Q3 2022 Hormel Foods Corp Earnings Call

Good morning, everyone and welcome to the Hormel Foods third quarter 2022 earnings webcast and conference call.

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At this time I'd like to turn the floor over to David Dahlstrom.

Director of Investor Relations.

Sir. Please go ahead good morning, welcome to the Hormel Foods conference call for the third quarter of fiscal 2022.

We released our results. This morning before the market opened around 630, a M. Eastern if you did not receive a copy of the release you can find it on our website at Hormel foods Dot com under the investors section.

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

Jim will provide a review of the company's third quarter results, an update on business initiatives and a perspective on the remainder of fiscal 2022.

<unk> will provide detailed financial results and further commentary on the third quarter and our outlook. The line will be opened for questions. Following just sense remarks, as a courtesy to the other analysts. Please limit yourself to one question with one follow up if you have additional questions you're welcome to get back into the queue.

An audio replay a replay of this call will be available beginning at noon today Central standard time. The dial in number is 870 734 475 to nine and the access code is 107 4087. 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 be making.

Please refer to our most recent annual report and 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 organic net sales adjusted operating income adjusted operating margin adjusted diluted earnings per share and net debt to EBITDA discussion on non-GAAP information.

<unk> as detailed in our press release and third quarter earnings supplement, which can be accessed from our corporate website are located on our investor website, Investor Doc Hormel Foods Dot Com I will now turn the call over to Jim Snee.

Thank you David good morning, everyone.

But the results we announced this morning, we have successfully achieved seven straight quarters of record sales and four consecutive quarters of earnings growth.

In the current environment. This is an especially notable achievement.

Over the last 12 months.

We have delivered four consecutive quarters of record sales in excess of $3 billion.

We've grown diluted earnings per share of 15% compared to the trailing 12 month period.

We've made considerable progress across our supply chain, including investments in capacity to support high growth categories and improvements in our staffing levels are.

<unk> volumes inventories and fill rates.

We've integrated our largest acquisition to date with the plant or a snack business.

We began transformational work on the Jennie O, Turkey store segment, while simultaneously managing through the impacts of HPA.

We further de risked commodity profitability with a new park supply agreement.

We have generated over $1 billion in operating cash flow.

And we have increased the dividend for the 56th consecutive year.

Our experienced management team has again proven their ability to navigate and grow the business in a volatile market conditions.

And these results demonstrate that our business is built for growth our brands remain vibrant and relevant.

Our strategies remain effective and our inspire team members around the world truly embody our results matter mentality.

In the third quarter, we delivered another quarter of record sales and double digit operating income growth.

Our team's execution again played a pivotal role in growth this quarter as together, we overcame significant challenges.

<unk> continued broad based inflationary pressures persisted upstream and downstream supply chain disruptions.

Limited, Turkey supply and impact in China from Covid related restrictions and temporary plant shutdowns.

Double digit operating income growth. This quarter was led by outstanding contributions from Jennie O, Turkey store and refrigerated foods.

The Jennie O, Turkey store team significantly outperformed our profit expectations for the quarter as the team effectively managed limited, Turkey supply and maximized operational performance.

All while working to restore the impacted Turkey farms across the supply chain.

Refrigerated foods delivered double digit value added earnings growth on retail and foodservice items more than offsetting the lower commodity profitability.

Similar to prior quarters, our balanced business model was able to offset inflationary pressures and supply chain disruptions, which were both significant headwinds during the quarter.

Most importantly, our performance indicates our brands remain healthy and are generating growth kind.

Consumers and operators have continued to engage with our brands due to their value convenience and versatility.

The team drove volume sales and share gains at retail for brands, such as Skippy Hormel gatherings, Hormel Chili Dinty Moore and Mary kitchen.

I would like to acknowledge the tremendous work and coordinated efforts of the Skippy team, who supported our customers and the category this past quarter.

We continue to drive growth across our premium retail brands for products, such as Applegate natural and organic needs and Columbus Charcuterie.

We also experienced an acceleration across our set of our store portfolio, which is firmly aligned with the value shopper.

Our grocery products segment delivered strong organic volume and sales growth during the quarter and is well positioned to grow as consumers seek flexibility versatility and Yale at lower price points.

Demand for foodservice products remained elevated as well as operators again turned to our items to help mitigate labor pressures and diversify menu offerings.

Value added products, such as our premium Bacon and sausage.

Nice to meet and line of premium prepared proteins performed exceptionally well this quarter.

We saw great demand for our brands, including Austin Blues Natural choice Bacon, one cafe H <unk> smokehouse.

Regardless of channel our brands have responded well to the pricing actions, we have taken over the past 18 months.

Even as current macroeconomic conditions pressure some of our customers consumers and operators.

The demand environment has remained favorable, especially for our food and convenient meal solutions.

We have seen this in the positive syndicated data for many of our grocery and refrigerated products, adding the momentum behind our branded foodservice items.

And in some cases demand is still outpacing our ability to fully supply.

Our broad portfolio of products spanning value chairs eating occasions and channels positions us well.

We anticipate some additional impact from elasticity as new pricing actions are reflected in the marketplace and we have accounted for this in our outlook.

To date the impact of price elasticity has been muted by other factors such as distribution and assortment gains and as we have increased production to drive improved fill rates.

Our teams remain keenly focused on the long term needs of the business, our strategic priorities and protecting the equity of our brands.

Hormel foods has a history of continuously evolving to become a better more agile and more balanced global branded food company and.

In early August we announced the next step in our strategic evolution. Our go forward initiative.

Effective October 31 of this year, the beginning of fiscal 2023.

We'll be organizing the business into three empowered segments.

Retail foodservice and international.

As a result of this initiative.

We expect to elevate our clear strategic growth priorities.

Better align that business to the needs of our customers consumers and operators.

Deepen our sales capabilities.

Simplify our approach to customers and operators.

And enable faster decision, making.

The three new segments will continue to be supported by the company's one the supply chain team and corporate functions.

We are a much different company today than we were even a decade ago.

Since the acquisition of Skippy in 2013.

Have shifted to becoming a global branded food company with a food forward mentality and a growing set of leading brands across channels.

This shift has involved a series of intentional and strategic actions, including.

Numerous strategic acquisitions focused on snacking and entertaining.

Growing our branded leadership positions in retail and foodservice and expanding our geographic footprint.

It includes regular evaluations of the portfolio, which in some cases led to divestitures of businesses, where we identified a better long term holder.

It includes a right sizing of our pork supply chain, including the divestiture of two hog harvest facilities and the entry into a long term pork supply agreements.

It includes the creation of one supply chain, which centralized operations logistics and sourcing decisions to drive efficiencies for the total company.

The modernization of our technology and ecommerce capabilities, including project Orion and the creation of the digital experience group.

And most recently.

The transformational efforts at Jennie O Turkey store.

This next step.

Our new operating model is a culmination of these recent strategic actions.

As part of the go forward initiative will be folding in the important work we've been doing to transform the Jennie O Turkey store segment.

As we said when we announced the transformational efforts.

Turkey will continue to play an important role in our company and will contribute to growth in both retail and foodservice.

We remain on track to integrate all business functions.

Combined the 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.

Our successful transition to the new strategic operating model is dependent on a strong leadership and execution from our teams.

As previously disclosed Diana Brady, Mark Corrado and spend neufeld, who will be leading the retail foodservice and international segments respectively.

Each of these leaders has over 25 years of experience with the company.

And reputations for delivering results.

Under their leadership.

We expect to drive sustainable growth in line with our long term growth goals of chaired a 3% top line growth and 5% to 7% bottom line growth.

There has been a tremendous amount of work done on this initiative and more work to do in the coming months as we create for Hormel foods as the future.

We'll provide more information on go forward next week at the Barclays Global Consumer Staples Conference.

We will also be releasing recast financial information during the first quarter of fiscal 2023 to aid and compare ability to historical financial data.

Earlier this week, we released our 2021 global impact report.

Which details how we are advancing corporate responsibility ESG and our food journey at Hormel foods.

This is the 16th year, we have published a report of this cost.

Thanks to the incredible work and dedication of our team members partners and suppliers Hormel foods is making a difference.

We remain committed to our mission to be one of the top corporate citizens in the world and encourage you to review the report and the progress we have made to advance efforts through our 25 30 challenge.

Our business remains healthy.

Even as we continue to navigate some of the most difficult operating conditions in the company's 130 year history.

Our revised full year guidance reflects both the continued top line strength, we expect to see across our business and escalated cost pressures, which are impacting the back half of the year.

For the full year, we are increasing our net sales expectations to 12, two to 12 $8 billion and we are lowering our diluted earnings per share guidance range to $1 78 to $1 85 per share.

There are two key takeaways from our guidance revision.

One <unk>.

We expect top line strength across our businesses to continue as our portfolio is well positioned for the current macroeconomic climate.

<unk> and.

That escalation and certain operational logistical and inflationary costs, which began impacting results in the third quarter has lowered our earnings expectations for the back half of the year. However.

However, we believe the majority of these cost pressures to be transient in nature and to subside over time.

First from a topline perspective momentum remains very strong we're confident in our ability to exceed our previous sales guidance due to strong demand for our foodservice in center store grocery brands.

Higher Turkey markets and the pricing actions, we have taken across the portfolio.

Our long term strategy to meet consumers, where they want to eat with a broad portfolio of products has been a key differentiator in the current environment.

Second.

We expect to absorb incremental costs in the fourth quarter related to certain operational logistical and inflationary headwinds similar to what we experienced in the third quarter and.

In terms of magnitude we view each of these cost buckets. Similarly.

Starting with operational costs, we have made progress across our supply chain over the past year as a recovery in staffing levels has contributed to higher production volumes inventories and fill rates.

As we said last quarter inefficiencies related to new team members and turnover has impacted operations leading to higher costs.

We continue to see this pressure in the third quarter and do not expect meaningful improvement for the balance of the year.

We are also experiencing higher than expected freight and warehousing costs, both domestically and for our international business.

Great rates have moderated recently, but this benefit has been more than offset by elevated fuel surcharges and significantly higher warehousing costs.

Protein prices on key inputs have remained elevated compared to our expectations and historical averages.

While we have mechanisms in place to manage the impact of elevated and volatile protein costs markets have generally sustained higher price levels for longer than we anticipated in our previous outlook.

We believe these cost pressures are transient.

And likely to subside over the coming quarters.

We fully expect our one supply chain team to continue to improve over time as our teams effectively onboard train and retain our near team members, while striving to provide a best in class workplace experience. This is in addition to the investments we are making.

In automation and supply chain optimization.

We also expect to benefit from the work the team has been doing to control freight expenses and capture the benefits from our recently expanded logistics network.

Finally.

We are starting to see relief across key input cost markets that are better aligned to our expectations, which should present the opportunity for margin expansion in the coming quarters.

The revision to guidance for the year is disappointing.

But we will continue to manage the business for the long term as we navigate these difficult business conditions, leveraging our balanced business model and experienced management team.

As I look beyond the fourth quarter I have a high level of optimism regarding our future.

We expect our brands to continue to perform well and plan to introduce an exciting slate of innovation in 2023.

We anticipate improvements in our supply chain and the industry wide supply chain as the broader market stabilize.

We expect Turkey supply to normalize, allowing our teams to continue their work to create a demand oriented and optimize Turkey portfolio.

We fully expect our international business to be a significant growth driver for the company and took benefit from the investments we have made during the year, including the New Asia Pacific Innovation Center.

And once implemented our newest strategic operating model will better align the businesses to the needs of our customers consumers and operators to drive sustainable long term growth.

For all of these reasons and from the inspired work of our 20000 team members around the world.

Cannot be more excited for the future of our company.

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

Thank you Jim good morning, everyone.

Record third quarter sales were $3 billion.

Net sales and organic net sales increased 6% and 3% respectively compared to last year.

Volume for the quarter was $1 1 billion pounds down 9% compared to last year.

Organic volume declined 11%.

These declines were in line with our expectations and are attributable to our efforts to rationalize lower margin commodity pork volume and lower Turkey counts as a result of HPE AI.

These volume declines generally had strong underlying growth from many of the value added businesses.

Gross profit increased $83 million compared to last year at 20% increase.

<unk> profit margin was 16, 7% compared to 14, 8% last year.

Improvement was driven primarily by strength in Jennie O, Turkey store and refrigerated soup. In addition to strategic pricing actions to help offset inflationary pressures.

SG&A expenses declined 2% in the third quarter as we lapped the planters acquisition related expenses last year.

SG&A as a percentage of sales for the third quarter decreased to seven 3% from seven 9% last year.

We continue to generate strong sales and demonstrated disciplined cost management.

We again increased to support for our leading brands for the quarter advertising expense increased 21% or approximately <unk> <unk> per share.

Advertising expenses have increased 29% year to date.

Operating income increased 40% to $291 million.

On a comparable basis, which removes the impact of planters onetime cost last year adjusted operating income increased 17%.

Operating margin for the quarter was nine 6% compared to seven 2% last year.

Adjusted operating margin was eight 7% last year.

The effective tax rate was 24, 5% for the quarter up from 13, 3% for the same period last year.

Last year's rate reflected the benefit from a large volume.

<unk> option exercises and a onetime foreign tax benefit.

Our effective tax rate guidance range of 25% to 22, 5% remains unchanged.

For the quarter diluted earnings per share or 40 reps.

Represented at 25% increase compared to last year.

On a comparable basis adjusted diluted earnings per share increased 3%.

The company continued to generate consistent and strong cash flows.

Operating cash flow for the third quarter increased.

143% to $186 million in operating cash flow.

Through the first three quarters increased 74% to $763 million.

We paid our 376th consecutive quarterly dividend effective August 15 at an annual rate of $1 <unk> per share.

This completes the 94th consecutive year of uninterrupted dividend payments to our shareholders.

Capital expenditures in the third quarter were $61 million compared to $54 million last year.

For fiscal 'twenty to 'twenty two target for capital expenditures is unchanged at $310 million.

We are benefiting from new production capacity, we have added to our system over the past year and remain on track to open new capacity in the first half of fiscal 2023.

Remaining investment grade is a top priority for the company.

Since acquiring timeshare business last year, we have grown our cash position and EBITDA.

On a net basis, we are now well within the stated goal of one five to two times EBITDA by 2023.

Turning to our segment results for the quarter.

Refrigerated foods volume declined, 18% and organic volume decreased 19% compared to last year.

As referenced earlier.

Painted decline in volume was primarily due to lower commodity sales, resulting from the company's new pork supply agreements.

Sales increased 2% and organic sales increased 1%.

Retail products, such as application natural and organic needs.

Hormel gatherings party trays.

<unk> natural choice like me.

Thats quite table entrees, and Lloyds barbecue products grew volume in sales for the quarter, while the foodservice businesses delivered another excellent quarter.

Refrigerated foods segment profit increased 16% driven by strong results from the value added businesses more than offsetting higher operational and logistics costs and lower commodity profitability.

Grocery products volume increased 15% and sales increased 25% led by strong demand across the nut butters.

Mexico, and simple meals portfolios and the addition occupying treats business.

Organic volume increased 8% and organic sales increased 13%.

Organic sales gains were led by products, such as skippy spreads wholly guacamole.

Hormel Chili.

Two more beef.

And Mary kitchen hash.

Segment profit declined 5% due to the impact from continued inflationary pressures and lower results from Mega mix.

Dan you had Turkey store delivered another outstanding quarter, despite challenges related to HPE AI.

Volume and sales declines were less than expected and segment profit increased by more than $32 million.

Due to higher commodity prices and foodservice sales.

For the international and other segment volume was down 11% and organic volume declined 12%.

Net sales declined 5% and organic sales fell 6%.

Higher global sales of spam luncheon meat and improved results in Brazil did not overcome an overall decline in export sales and lower sales in China.

Export volumes declined because of current export logistics challenge.

Lower commodity sales due to the company's new pork supply agreements.

Sales in China was negatively impacted by Covid related restrictions and temporary plant shutdowns.

Segment profit declined 9% as growth in China did not offset the impact of lower export sales.

We have revised our full year fiscal 2022 sales and earnings guidance ranges.

Consolidated net sales are expected to exceed our previous expectations benefiting from continued topline trend and pricing actions implemented across the grocery products portfolio at the start of the quarter.

We project elasticity to remain below historical levels.

From a segment perspective, we anticipate profit growth from the Jennie O, Turkey store and international and other segment and anticipate declines for refrigerated foods and grocery products.

As a reminder, all segments benefited from an additional week of sales in the fourth quarter of fiscal 2021.

Jennie O Turkey store remains on pace to exceed profit expectations for the year with significant profit growth in the fourth quarter.

Sales volumes are projected to decline approximately 30% in the fourth quarter due to continued supply gaps and its vertically integrated supply chain and whole bird sales pulled forward into the third quarter.

Further with a positive cases identified earlier this week in our supply chain, we expect the impact from HPE AI to reduce production volume.

Our Cherokee facilities.

Through at least the end of the first quarter of fiscal year 2023.

The international and other segment anticipates growth in the fourth quarter, driven by branded exports and improved profitability in China.

Persistent shipping interruptions.

Those are risk to export sales and profit growth, while additional COVID-19 related restrictions in China could pressure.

In country results.

Refrigerated foods expects continued strength in the foodservice businesses and strong demand for its retail product.

Profits will be pressured by higher raw material and operational and logistics costs.

Lastly, gross products expect improved results sequentially due to strong demand across the business and from pricing actions effective at the beginning of the fourth quarter.

As Jim detailed we continue to battle extreme input cost volatility and inflation during the third quarter and expect this to continue for the balance of the year.

Our previous outlook assumed key protein markets to move seasonally lower into the fourth quarter.

Given that prices on key inputs remained elevated for the majority of August we are managing through higher than expected inventory required to begin the quarter.

We have seen some relief in these key markets over the past week.

If sustained would benefit margins in the back half of the fourth quarter.

Lower industrial wide, Turkey supplies are expected to keep prices higher near term.

Breast meat prices set a record in the third quarter and have yet to moderate.

Our team has done an exceptional job managing through disruption.

Cost by HPE AI.

We continued to see increased hiring and African flow at our production facilities.

Inefficiencies and elevated production costs related to newer team members.

Over absenteeism and overtime.

<unk> operations, but should ease over time.

Investments in value added capacity are paying off strategically.

Including our pepperoni expansion in Omaha, New Bacon lines at the Austin facility.

And the addition of co manufacturing partners to support multiple credit lines.

We expect freight and warehousing costs for the domestic and international businesses to remain elevated and our one supply chain team is actively looking for ways to drive efficiencies and control costs.

In closing I am excited for the next step in our evolution as a global branded food company.

Go forward initiatives.

This will create greater focus on our six strategic priorities.

Better align our business to the needs of our customers.

<unk> and the operators and it positioned us well to drive sustainable long term growth and shareholder value.

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

Ladies and gentlemen, we will now begin the question and answer session.

To ask a question you May press Star and then one on your Touchtone telephone.

If you are using a speaker phone, we do ask that you. Please pick up the handset prior suppressing the keys to ensure the best sound quality.

To withdraw your question you May press star into.

Once again that is star and then one to join the question queue.

Our first question today comes from <unk> Parikh from Oppenheimer. Please go ahead with your question.

Good morning, Thanks for taking my question. So I want to start with a longer term question I mean, I'm guessing just may have to wait till next week, but with your Gulfport initiatives, which segments do you think we'll see the greatest impact from the structure the structure change.

Yes, good morning, or Apache I mean.

So obviously the biggest impact is going to happen in our in our retail segment.

And Thats really the segment that we're excited about all of them, but as we think about the opportunities for us to really accelerate progress on our six strategic priorities.

That's the one that's going to have the biggest impact so really being able to align the operating model with the strategic initiatives.

In a bigger way than we ever have before is really going to be exciting foodservice will have will have some impact as we move our some of our affiliated business in there and then also move the Jennie O foodservice business in there it'll strengthen us in certain channels or segments like K through 12.

International will be the least impacted.

All of the three so really retail and foodservice and international.

Okay, Great and then maybe one additional question I'm not sure I can say that again I'm not sure. If you guys could comment on that but as you look towards next year any early puts and takes on the operating margin line I'm just trying to get a sense just given all the moving parts in theory, Johnny how some of the cost pressures, whether you think you can actually expand operating margin versus your current guidance for this year.

Yeah, I mean, it's.

Early to look into 2023.

We're thinking about it.

So far.

We expect that our brands will continue to perform well in face of pricing, we talked about some of the innovation that we'll be able to bring to the marketplace and our supply chain improve.

We do expect to see some supply chain improvements.

We talked about some of the operational challenges that we've had with.

New labor turnover, some variances that we hadn't planned for we know that we've got to get better on that side. So there is certainly going to be opportunities for us in 2023 also a recovery in our international segment as we think about.

Lockdowns not being as frequent and China exports being able to pick up and then we do expect a benefit from our go forward initiative as we think about how we can really accelerate the progress on our six priorities.

Great. Thank you I'll pass it along.

And our next question comes from Ben Theurer from Barclays. Please go ahead with your question.

Good morning, and thanks for taking my question I actually wanted to elaborate a little bit.

You alluded to it on the sensitivities so want to understand if you could share a few more details in.

And between the volume performance versus the pricing performance because it really feels pricing was a big driver during during the quarter.

Volume down I get it in refrigerated just because of the change in the business model, but then obviously, if we put it all together.

It feels like volume was a little more under pressure would you assign this to third tier.

<unk> because of the pricing actions and how do you think youre going to be able to recover some of the volume over time, if we look into fiscal 'twenty three.

Yeah, I mean as we can.

Think about the business spend.

Clearly.

Really pleased with the overall health of the business and our performance in the quarter you touched on it we knew we were going to have some refrigerated volume declines.

Jennie O clearly had volume declines tied to HPE AI.

Our grocery products business had strong volume growth.

As you dig into some of the specific brands.

In categories, where <unk>, probably the most softness we had was in the area of Bacon and a lot of that would be tied to the belly market and some of the escalated pricing that we saw throughout the quarter.

Okay Perfect and then just a quick follow up if I may on the new operating model and obviously, we can we can explore this more in detail next week, but if we kind of and you've said it about the importance of it and we've seen obviously retail performing year to date relatively strong up 12%, but foodservice even more.

Can you give us a little bit of a preview in terms of like the distribution of these segments in terms of in terms of relevance clearly feel like retailers like most likely more than 50% of it and that's why this has been most focused where you're most excited about correct.

Yeah, I mean, obviously retail will be roughly about 60% we've talked about food service in total being just over 30% and inner.

International high single digits.

<unk>.

We're excited about all of them and really when we talk about retail being the most impacted it's because we are bringing together our retail refrigerated our grocery products unit, our Jennie O retail. So you do have the most change occurring there, but we also.

So has the most opportunity to really generate the alignment that we need and so a perfect example of that I believe is when we've talked about entertaining and snacking in a in a bigger way being a strategic priority for our organization.

Historically, we've had pepperoni and refrigerated retail we've had our gatherings party trays and Art Gallery organization.

Of course, now planters in our grocery products organization and now have the ability to bring those together under one pillar.

And really talk to customers and consumers in a way that we haven't before.

Really excites us for the future.

And just just a quick add there then.

Jim described all of that from a strategic standpoint, if you think about how we go to market as well what this model actually does it really just both or how we go to market as a as a company and just bringing that one hormel to bear and that's truly going to be a strategic advantage for us.

Perfect.

<unk>.

Our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead with your question.

Good morning, guys.

So my first question is on.

With all the volume that was created due to it seems like there would be a greater association.

With the increase.

Opportunity created there.

Did you guys have co Packers.

They're short of supply it seems like there was a lot of top line, but it didnt really translate to the bottom line.

Yeah, Good morning, Kevin.

Definitely it was a benefit from skippy and in the quarter.

Really as we talked about it with the escalation in cost its really across the board.

We've talked about.

The operational inefficiencies, so even though in aggregate we're at a good place with our total number of employees. Those employees are younger less experienced and we are seeing that turnover.

And then we talked about some of the input costs. So continued escalation for across the supply chain and then specifically towards.

We ended the quarter as we saw some of the raw materials runoff and so that really is what created that erosion of the benefit from from Skippy, but we definitely did see a benefit.

In the quarter.

Okay and then my.

Second question is is when you think about your long term guidance.

The last couple of years, you really haven't been within that.

Is it.

What is it that changes.

2023, 2024 back into that long term guidance range or is it going to still take time.

<unk> re establish your growth algorithm.

That's the thesis.

How do you think about that.

Yeah, I mean, we're very.

We're very positive about the business.

We know that the brands are strong the business is strong.

We continue to fight the escalation in cost we know that we have work to do on the operational front, we talked about our need to really capture the synergies and the value in our expanded logistics model.

We we have taken appropriate pricing.

We are starting to see some relief on input costs here in the fourth quarter that should translate into 2023, we've got back to pricing.

Full year impact of some of the pricing that we've put in place.

And I think for US it is a better internal supply chain performance that'll be a key driver for US we do expect brands to continue to perform well.

And so we're confident in our ability to deliver our long term growth algorithm.

We do have some work to do but we're confident that we can get it done.

And just to add to that we also are currently underway executing that automation and really getting optimizing indifferent funds from operation standpoint, So that should certainly add to us being successful in executing on our long term goals as well.

Thank you.

Our next question comes from Tom Palmer from Jpmorgan. Please go ahead with your question.

Good morning, and thanks for the question.

I wanted to ask on the grocery products side the pricing.

You've taken adopt to offset the inflation that you're facing do you need additional rounds of pricing.

Can you address there's still mounting inflation or given maybe given your view that cost is.

<unk> added rounds of pricing, maybe not planned at this point.

Just trying to understand that dynamic and what kind of causes the inflection in grocery.

Yes, Thanks, Tom.

Obviously, we're pleased with the strong organic top line growth.

The strong demand for the grocery products portfolio.

And you.

You described the cost and pricing scenario very well.

With the relief that we have recently seen from some of the key inputs.

We don't believe that additional pricing is going to be necessary.

Our pricing that is now going into effect in Q4 will.

We will be sufficient.

But we did have pressure at.

At the end of Q3 and in the early part of Q4 because of those elevated market.

Understood.

Thank you and then.

Another question on the <unk> outlook. So it sounds like the third quarter overall was pretty consistent with what you had talked about a quarter ago. So it would seem that.

Essentially the guidance cut was mainly for reduced expectations around the fourth quarter.

From the comments today it sounds like the greatest incremental pressure was on refrigerated foods.

Is that accurate and then.

To what extent do the easing costs that you mentioned in the last week or they factored into the guidance range.

Yeah. So it's a couple of things the refrigerated foods group is impacted.

By the elevated market as well and as we as we think about the fourth quarter. There is always going to be the puts and takes.

We've obviously seen a reoccurring of HPA I with with jobs, and so really watching to see how that plays out throughout the quarter from a upside potential or is there some risk really understanding what will happen with the consumer.

With this last round most recent round of GCE pricing.

And then the other part that is on our radar is although we have seen this market relief. We are also seeing just an incredible amount of market volatility throughout the year and so we've seen significant moves up and down and so while we're in a better position today.

Hey.

We'll be watching that closely because we know how quickly that can change.

Okay. Thank you.

Okay.

Our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.

Hi, a couple of questions.

In the grocery division I'm now forecasting based on your guidance I think the decline in profits for the year of about $20 million $30 million and thats. Despite having seven months incremental of the planners acquisition. So I guess I'd like to know is planters.

Weaker than you thought I didn't hear you.

Reiterate planters is doubled.

Accretion number today, but maybe maybe that's just.

Still there but.

And if it's not that you know what is is it.

Which of the other brands and then a follow up please.

Yeah, Rob so.

So a couple of things your assessment of the GP Division is correct.

<unk>.

That will be will be down for the full year. When we think about planters, although we probably werent as intentional yes, the sales of.

We're on track for the sales guidance that we've provided in line with our our $1 billion guide our earnings continue to be at the high end of that accretion model and really for us the long term strategies and tax rate. So as we think about this being an important part of our entertaining and stacking.

Platform the work that we're doing on the <unk> stores.

The business is still performing the way we want it theres always opportunities within.

Categories, but overall the business is well in line with our expectations.

And really what it is it's the inflation that we've experienced in grocery products and so we've had significant packaging inflation, we've taken incremental pricing along the way.

This most recent round of pricing should be very positive and favorable as we head into 2023.

Yes.

Okay, maybe a follow up then when you talked about transitioning to one supply chain model it sounded like a great idea and.

It consolidated a lot of the information consolidated a lot of the.

I guess the decision making.

And yet here, we are in a year, where you're warehousing costs are higher than you thought youre afraid is and you're having.

Still lingering labor issues and I guess I have to ask did this transition.

Did it exacerbate any issues didn't make any of these issues incrementally easier.

Why does the transition.

Help prevent a lot of these these situations.

Yeah, Great Great question, Rob I mean, and as I sit here I can't imagine us having gone through what we've gone through over the last several years without having our one of the supply chain in place.

Everything you described to half one per view of the supply chain has really helped us throughout COVID-19 and some of these labor challenges.

We're not alone in what's happening you know you can go across industry and the conversation about turnover and these manufacturing variances I mean, they're everywhere.

We have work to do.

And so we do we're getting people through the door, we're getting people hired.

There's work to do in terms of training and retaining those people. So that we do over time develop that experience that is a problem today, that's kind of one supply chain issues.

A broad based issue.

And I think when we think about other challenges.

Can you see countless upstream challenges from our suppliers, so industry wide issues persist and as.

As I.

Finish where I started and that I, just can't imagine us having gone through what we went through over the last several years without having our one supply chain in place.

Got it thank you.

Yes.

Our next question comes from Michael Lavery from Piper Sandler. Please go ahead with your question.

Yes.

Good morning, Thank you.

I just wanted to come.

Come back to.

Looking ahead, a bit into fiscal 'twenty, three and maybe specifically can you give a sense of.

How much of your commodity exposure is already locked in or hedged and how that might compare to what's typical.

Okay.

Okay.

So so.

So.

We're currently for the moment for 2022.

Have.

Hedged it.

Our grains.

At around 88% for the year and we have already started hedging and have actually locked in or hedged for for 2023, albeit at an elevated level, given where green green.

Today. So that's of course know that challenge and we're not 100% hedged. So we still have a little bit of exposure to the market and working through as we think about other areas as well.

Leaning into forward contracts, where we can where we are not able to to really execute any hedges in those areas.

So for this time of the year relative to the following fiscal year.

Are you less or more hedged than normal.

No.

We're consistent with where we're normally thinking at this stage.

Okay, and just Ben to Jennie O you touched on the volume impacts that will run at least through one Q2.

Three.

Can you give a sense of the magnitude there, obviously third and fourth quarter this year.

Yeah.

At least what you reported and expect us.

Pretty different in terms of the magnitude of the impact on volume.

What would it look like going forward.

So going forward I think it.

It depends on what you want to have things with HPE AI, certainly I mean for for this year for the third quarter, our impact was about 20% less volume going into the fourth will be off 30% volume for the fourth quarter and our expectation is as we go into the the <unk>.

First quarter of next year, if nothing has happened from an HPA standpoint, we should be rebuilding our supply there and being a good spot.

So.

I think you had mentioned, though just.

A recent case or something that would add some pressure on <unk> with the volume pressure there be more like.

More similar to <unk> or do you expect it to be improving.

Yes, we don't expect the specs that volume pressure, so we actually and Youre exactly right. I mean, we've had a couple of situations here within the last last few days with them, but these were really.

Young young bird and so it is a name patent that doesn't impact Q4 at all and actually pushes into the first quarter of next year, but really will be immaterial to the quarter, yes. So Michael.

If we stay where we are today.

We don't expect.

A material impact in Q1.

As always if it's a developing situation.

And so we'll be we'll be watching it closely but at this point, it's really too early to tell what the impact for Q1 would be.

Okay, great. Thanks.

Yes.

Our next question comes from Ben <unk> from Stephens. Please go ahead with your question.

Hey, guys, Jim Taylor on for Ben.

I wanted to drill down a little bit more on some of the labor challenges is it that youre seeing more acute labor markets in the areas that you operate your facilities and maybe as the economy weakens that loosened up a little bit and gives you an opportunity to hire more people or is it just.

Your wage issue or flexibility or what are some of the specific challenges that are preventing getting those under control.

Yes.

The issue of hiring getting people through the door is not a problem right. So we're getting people hired.

We are seeing is that they're not state that there is there is higher than normal turnover.

There is significant absenteeism and we do think that.

Partly driven by the labor market that we've had the ability to find many jobs elsewhere. So to your point.

As the labor market potentially tightens.

Does that lead to lower turnover the ability to keep people longer and then build that experience and that training absolutely. So.

It's not getting people hired it's out of the labor rate. It is just keeping the turnover down so that we can build the experience within our facility.

Okay.

As you expand automation through your plants.

The timeframe of how long it'll take to get those equipment that equipment in the plants are up and running to supplement maybe some of the necessity for heidrick.

High return labor positions.

Yeah, So I mean.

That's going to vary right. So we will we will continue to always.

Evolve and look for opportunities to take.

Cost out of the plan. So there isn't really any point in time, I'd say that we would stop doing that so it really is a continuing improvement in our mind.

Okay, and then if I could sneak in one quick question on <unk>.

I know theres been a couple of cases pop up here more recently, despite the weather getting warmer.

And any anything in maybe the contingency plan or.

Anything you can do to prepare for the possibility of this popping back up as the year progresses.

Yeah, I mean, we've obviously done a lot of work since I could go back to 2015.

A bio security efforts the investments that we've made on our farms have been and have been a substantial so we've worked really hard.

But clearly there.

This is still still an issue.

Tier tier point, the new development has historically.

Warm weather or he has really kept us down, but youre starting to see cases in California, where temperatures are higher.

And then just making sure again that we've got the continued emphasis and the continued focus on training with our team members.

We keep this top of mind, so that we are able to minimize the effect.

Okay, great. Thanks, guys I'll pass along.

Our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.

Hey, guys. Good morning, I'll keep it pretty quick.

Jim just in the context of going back to the new operating model I guess.

I think youre going to stand up a brand new brand center.

Just curious like are there are there incremental costs of restructuring actions that will come in.

With the re segmentation and then I guess streamlining everything.

I know you've talked about some of the synergies you expect to get but just any of the upfront costs that we should kind of think about.

Yes, nothing nothing really significant or material Peter.

We're moving some people around and shares.

Focusing their expertise in areas that we need some extra emphasis so as we think about.

Branded fuel, which is that center of excellence to really support all of our strategic pillars and brands in a bigger way.

That will consist of our digital experience group, which has been a huge benefit to our organization will continue to strengthen that area.

Making sure that our insights group.

Is being fully utilized across the entire organization so making.

Few investments there.

Continued our good work on innovation.

And having that even more ingrained with the brand and the strategic pillars. So nothing really material as much as it is moving some people and chairs and then making sure of course that we've got all the right financial planning and analysis to support the business in a bigger way.

But really.

Nothing nothing from a cost perspective that we're thinking about.

Okay.

The other piece I'll add there I mean really fundamentally what it what it has done for us or what it will do is just.

This.

Synergistic green power into one place to be able to support the business and just take away some of the silos in which we're working today and and also bringing JAKKS as well into play as we integrate them into the organization as part of the transformation.

Got it Okay. That's helpful and then Jim I just want to go back to your comments around what I'm, assuming mostly pertain to the hog markets.

Obviously, you've seen a little bit of relief here your commentary suggested.

Over time, you are expecting some relief, but just as we think out 12 to 18 months.

What are you tracking what are you seeing that.

Suggesting that maybe that youll get some relief on the protein side.

Just given some of the USDA forecast or maybe for less protein availability next year as opposed to more than I would think that would keep prices higher but just curious if theres anything that youre seeing that we should be aware of.

Yeah Vegas, staying there Peter is the volatility.

We continue to see so in terms of the absolute supply I mean, our view is consistent with what everybody else is seeing we're obviously going to be making some forecasts that are probably tied more to <unk>.

Slightly higher than historical averages, but really the difference in all of this is that that volatility or when some of these markets are staying elevated longer than they historically have liked like we've just seen here at <unk>.

The end of Q3 and for US the first period of Q4.

That's where we really start to experience some of that compression. So when you've got the elevation that's higher longer and then some of the volatility that has been persistent throughout the year.

And our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.

Yes. Thanks, good morning, a lot of Ground's been covered but I was hoping maybe just to get your view on trade and promotional spending here I mean, you talked about the specific advertising dollars in SG&A.

But the trade the trade spend that would be kind of above the revenue line.

Kind of any color on what that looks like today relative to.

Maybe pre COVID-19.

Do you think thats going to have to get bigger lever.

To pull over the next over the next 12 to 18 months to combat maybe.

More more risk in consumer price elasticity and <unk>.

And retailers that might be a bit more.

But where is pricing.

Pricing actions.

Yeah I'd say.

Adam is as supply continues to improve and we talked about still having a number of categories, where demand is outstripping supply, but as supply continues.

To improve how we do it we do expect that to be.

However that we've historically, we've always used it will continue to use that in conjunction with the advertising dollars that we need to build the brand equity and build that connection with with the consumer. So yes, we do expect to see that to continue to be an integral.

Part of our business going forward.

And as we think about our updated operating model and we start to bring these retail businesses together.

That's also going to be a benefit for us as we'll have again, a bigger per view of all the retail businesses in terms of how we're interacting with customers and consumers.

Okay, and then just quickly in foodservice.

You could provide maybe by some of the different channels or verticals within foodservice between.

Quick service institutional you guys are pretty broad kind of customer set there and just any any color on differences in trends between them.

It would be helpful.

Yeah.

Not at this point Adam.

We're seeing continued strength across all of the different channels, where we compete.

I.

Would say that a big driver of that we've talked about some of our labor issues.

So many foodservice operators are facing those same labor issues. So.

Are there for us to think differently about how they're going to be able to provide products and we've talked a lot about.

The value added offerings that we have in our foodservice portfolio really being able to help those operators move the labor that they do have from back of the house to front of the house.

We continue to see that play out.

We have seen a strong back to school season.

Not only with our Jennie O K 12 business.

But with the work that the Hormel side does on the colleges and universities. So again really really strong broad based foodservice business.

Okay I appreciate that color. Thank you yep.

And ladies and gentlemen, with that we'll be concluding today's question and answer session.

Now I would like to turn the floor back over to Jim Snee for any closing remarks.

Yes. Thank you I want to I want to thank all of you for joining us today.

As we've talked about this morning, our business remains incredibly healthy even as we continue to navigate some of the most difficult operating conditions in our company's 130 year history.

Our team is focused on a strong finish to 2022, but we're also incredibly excited about our future with the implementation of our go forward initiative to update and better align our operating model against our strategic initiatives. This as a pause.

It is an exciting time for Hormel foods.

Have a safe and enjoyable labor day weekend.

And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining today's conference you may now disconnect your lines.