your long term strategy do you expect the opportunity for growth to be driven.

Disproportionately by M&A versus organic growth.

And given kind of the debt profile of the business right now and the leverage profile, which is.

Yeah.

Very manageable given the cash flows of the business how aggressive.

Are you in terms of pursuing M&A in that business at the moment.

Sure.

Couple of a couple of questions in there.

So we are very optimistic about the international business over over the long term we expect these.

<unk> challenges to be temporary same with the COVID-19 restrictions that we experienced in China.

What we're so optimistic about is the platform that we have built and continue to build across the entire international business are strong as part of that foundation is in China, where we've been the longest we've learned a lot about the business, we've added infrastructure and feel like we can.

Turning to leverage what we already have and continue to scale up that business and not just in China, but also throughout Asia Pacific because of what we've done in China.

And so we have not backed off at all of our M&A strategy, whether internationally or domestically.

Honest with you.

We're continuing to look for those opportunities that fit into the strategic initiatives that I laid out in my prepared remarks. So we know that we have the financial wherewithal, we have the structure in parts of the world, where we can do additional <unk>.

The M&A, it's all about finding the right opportunity at the right time, and we continue to prospect for those opportunities internationally and domestically.

Okay, great revisiting.

The repositioning of the jobs business.

You characterize the savings the $20 million to $30 million of savings I think of G&A, but it sounds like the breadth of some of the actions you are taking there might extend beyond just G&A savings should.

Should we think of that $20 million to $30 million as a baseline and incremental rationalization and supply chain savings stack on top of that.

Or would those broader actions be contained within that $20 million that you referenced.

Yes, you're thinking about it the right way that that would be the baseline and there will be additional opportunities.

The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes. Thank you good morning, everyone.

I was hoping to go back to grocery.

And obviously you talked about some of the discrete pressures.

Mega Max and you can kind of see that.

At least in part in the equity earnings line being down year on year at the corporate level.

Well you still have the Panthers acquisition contribution in there. So I'm just trying to get a sense on maybe X Mega Max Explant. There is there would seem to be a pretty significant year on year profit decline.

Implied by the by the fiscal first quarter results and talk to especially packaging inflation.

Maybe just talk a little bit about the rest of the portfolio between.

They can meet and nut butters.

What.

Kind of Youre seeing there from a margin perspective, and how we should think about that going forward.

Yes, a couple of things there Adam I mean, the first thing is that there is demand across the portfolio remains exceptionally strong and as we've said several times, we cannot fully supply all of that demand.

GP had a significant impact in terms of inflation.

In freight steel aluminum trim avocado, so it really was across the board and broad based.

The thing that we have done obviously as we've we've taken pricing to offset that and we've got again pricing that same process and some pricing reevaluating that can be yet to come.

And so they have had that significant inflationary impact, but the demand across the business remains extremely extremely strong.

Okay, Alright, that's helpful and then just over in in refrigerated.

Organic volumes were down on a year on year basis, and I imagine there isn't at least some element of the new pork supply agreement and having less kind of fresh pork running through that business, but can you help us think about the organic volume trajectory.

Moving forward with some of the new capacity.

Do you have.

I'm just trying to think about.

Once we hit a peak on pricing I mean, the way you grow the business is going to be volume overtime.

Let me try to think about how we get how we get there.

Yes, so you're exactly right Adam.

The decline was due to the effect of the New Park agreement.

But the biggest driver for US right now is this added capacity and so we've got our pepperoni capacity, that's up and running in Omaha, We've started additional bacon capacity in.

A number of different locations, we've talked about other projects and building out our co manufacturing network and all of those are having a very very positive impact on refrigerated foods because again.

Both the retail and foodservice demand remain incredibly incredibly strong.

The next question is from Eric Larson of Seaport Research partners. Please go ahead.

Yes, Thank you and thanks for taking my question. Good afternoon, good morning, everybody. So.

The question, let me just step back and when we asked the question on pricing a little differently Jim.

Without it without highlighting specific products that you may or may not have priced.

What what percentage of maybe grocery revenue.

It still requires further pricing that you may not have taken already maybe that the.

Better way to kind of clarify it.

Yes, I mean, so I just want to make sure I understand the question, Eric I mean, we've taken pricing on on everything.

So.

There is again some pricing that's fully implemented we've got some pricing that's in process. We've got pricing that's yet to come and then we're still evaluating the need for future pricing. So.

Where.

We're pretty aggressive on the on the pricing front.

And J P and refrigerated foods.

Okay.

So my follow up question is can you give us.

It's a pretty dynamic environment in the meat protein sector with pork.

It looks like the USDA is looking for lower <unk>.

Production this year, maybe 1% to 2% it looks like maybe.

You've got really high soy meal costs, so farmers incentive for farmers to maybe increase production is not as great at least right now and maybe some of the Chinese demand might be backing off.

After a couple of years of really strong demand. So could you kind of give us a feel for.

How are you.

Your pork in your hog costs might look for the remainder of the year.

Yes.

This thing there Eric is there going to be elevated for all the reasons that you described we do expect them.

To continue to be elevated and we expect them to continue to be to be volatile.

I mean, the other at the other element of this to consider is labor and we do expect to see continued improvement in labor, but.

We've talked in the past about raw materials that are impacted by later labor pork trim and so as we continue to get more labor will be able to do more boenning and get more pork trim, but we.

We also know that all of the variables that you described we will have an impact leading us to to those higher higher costs.

This concludes our question and answer session I would like to turn the conference back over to Jim Snee for closing remarks.

Well. Thank you everyone for joining us this morning.

I didn't want to take a moment to recognize Nathan Anna Sui is completing his final earnings call as director of Investor Relations as he transitions into his new role of Vice President of corporate development.

Based on its done a great job, helping us to evolve our investor relations messaging over the last five plus years I know he'll be equally successful in his new role.

And replacing Nathan as Dave Dahlstrom, So it's been alongside Nathan over the last several years and is well prepared to assume this very important role I.

I want to personally congratulate both of them as they begin their new assignments in.

And in closing.

We remain very optimistic about our business and we are well prepared to navigate the balance of our fiscal 2022.

Again, thank you for joining us and have a great day.

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