Q2 2022 Hormel Foods Corp Earnings Call
Good morning, and welcome to the Hormel Foods second 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 star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
Draw from the question queue. Please press Star then two we ask that you limit yourself to one question and one follow up. Please note. This event is being recorded I would now like to turn the conference over to David Dahlstrom Director of Investor Relations. Please go ahead.
Good morning, welcome to the Hormel Foods conference call for the second quarter of fiscal 2022.
We released our results. This morning before the market opened around 630 am eastern.
Now receive a copy of the release you can find on our website at Hormel foods Dot com under the investors section.
Our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer, and Justin Smiley Executive Vice President and Chief Financial Officer.
Jim will provide a review of the company's second quarter results, an update on business initiatives and a perspective on the remainder of fiscal 2022.
We will provide detailed financial results and further commentary on our second quarter and our outlook.
The line will be opened for questions following <unk> remarks.
Courtesy to the other analysts please limit yourself to one question with one follow up.
Additional questions you are welcome to get back into the queue.
An audio replay of this call will be available beginning at noon today central time.
Island number is 870 734 $475 two nine and the access code is 806, 1% to 95 and will also be posted to our website and archived for.
For one year.
Before we get started I need to reference the safe Harbor statement.
The comments made today will be forward bookings and actual results may differ materially from those expressed or.
Or implied by the statements we will be making.
Please refer to our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q, which can be accessed at Hormel foods dot com under the investors section.
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 and organic net sales.
non-GAAP information is detailed in our press release and located on our corporate website.
We have also posted supplemental information on our second quarter and our outlook. This can be found on our investor website, Investor Hormel Foods Dot Com I will now turn the call over to Jim Snee.
Thank you David good morning, everyone.
Our team continues to successfully navigate some of the most difficult operating conditions and the company's 130 year history as we again delivered strong top and bottom line growth this quarter.
I wanted to express my gratitude to the entire team for their commitment and ability to drive results.
There are many examples across our company of our results matter focus.
And I would like to specifically acknowledge two teams who showed incredible dedication and determination during the last quarter.
First I want to recognize our Jennie O Turkey store team.
In March highly pathogenic avian influenza or HP AI was confirmed in our supply chain and our team quickly and effectively mobilized into crisis mode.
This involves working long hours over the course of many weeks to protect the safety of the Turkey flocks provide transparent communication to customers and operators and plan for future business interruptions.
While operating with a day to day business.
This was compounded by severe weather in early May which also impacted several facilities within the supply chain.
Our Jennie O team went through a lot this quarter, showing an unwavering commitment and resolve in the face of some exceedingly demanding situations.
Thanks, Dan for the work they've accomplished and for the work yet to come.
Secondly, I would like to applaud our team in China for their incredible execution during a truly unprecedented times.
Strict Lockdowns force the partial closure of two of our manufacturing facilities.
Some of our team members volunteered to sleep and live inside the facilities for 10 days to ensure the plants remained operational.
Normal production could resume.
Simultaneously, our sales and marketing teams drove outstanding retail sales gains in anticipation of widespread lockdowns.
Ingenuity resourcefulness and grip displayed by our entire team in China was truly commendable and another example of what makes our company uncommon.
In the second quarter, our team delivered its sixth consecutive quarter of record sales and a third consecutive quarter of earnings growth.
Operating margin also improved compared to the first quarter, an indication that our balanced business model and efforts to mitigate inflationary pressures are working.
Custer and operator demand for our leading brands remained robust as we continue to realize the benefits of investments in our direct sales force diversified product portfolios increased advertising brand building and innovation.
Across all channels, our brands have responded well to pricing actions and we are actively managing pricing and promotional levers to ensure the long term health of our brands and the categories in which they compete.
We also made meaningful progress across our supply chain during the quarter.
Our investments in capacity and recovery and staffing levels contributed to improved fill rates inventories and production volumes.
One of our most important strategies has been to create a balanced flexible and diversified business model able to withstand market volatility business fluctuations and other unforeseen events as.
As our second quarter and first half results clearly demonstrate our strategy to bring balance into our business continues to differentiate hormel foods from others in the industry.
One of the ways. We do this is through our channel diversification.
And the initial stages of the pandemic, we leaned heavily on our retail businesses, both domestically and internationally to drive growth.
In the current environment, we are growing with the foodservice industry through its recovery and continuing to meet elevated demand at retail.
From a top line perspective.
Drove 15% growth from our retail businesses in the second quarter.
And continue to see elevated demand for our leading brands, including wholly Skippy Hormel square table refrigerated entrees spam hormel gatherings, Jennie O Columbus and Applegate.
We are also seeing our investments in the ecommerce channel pay dividends with solid above category sales growth and share gains.
As measured by IRI sales increased 5% for the quarter.
Ending with a strong April .
e-commerce constitutes around 12% of our tracked retail sales.
As an important part of our future growth.
We demonstrated our leadership position in the foodservice channel again during the second quarter.
Driving sales growth of 32% compared to last year.
Growth was extremely balanced with strength in both refrigerated foods and Jennie O Turkey store.
We have made substantial gains in the fast growing convenience store channel and a large part due to the scale of planters brand brings to our company.
Growth from the planters and cornered us businesses and this channel is enabling expanded placements of other products.
<unk> lands in our retail and snacking space.
<unk> spam, Chile, Skippy peanut butter complete black label Bacon and egg bites.
<unk> stack trays, justin's items, and Hormel gatherings party trays.
Additionally, we have placed premium foodservice items, such as Austin Blues barbecue fire braised meats Bacon, one precooked bacon to be used in prepared items in this channel.
Like E Commerce, and our retail channel convenience stores provide an important part of our future growth in foodservice.
Internationally, we're continuing to make progress to bring even more balance to the company our business in China is a great example of this.
This quarter, we again experienced demand softness in foodservice due to the country's COVID-19 related restrictions.
Our team quickly pivoted its resources from food service to the retail channel.
<unk>, a spam and skippy surged and our team was also able to effectively redirect foodservice items to food security programs to help supply those experiencing lockdowns.
Our strategy to meet consumers, where they want to eat with a broad portfolio of products from mainstream to premium.
Both domestically and internationally is a strategy that has served us well and will continue to serve us well into the future.
From an earnings perspective, our Jennie O Turkey store segment had an outstanding quarter as its ability to adjust to current market conditions and meet strong foodservice demand drove higher results.
<unk>, our foodservice businesses, and our refrigerated foods, we're able to price for inflation and deliver excellent volume growth.
These businesses more than offset higher freight expenses for all segments.
And the earnings decline in grocery products, which absorbs significantly higher costs for certain inputs such as avocados protein added packaging.
We have announced another round of pricing actions across our grocery portfolio to help mitigate these inflationary pressures.
Well in the meantime, lean into our balanced model as we did this past quarter.
The balanced business model has been a key driver behind our recent success and our long term growth.
We remain confident in our ability to withstand volatile economic conditions and market cycles through our continued focus on that one.
We successfully completed the integration of all aspects of the plant or a snack nuts business during the second quarter.
And the business continues to perform at the high end of our expectations.
During the cutover period in February we experienced lower fill rates as we fully transitioned inventory into our logistics network.
I assumed control of the entire supply chain.
While this did have a short term impact on sales and consumption. We are seeing improvements in customer service levels and expect consumption data to show continued improvement in the coming months.
As we celebrate one year of owning the <unk> business I am proud of the excellent progress we have made on our commitments from last June .
We have invested heavily behind the planters and corn nuts brands. We are on track to capture the synergies identified during diligence and we have leveraged this business to amplify our scale and snacking and entertaining.
After an excellent first quarter and significant profit growth in the second quarter, our Jennie O. Turkey store team is facing an uncertain period ahead due to the impacts and risks to it supply chain from HPE AI.
Similar to what we experienced in 2015 HPE AI is expected to have a meaningful impact on industry poultry supplies over the coming months.
Including large supply gaps in the Jennie O, Turkey store vertically integrated supply chain beginning in the third quarter.
On a positive note it appears that the bio security measures. The company has implemented since 2015 have provided additional protection against the virus as the number of company managed turkeys impacted to date is 25% lower than during the previous.
Event.
Breast meat prices have already risen to levels higher than any point in 2015.
Currently trading above $6 compared to the previous all time high of.
585.
We have seen increases in other Turkey markets as well.
From a cost perspective feed prices are significantly higher with corn and soybean meal up more than 125% and 40% respectively as of early may.
Additionally, there is further upside risk to feed prices less later plantings due to cold and wet weather across the Midwest. This spring.
The cost of production labor at company manufacturing facilities has also increased more than 50% on average compared to 2015.
Our team is taking the appropriate actions to protect the health of the turkeys across our supply chain.
Managing through operational challenges caused by the outbreaks and adapting to changing business conditions.
While simultaneously managing through the impacts of HPE AI, our team made progress on the Jennie O Turkey store business transformation.
During the second quarter.
Lowe's The Benson Avenue facility and successfully transferred approximately 200 employees to the newer and larger manufacturing facility in Walmart.
We remain on track to integrate business functions.
Solid eight that Jennie O, Turkey store supply chain into the broader Hormel foods, one supply chain and drive SG&A cost synergies of approximately $20 million to $30 million annually by fiscal 2023.
Above all the team is focused on creating a business model that is better aligned to the changing needs of our customers consumers and operators to drive long term sustainable growth.
I also want to provide an update on the great work our team is doing to fulfill our ESG commitments and achieve our 20 by 30 goals.
During the second quarter, we announced we are on track to match, 100% of domestic energy use with renewable sourcing by the end of 2022.
We announced at our Justin's brand is transitioning to jars that use 30% plus plastic.
We were ranked number 57 on the U S. Environmental protection Agency's Fortune 500 list of the largest green power users.
We were named one of America's most trustworthy companies by Newsweek.
And in May for the 13th time, we were named one of the 100 best corporate citizens by three P. L media.
This ranking recognizes outstanding environmental social and governance transparency and performance, we are proud and honored to continue to be named a top corporate citizen.
Lastly, I want to share a recent success story from our inspired pathways free community College program.
This week, we hired the first individuals from the program to participate and paid summer internships.
This marks yet. Another example of why we believe this program can be generational for our employees their dependence and for the future of the company.
We are reaffirming our sales guidance range of net sales between 11, seven and $12 $5 billion and narrowing the earnings range of a $1 87 to $1 97 per share.
We are confident in our ability to deliver our sales guidance given the robust demand for our brands across the retail foodservice and international channels improvements.
Improvements in our supply chain and investments in capacity and from strategic pricing actions.
From an earnings perspective, we expect a strong finish to the year from our refrigerated foods business, we anticipate a fourth quarter improvement from pricing actions taken across our grocery products portfolio.
We are navigating the impact of HPA AI on the Jennie O, Turkey store supply chain and external factors affecting the international and other segment.
Including currency export logistics challenges and Covid related Lockdowns in China.
Our teams have actions in place to manage through these challenges and drive results for the company.
At this time I will turn the call over to just set a smile to discuss financial information relating to the quarter and provide more color on key drivers to our outlook.
Thank you Jim good morning, everyone.
We delivered another quarter of record sales of $3 1 billion, a 19% increase compared to last year.
<unk> sales increased 10%.
Gross profit increased 7% to $7 million.
Compared to last year at 16% increase.
This improvement was driven by strength in Jennie O, Turkey store growth from refrigerated foods.
The addition of the planters nuts business and strategic pricing actions to offset inflationary pressures.
Gross profit margin was 17, 9% compared to 18, 3% last year and 17, 7% in the first quarter.
SG&A expenses increased 12% compared to last year due to the addition of the plant just snack nuts business and higher advertising investments in our brands.
SG&A as a percent of sales decreased to seven 3% from seven 7% last year.
This speaks to our continued.
Strong sales growth.
Disciplined cost management.
We increased advertising investments in the second quarter to support the planters.
And spam brands for the quarter advertising expense increased by 20% to 7% or approximately one cents per share.
Operating income increased 16% to $335 million.
Operating margins were 10, 8% compared to 11, 1% last year.
Operating margin increased sequentially from 10, 5% in the first quarter.
As anticipated, we delivered quarter over quarter improvement in operating margins and made.
Any progress in mitigating the significant inflation we experienced.
Interest and investment income declined $9 million, primarily due to lower results from our Rabbi Trust, which generally tracks with equity market.
Interest expense increased $7 million.
Compared to last year.
Our effective tax rate was 18, 7% for the quarter down from 22, 1% for the same period last year.
The lower rate this quarter was primarily due to tax benefits from increased stock option exercises.
Our effective tax range guidance of 25% to 22, 5% is unchanged from the prior outlook.
The net result of all these factors with diluted earnings per share of <unk> 48.
A 14% increase over 42.
Last year.
Turning to cash flows operating cash flow for the second quarter increased 24% to $193 million.
Operating cash flow for the first half of 2022 increased 60% to $577 million.
Strong earnings growth has been a key catalyst to these increases.
Capital expenditures in the second quarter was $78 million compared to $45 million last year.
During the quarter, we benefited from new capacity, including our pepperoni expansion in propylene foods plant in Nebraska, and raw Bacon investment in our plant in Austin.
Our fiscal 2022 target for capital expenditures is unchanged at $310 million.
We paid our 370 <unk> fifth consecutive quarterly dividend effective may 15 at an annual rate of $1 <unk> per share.
We did not repurchase any shares during the first half.
We will repurchase shares opportunistically based on our internal valuation.
We expect to make our first payment and begin our deleveraging related to plant trees acquisition in the back half of the year.
We remain committed to maintaining an investment grade rating and deleveraging to one five to two times EBITDA by 2023.
Turning to our segment results segment profit increased by 15% as growth in January Turkey store, and refrigerated food more than offset declines in grocery products and international and other.
The company benefited from time to sales of $239 million in the quarter.
The related profit contribution.
Refrigerated foods volume declined 13% and organic volume decreased 14%.
Decline in volume was primarily due to our strategic decision to restructure our pork supply agreement, reducing our exposure to low margin commodity to port business and better aligning resources to value added growth.
Sales increased 13% and organic sales increased 11%.
Refrigerated foods segment profit increased 3%.
Refrigerated foods saw meaningful improvement in many areas across the supply chain due to improved labor availability and additional production capacity, helping to offset production constraints.
Grocery products volume increased 19% and sales increased 39% due to the addition of the planters business.
Organic volume increased 2% and organic sales increased 7%.
Segment profit declined 9% as organic sales growth and the addition of planted next business was unable to offset considerably inflationary pressures and lower results from Mega mix.
Jennie O Turkey store had another excellent quarter with sales up 16% and segment profit up nearly 400%.
Higher commodity prices and improved foodservice sales drove the substantial improvement in segment profit.
<unk> had an immaterial impact on this segment's results for the second quarter.
For the international and other segment volume was down 14% and organic volume declined 15% due in large part to lower commodity sales associated with the company's new pork supply agreement.
Segment profit declined 3% as profit growth in China did not overcome lower results from the export business.
We continue to battle extreme input cost volatility and inflation.
We have seen increases across all our inputs, including raw materials.
Packaging and supplies.
<unk> and logistics and labor.
We expect to stabilization as demand and supply.
Come more into balance and anticipate certain costs, such as labor to be more structural in nature.
Protein markets have generally remained elevated and above a year ago and historical levels.
For context.
<unk> as measured by the USDA composite cutout were 6% higher in the second quarter compared to last year and more than 30% higher.
And the five year average.
We have seen similar dynamics across beef and chicken markets and witnessed an acceleration in the Turkey market during the quarter due to the emergence of HPE AI.
Speed also continues to be highly inflationary.
Our hedging program at Jennie O, Turkey store has effectively helped us manage risk near term.
Looking to the back half of the year, we expect protein and feed cost to remain volatile and elevated compared to historical levels.
Cost for packaging and supplies are up double digits on average over last year and accelerated during the most recent quarter.
Trucking freight is also up significantly on both an absolute and per volume basis.
This is being driven by volatility in the spot market and soaring diesel fuel prices.
While we're noticing some relief in spot markets in the third quarter increased fuel surcharges are partially offsetting this benefit.
Ocean freight rates.
And export logistics continue to challenge our international team.
Labor shortages.
Have been underpinning the inflation, we have seen across many of our inputs and in our own facilities.
We continue to see positive trends in staffing levels, which has allowed us to increase production and important product lines, such as spam raw Bacon and pizza toppings.
Inefficiencies related to new team members and a turnover continued to impact operations, but we expect improvement in the back half of the year.
As labour recoveries across the industry wide supply chain, we expect fewer upstream and downstream challenges.
Our experienced management team has done an excellent job managing profitability in the face of these challenges through strategic shifts in product mix disciplined management of SG&A and driving efficiencies through our one supply chain.
As Jim mentioned, we are reaffirming our full year fiscal 2022 sales guidance and the narrowing our earnings guidance range.
For refrigerated foods, we expect a strong finish to the year led by continued strength in the foodservice businesses and strong demand for retail products.
Our grocery products business will continue to be challenged by inflationary pressures until the recently announced pricing actions for this segment becomes effective in the fourth quarter.
Given the uncertainty regarding HP AI and based on our current expectations Jennie O. Turkey store sales volumes are expected to decline approximately 30% in the back half of the year due to supply gaps in a vertically integrated supply chain.
With the third quarter, representing the seasonal earnings low for this business, we expect third quarter earnings to be in line with last year.
The international and other segment continues to see strong demand both in its export business and in China. However.
However, due to the impact of two partial plant shutdowns in China as a result of COVID-19 related restrictions and persistent export logistic challenges.
Remains a risk to earnings growth in the back half of the year.
Across our retail businesses, we expect continued strong demand and anticipate improvements in fill rates.
<unk> and its strategic promotional activity to mitigate potential downside of elasticity.
We continue to see strong momentum in the foodservice channel with demand for many items outpacing our ability to supply.
This strong demand coupled with supply chain improvements.
It gives us a confidence.
Confidence in our ability to deliver sales and earnings growth in the second half of the year.
At this time I'll turn the call over to the operator for the question and answer portion of the call.
We will now begin the question and answer session to ask a question you May Press Star then one on your touch.
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.
As a reminder, please limit yourself.
And then one follow up if you have additional questions you may reenter the question queue.
My first question is from Ben <unk> of Stephens. Please go ahead.
Yes, Hello, This is Jack hartung stepping in for Ben.
Jack.
But you touched on the volume impact split on HCI.
Zero margin benefits on the back side of it.
Next year, just like we saw in 2015.
Okay.
Yes, Jack Thanks for the question, we've spent a lot of time.
Over the last several years working on our on our jobs business. We know we've got a.
Fantastic brand, we've been doing a lot of work to continue to build a stronger business model that leverages our entire enterprise.
And we had a strong finish to 2021, a great first half we've got uncertainty in the back half of 2022.
And we are going to begin to repopulate those barns.
Going to return the supply in a very safe and timely manner.
So we know that the demand is there for the product.
And as supply comes back in line, we expect strong demand across retail and foodservice.
What we've tried to highlight where a couple of the differences in.
In terms of what's changed since 2015, how do we think about feed costs. When we think about labor costs, but I think the most important thing for us is that as we get supply ramped back up we know that the demand is going to be there both in the retail channel and the foodservice channel.
<unk> of the work that we've done and as market stays strong and if markets are better that offers that opportunity certainly exists.
Awesome. Thank you that's it for me congrats on the street strong quarter, great. Thanks, Jack.
The next question is from Antonio Hernandez with Barclays. Please go ahead.
Yeah.
Hi, good morning.
Quick question on Cobra.
Sure.
China started with vehicles.
Okay.
Okay.
Yeah, So antonio Thanks for the question.
Again, the work that we've done to develop our business in China.
It's been really really successful as we've been able to build out a very balanced and strong business model to both on the on the retail and foodservice side of the business.
If we go back to 2020 at the outset of the pandemic when really China led the way in terms of shutting.
Shutting down and some of the current some of the similar dynamics that they are facing today.
Business behaved much like it is today we saw.
Slowdown in foodservice a ramp up in retail, but then as things got back to somewhat normal we saw return in our foodservice business and so having that near term experience that.
We would expect to see our business returned to a very strong growth should trajectory that being said.
Knowing that we're dealing with these two partial shutdowns that really will have more of an impact in our Q3.
There may be some short term impact on the China business, but really there is absolutely no change in our long term outlook very confident in the business and very strong demand in all aspects of it.
Okay. Thank you.
Hum.
Okay.
The next question is from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, guys Hi, Ken.
So on the price.
It's the inflation non grocery can you talk about you.
You are taking the pricing that you're seeing does that cover all your expenses and your inflation and have you seen any pushback from any of your retailers and then lastly on this is what is your demand elasticity across your portfolio and which products have the least and which ones have the most.
Yes, Ken so their first round of pricing in GDP.
We'll cover down our costs, our expenses and as you know I mean, we are very very thoughtful about the managing of our pricing and promotions to ensure the long term health of our business and we always take a long term view because.
As we said in our comments in our press release, we know that we have a responsibility to our customers to our consumers and to the categories.
And in regards to push back what I would say is that really the pricing dynamics haven't changed.
We've always had to build a business case and have strong justification.
Our wire price increases as necessary.
I would say that what has changed is probably that we're all retailers and manufacturers. We're all experiencing the same broad based inflation.
And even though that's the case I mean, it still doesn't make conversations any easier.
Because we're all going for the same thing and Thats that responsibility to protect the equity of the brands in the business and then.
I would say in terms of pricing.
Brands are the categories that we've seen the most impact on and this is the price increase impact.
It would be spam.
Of our protein inputs and some of our packaging costs and then wholly guacamole because of avocados, and then really at least impacted with these skippy.
<unk>.
Spam and wholly have both as you look at the data they both held up incredibly well in the face of some pretty strong pricing actions. So hopefully that gives you some some clarity.
And just yesterday.
Yes, I just wanted to add to Jim's comment I mean, this portfolio does very well during these slowdowns and.
Leaning into Henry <unk> and are a key brands like spam and.
And planters and really expect to continue to see strong.
As we're seeing with in the face of all this inflation and negatively impacting the bottom line, but there is still very strong topline growth and consumption data continues to be very positive with double digit growth in many of our key categories.
Great I appreciate it thank you.
Okay.
The next question is from Michael Lavery Piper Sandler. Please go ahead.
Good morning, Thank you.
Good morning, Michael just wanted to follow up on that train of thought a little bit with consumer trading at maybe not elasticity exactly but.
Just curious what you've seen historically with down trading just as I think you just mentioned you see some benefit but.
How do you balance that.
Tends to be the net result of maybe downgrading to some products from say beef to perhaps pork or spam or something like that versus some of the color. We heard from Walmart. The other day, where they were calling out John trading to private label in some categories like Bacon and Deli and lunch meat that are of course very big ones for you.
Is it typically a net positive even with all those moving parts can you just maybe call out what some of the biggest moving pieces are there.
Yeah.
Great question, and I know a conversation we'll be having is as we continue to head into the face some of these economic challenges but.
The key takeaway for US is this balance that we've continued to build across all of our business.
And as we think about our portfolio.
We've got such an incredibly wide range of offerings, when we think about those.
The value consumer and Thats, where it just talks about our GPA portfolio that that historically has done well during slowdowns in in this quarter. You know we have been able to demonstrate great topline growth great volume growth now, we just have to get up get caught up on some of the.
Inflationary factors, but as you think about that.
Clients across.
Assume are tied across channel across products across brands.
We're able to navigate these environments really really well.
And while we're talking about the value consumer meaning the same to remember is that we still have premium consumers and primary and premium offerings that are doing incredibly well the.
The strength of our Columbus business, when we think about entertaining and snacking when we see the continued strength of our applegate business, which is.
More of a food forward type brand and product line.
It all goes back to really the balance that we've built across the portfolio that sets us up incredibly well for so many different economic conditions.
Thank you that's really helpful can.
Can I just do a follow up on your guidance.
Jim you called out the responsibility to protect the equity of your brands.
The lead off to that.
Its language I don't think I've seen before and just was curious.
If theres some significance to that we should make sure that we understand it looks like the advertising spending in the quarter was up probably maybe.
Lift from printers is a big factor in how you think about the outlook.
Whats the weight of those of that remarks.
Yes, I would say, there's not really a dramatic change is really is just a call out in terms of what we do.
We've talked a lot about the strength of our brands.
The investments that we make in our brands every year.
And that is that is our responsibility is something that we believe is a differentiated capability for us as we think about brand stewardship and so and it's also about the recognition that we have a responsibility to our brands we understand that there are others in the channel that.
We have an obligation to as well to make sure that we're taking care of our customers that we're taking care of our consumers.
Even in our in our foodservice business, we've got to take care of our operators to make sure that we're servicing their needs and providing great value, but again all of it goes back to this this long term view that we always take is to make sure of that.
Yes, we have to run the business for today, but we want to make sure that we have long term healthy businesses long term healthy categories.
And I'll just add is just having that again that long term view, but maintaining that stickiness that we have with our <unk>.
Consumers and not really doing anything in our mind that would really destroy that brand equity that we have built out over time with our consumer base.
Okay. That's great. Thanks, so much.
Okay.
Okay.
Okay.
Okay.
The next question is from Bryan Spillane of Bank of America. Please go ahead.
Thanks, operator, good morning, everybody. This is Brian .
<unk> for the Honeymooning Pete Galbo.
Good morning.
And hopefully I don't screw this up I think you may be listening.
So.
So a couple of questions first just.
You mentioned, you mentioned a little bit in terms of the earnings season can we just get a little bit more color I think typically the margins in the third quarter, our lower sequentially than the second quarter.
So is that still kind of the pacing would we have that normal sort of seasonality in margins as we move through the back half of the year and I guess as we're thinking about earnings effectively being flat year over year, how much of that is seasonality how much of that is I guess, the mismatch or beginning to match up your pricing versus covering your inflation. So just trying to understand some.
The moving parts in terms of the phasing as we look through the third quarter and fourth quarter.
Yes, it's great question, Brian you didn't mess that up nice job so.
For us as well.
We've talked about this year at the first quarter, we were expecting some sequential margin improvement throughout the year.
So the impact this year is really what's going to happen with with Jennie O in the third quarter. So that is a big factor.
The other thing is as our mix our mix does change in our third quarter and then like I said the jobs impact will be a significant impact and then as we get into the fourth quarter.
We will continue to have strong business in refrigerated foods, we've got still some uncertainty in jobs, but we expect that to perform better and then the big driver is the grocery products pricing that we talked about which will take hold in the fourth quarter.
So sequentially margins will be down.
<unk> like they normally would be and then there's these other pressures and then we would see it sort of begin to catch up more in the fourth quarter, that's roughly the way to think about it both at the gross and I guess EBITDA margin lines.
That's correct, Okay, and then just.
A follow up.
I know, we've talked a little bit about elasticity on this call and trade up trade down can you give us a sense of just.
How you're looking at maybe the just planning.
Maybe cross elasticity between channels and.
I guess, what I'm after is with inflation being as pronounced as it is for the consumer you were beginning to see some choices that they're making about discretionary versus non discretionary spending so.
Running spending on food, but not buying discretionary items or general merchandise, let's say at Walmart. So I guess as Youre planning your business forward for what we would expect to be a more inflationary period in general.
Would your expectation be that theres going to be a little bit of a shift away from foodservice and into into grocery are within foodservice within channels. Just just generally how you're kind of thinking about that.
In the context of inflation's going to be with us for a while and then consumers will have to start making some.
Discretionary choices.
Yeah.
Ryan It is one of the things obviously that we watch very closely.
We talk a lot about the strength in the competency of our foodservice business, our foodservice direct selling organization.
The incredible portfolio that we've built over the last several decades and so we know that are well positioned to support the foodservice industry with all of their needs that they have top of mind of course is labor.
But specifically to your question you know as we're watching these dynamics.
Intuitively, you would say with all of the soaring inflation in sorry in gas prices that what you described would take place, but as we think about what we're hearing with flight bookings what were hearing about lodging bookings.
What we are seeing and hearing from restaurant reservations.
Is that certainly in the short term and I think even beyond that we're going to continue to cease.
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Speakers, please continue to hold.
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Hello, everyone that the speakers have been reconnected.
Please go ahead.
Yeah, So Brian I believe I got cut off in the Middle of my response to your second question I promised I wouldn't screw this up and I apparently broke the law.
We that's what we said at in private.
We werent going to say that publicly you too.
But really where I think the.
The key takeaway here is we're well positioned as the foodservice business may shift from segment to segment within the channel.
And then just on a broader basis.
We don't see any short term slowdown in the foodservice business. We do think there is still an incredible pent up demand and we're able to take advantage of it. The one thing I did talk about was.
<unk>.
Yes.
Individuals may change the way they travel if they are not flying because an airline ticket prices and they begin to drive even though fuel prices are higher the <unk>.
C store channel is an area, where we've made tremendous progress in a short period of time and the acquisition of planters has really helped us both in the retail aspect, but the foodservice or the takeaway food aspect of the convenience store channel. So.
That was that's the shorter version of my long answer.
Alright, thanks, guys. Thanks for the insights.
Good day.
The next question is from Tom Palmer of Jpmorgan. Please go ahead.
Good morning, and thank you for the question.
Maybe just to start off if I could clarify the comment about third quarter earnings being in line with last year. There was the unusual costs. So you had kind of two earnings numbers a year ago to 32 from the 39.
When youre talking about in line with last year to two which last year are you referring.
Last we are referring to the gap the gap numbers, which is 39.
Great.
The adjusted down 39.
Daily.
Sure.
Okay.
Thank you for that and then maybe to follow up on Ken's question.
On grocery products segment, just the pricing. So can I just clarify is the pricing were you able to fully offset the inflation that you are currently seeing with that pricing and then you mentioned in the fourth quarter kind of being.
The impact in terms of that pricing flowing through should we think about it as the pricing flows through during the fourth quarter and therefore you have even.
Added impact when we think about the first quarter of fiscal 'twenty three or is this it flows through and in part during the third quarter. The fourth quarter reflects kind of the full benefit.
So we would.
<unk>.
You factor the benefit will take will have an impact it will be right at the end of the third quarter beginning of the fourth quarter.
And so naturally of course that will flow into the first quarter of 'twenty three but the full fourth quarter will be impacted in a positive way.
Okay and that is you were able to secure pricing that essentially addresses the inflation that you were seeing at the time of those negotiations.
That's correct.
Okay.
Jeff.
The next question is from Eric Larson of Seaport Research partners. Please go ahead.
Yes. Thanks.
Perfect.
<unk> guidance so.
Jim.
I was curious I'm going back to 2015.
The last AI breakout you said that you are.
Youre impact Youre volunteer Bert impact was 25% plus the net impact to 2015, but.
I think one of the things.
In 2015 and virtue pretty badly.
Sure.
We're a net buyer of <unk>.
Oh supply so that you could meet your demands and hold high spot prices really hurt your numbers.
And then.
You took quite a while to kind of re populate those articles grow houses, whose bruce take longer to grow out so maybe I'm missing as a solvent.
That's not going to be as big a deal this time or when should we expect to see the volumes actually start recovering as you kind of re populate Google houses.
Yes, so Eric thanks, Thanks for the question.
And the comparisons to 2015 are never perfect.
So when we say we're down 25% right. We are talking about our company owned facilities.
Your other question about.
US buying meat and that we are not currently by week this year.
And then again, let's just think about the timing, which is usually 26 weeks.
And so we've started some re population.
When you think about when the events started so the volume will get better in Q4, but still is down compared to normal and then assuming.
That we don't have any more outbreaks from this event.
Or that we don't see a re occurrence in the fall.
Would expect again to have more traditional volumes available in Q1.
Okay. So then the.
Second follow up to this whole this whole venues.
Did you did you decide in 2015, one of your actions given what happened with NII to actually increase your.
The increase your internal production. So you don't have to buy outside supplies or did you.
Converting more of the commodity stuff too so what is the change between.
A net buyer of supply outside of your company to being raised now youre not by product.
I'm just trying to figure out what the dynamic is there sure sure sure. So the two biggest drivers really as we think about the supply side of the business wanted to speed cost, which is significantly higher today.
Then we have had significant SKU rationalization. So as we think about the work that we're doing in this transformation of jobs to make sure that we've got a stronger business model, we have rationalized a number of different skus that have made us far.
Less dependent on outside meat purchases.
Got it thank you that helps explain.
Thank you.
Yes, absolutely.
The next question is from Robert Moskow of Credit Suisse. Please go ahead.
Hi.
I came a little late to this call. So I apologize if you've kind of addressed this already.
But.
Maybe you could tell me like.
The timing of the grocery price increases youre, saying its starting in July really.
Were those negotiated like a couple of months ago or very recently like how long did it take to take for.
That kind of negotiation to get implemented in the marketplace.
And then.
Given what we've heard from Wal Mart is there.
I'm sure you've answered this already but do you expect any pushback on future price increases in processed meats categories, given that they kind of call them out by name.
Yes, Rob we talked a little bit, but happy to happy to revisit that.
Yes, the pricing that we're talking about has been negotiated recently soon no.
We do have in our portfolio, that's really 60 to 90 day lag to have our pricing take take effect and so.
We're in that window and that's why we're talking about the end of July or the end of Q3.
What we talked about earlier in terms of the pricing in the environment that we're in.
Is that really the pricing dynamics haven't changed in regards to the justification that we've had to provide what we think is changed and while we know has changed is that.
Everybody is experiencing that same broad based inflation. So so the data is being felt by everyone and it does it makes the conversations any easier.
So we've had a lot of the same conversations as Joe said, everyone feeling the sei or seeing the same information and then the other thing that we did talk about was understanding that we've always taken a very thoughtful approach to the management of our pricing and promotion.
Because while we have this.
Inflationary environment that we're in we need to ensure the long term health of our brands and so that's that's how this has played out in terms of the pricing for GP and then Thats how were thinking about the actual pricing environment that we're in.
Okay I'll follow up later thank you.
And I just wanted to just I just wanted to clarify my answer to Tom.
Our adjusted down GAAP EPS number in Q3 of last year with 39 less planters one timer.
That is what we're comparing to and we expect to be in line.
To be better than than that in Q3.
The next question is from Adam Samuelson of Goldman Sachs. Please go ahead.
All right.
Hi, This is arthur filling in for Adam This morning.
I was just wondering if you could help us think about how you're thinking about maintaining branded retail placements throughout this.
Call it.
Fiscal period.
And if you could just help us.
How has demand elasticity evolves.
From the time, we last spoke.
Thank you.
Yeah sure so Arthur.
The placement of our products remains very very strong.
<unk> continues to get better as our supply chain and improves.
We're able to improve the assortment of our products the mix and as our supply chain and our capacity continues to get better.
We are able to engage in select promotional activity as well so from a from a distribution perspective continues to be strong and getting better as our supply chain continues to recover.
As we think about elasticity.
There is still a lot of noise in terms of fill rates assortment promo.
Getting some of the second and third tier items back on the shelf from the impact of the pandemic and so we're watching that very closely but we still see lots of noise in the system for the balance of the year.
Our brands have have responded well to that pricing. So we're going to continue to support them with advertising and promotion.
And we've got any potential impact factored into the guidance that we've provided for the back half of the year.
Okay that makes sense. Thank you.
Okay.
The next question is from Carson Barnes of consumer edge. Please go ahead.
Good morning, Thanks for the question.
Can you touch on the labor issues, a bit and discuss what are you doing to mitigate those impacts from a product mix perspective, and then how are you thinking about correcting those issues longer term.
Thanks.
Yeah Carson, Thank you I mean.
As we go back several years and the work that we've done to create our one supply chain and really leverage the strength of the enterprise.
As one of the key factors that has allowed us to navigate this incredibly difficult operating environment.
Since we last talked we have seen meaningful improvement in our supply chain since the end of January .
And those improving labor trends have really helped in terms of our improved production.
The building of some inventory improvement of fill rates.
And.
That has had a very positive impact on our business. So.
That being said.
While we are continuing to get better with labor within our own facilities, we continue to see upstream and downstream challenges.
Those challenges are significant on a weekly basis, whether it could be a packaging or ingredient headwind or.
When it comes to fray ability to get product into and out of ports.
That impacts our international business.
That is still a very real constraint for us that hasn't cleared yet so we feel good about the work that we've done to improve our supply chain, there's still some upstream upstream and downstream things that need to clear, but is that labor gets better we expect that to mitigate.
Over time.
Thanks I appreciate it.
Okay.
The next question is from Rebecca Schueneman of Morningstar. Please go ahead.
Good morning.
So first of all you know you had said the demand has remained strong in the face on inflation.
<unk> worked quite a bit weaker than we expected could you maybe help quantify what the impact was from the labor constraints.
Okay.
Rebecca.
The biggest issue in terms of total volume was.
The reduction in pork supply as we renegotiated our pork supply agreement at the end of last year.
The waiver was was a factor.
But what I'd say it really was a significant driver it was fairly.
Less far less than park in terms of the total impact on the volume.
Okay.
It'd be so bold as to ask you.
Quantify the impact of the port.
Okay.
Yes that is something that we've.
Broken out of four.
Actually what I, probably would do is just so we get you the exact information.
We'll have David follow up with you. So you got the exact number of pounds that we've talked about in the past.
Okay sounds good thank you and secondly.
Is it fair to assume that HPA I could maybe delay some of the planned cost savings and jobs.
The work that we've done.
The transformation of the business has has not slowed down.
Yes.
Anything of Rebecca we would say it has actually accelerated some of the work that's already underway to be able to reposition the business and repositioned to plan. The way we were planning to restructure this business to continue to be very consumer.
Lucas and really.
Leaning towards in embracing the trends that we're seeing in the consumer space until so if anything it really has been a positive and we continue to be on track to realize the timeline and the savings that we have communicated externally.
Okay, great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jim Snee for closing remarks.
Thank you and thank you all for joining us today.
I'm incredibly proud of the results our team delivered in the face of an incredibly difficult operating environment.
We've spent a lot of time and effort over the years developing a strategic and balanced portfolio for times just like these.
And it's our people our brands and our culture.
Give me confidence in our ability to continue to deliver results.
Thanks, again and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.