Q4 2022 Hormel Foods Corp Earnings Call

Good day and welcome to the Hormel Foods Sports 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.

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Please note today's event is being recorded.

I would now like to turn the conference over to David Dahlstrom, Director of Investor Relations. Please go ahead, sir.

Good morning. Welcome to the Hormel Foods conference call for the fourth 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 HormelFoods.com under the investor section.

On our call today is Jim Snead, Chairman of the Board, President and Chief Executive Officer, and Jacinthe Smiley, Executive Vice President and Chief Financial Officer. Jim will provide a review of the company's fourth quarter and full year results, an update on the company's Go Forward initiative, and a perspective on Fiscal 2023. Jacinthe will provide detailed financial results and further commentary on the Fiscal 2023 outlook.

The line will be open for questions following Jacinthe's remarks. As a courtesy to the other analysts, please limit yourself to one question with one follow-up. If you have additional questions, you are welcome to get back into the queue.

An audio replay of this call will be available beginning at noon today, Central Standard Time. The dial-in number is 877-344-7529 and the access code is 9562037. 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 on Form 10-K and quarterly reports on Form 10-Q which can be accessed at HormelFoods.com under the investors section.

Additionally, please note the company uses non-GAF results to provide investors with a better understanding of the company's operating performance. These non-GAF measures include organic net sales and NetVetze EBITDA. Discussion on non-GAF information is detailed in our press release and fourth quarter earnings supplement which can be accessed from our corporate website and is also located on our investor website, investor.hormelfoods.com.

I will now turn the call over to Jim Snead. Thank you, David. Good morning, everyone.

Fiscal 2022 was a return to growth for our business as we delivered record sales and double digit earnings growth compared to last year.

Vescal 2022 marked the third consecutive year of record sales and the second most profitable year in our company's 131 year history.

In addition to achieving strong year-over-year growth, our team made considerable progress on our six strategic priorities.

First, we continued our efforts to protect and grow our core brands.

Sales in our retail channel increased 7% in fiscal 2022.

led by brands such as Spam, Skippy, Hormel Natural Choice, Dinky Moore, Hormel Square Table Entrees, and Mary Kitchen.

Of note, the SPAM family of products achieved its eighth consecutive year of record growth.

Second, we made progress amplifying our presence in snacking and entertaining.

We delivered excellent growth on the Columbus and Hormel gatherings brands and we have successfully integrated the planters business.

We have a powerhouse of brands with the goal of becoming the leading solutions provider in the snacking and entertainment space.

Third, we saw growth from our ethnic and food-forward portfolios.

Both our Megamax Joint Venture and Applegate business achieved sales milestones this fiscal year.

driving growth behind the Holley, AirDes, and Applegate brands respectively.

These businesses are well positioned in the marketplace due to their strong and reputable brands, on-trend innovation, and loyal consumer bases.

Fourth, we continue to expand our leadership position in food service.

Sales in the food service channel grew 20% compared to last year as operators again turned to our items to help solve for labor pressures and to diversify menu offerings.

We drove excellent growth in this critically important channel, highlighted by brands such as Bacon One, Austin Blues, Hormel Fire Braids, and Cafe H.

Our food service portfolio and direct selling organization remain key differentiators and growth catalysts for the company.

Fifth, we invested into our international business as we looked to aggressively develop our global presence.

In Fiscal 2022, we commissioned a state-of-the-art innovation center supporting the Asia Pacific region and approved another capacity investment to support our growth in China.

Our international business is expected to be a significant growth driver for the company.

Finally, we continue to transform our company.

We made noteworthy progress on our transformational efforts at Genio Turkey Store and laid the groundwork for the next step in our evolution as a global branded food company.

Our Go Forward initiative.

We also made considerable progress on our 20x30 challenge.

Some of the year's highlights included matching 100% of our domestic energy use in fiscal 2022 with renewable sourcing.

Remaining on track to have an approved science-based target for the reduction of greenhouse gas emissions by 2023.

becoming a major sponsor of an up to 50,000 acre regenerative agriculture pilot project in central and southeast Minnesota.

announcing our commitment to create a food-secure community program in Austin, Minnesota, with the additional goal of sharing the blueprint and findings globally.

We are making a difference thanks to the incredible work and dedication of our team members, partners and suppliers.

Our team showed tremendous resolve to deliver growth in fiscal 2022.

The team overcame broad-based inflationary pressures.

supply chain disruptions, the impacts from highly pathogenic avian influenza or HPAI, and numerous headwinds in our international business.

I want to express my sincere gratitude to the team for their dedication, hard work, and for demonstrating our results matter mentality again this past year.

In the fourth quarter, our team delivered diluted earnings per share comparable with record results last year. And last year included an additional week of sales.

These results further demonstrate that our brands remain healthy.

and the strategic investments we have made are enabling growth.

We achieved another quarter of organic sales growth led by our Center Store grocery portfolio and solid performances from our food service businesses.

Segment profit growth was due to the Genio Turkey Store segment.

as the team again managed Turkey's supply effectively and maximized operational performance.

We also make progress across our supply chain to increase production capabilities and restore inventories on key product lines.

Fill rates for retail, deli, and food service items all improved compared to last year and the third quarter.

As we announced in August , we recently began transitioning our business to a new strategic operating model.

As of October 31st, we have moved to three operating segments.

retail, food service, and international.

Over the last month, we have been working to create a unified retail organization with scale, experience, expertise, and passion to grow our almost $8 billion portfolio of brands.

We are approaching customers differently, bringing together subject matter experts from across our businesses to find growth opportunities and execute strategies in the marketplace.

We are leading with a more food forward mentality, thinking and acting differently in the ways we position our brands with consumers.

This has created new opportunities that were not easily executed in our old model.

And we are working with a newly created brand fuel team to ignite the potential of our products in store and on shelf.

And these early successes are not limited to our retail team.

Our combined food service team will further leverage the scale of planters in the convenience store channel while assuming full control of the company's food service turkey business.

including the Genio brand.

Though we are only in the initial stages of the implementation, we are receiving positive responses from our customers and operators.

Our immediate focus is to accelerate the execution of our six strategic priorities while continuing to meet the needs of our customers, consumers, and operators.

Specific to the first quarter, our teams will be working to adopt the new organizational design, management structures, and accountabilities.

The teams will be working to continue the work to integrate Genneo TurkeyStore into the company's one supply chain and new operating segment.

And our teams will be working to stand up the brand fuel center of excellence which will house enterprise-wide brand management expertise.

e-commerce capabilities, insights-led innovation, and analytical support to better enable data-driven decisions.

Earnings will be reported under this structure beginning with the release of fiscal 2023 and the first quarter results in early March.

We will be supplying recast financial information for fiscal years 2021 and 2022 in February 2023.

the deliberate and thoughtful steps we have taken thus far.

are all about better aligning our structure with our proven strategy to create the Hormel foods of the future.

We are excited for the additional collaboration, capabilities, and value we will realize from this transition and remain confident in our ability to drive long-term sustainable growth.

Turning to our outlook, we expect to grow both sales and earnings in fiscal 2023.

We enter fiscal 2023 well positioned for the current macroeconomic climate and expect top-line growth from all three of our new segments.

retail, food service, and international.

In retail, we expect demand for our center store grocery business to remain strong as consumers continue to seek products and brands that offer high value, versatility, and convenience.

We expect growth from planters and the rest of our snacking and entertaining businesses, including the Columbus and Gathering brands.

Planners will be rolling out meaningful innovation throughout the year to complement and expand on the new flavor varieties and packaging introduced in fiscal 2022.

We expect to benefit from the investments we have made in additional black label bacon and Hormel pepperoni capacity and are excited for the new spam capacity to be operational in the first half of the year.

And lastly, we expect a recovery in Turkey volumes in the back half of the year, allowing our teams to continue to create a demand-oriented and optimized Turkey portfolio.

This is heavily dependent on any future impacts to the supply chain from HPAI.

We expect that the pricing actions taken over the past few quarters should result in a benefit to net sales in fiscal 2023.

However, we have also accounted for additional impacts from elasticities as these new pricing actions are adopted in the marketplace.

To help mitigate risk to our retail volumes.

We plan to increase advertising and brand investment

Make further progress on our efforts to continue to improve fill rates and return to full assortments across our leading platforms.

We plan to deliver innovation across the portfolio.

We'll leverage the capabilities of Go Forward, which include our well-established revenue growth management and digital experience teams.

our combined direct selling organization, and our newly created brand fuel team.

In food service, we are expecting another year of growth from our solutions-based portfolio and direct selling team.

We enter the year from a position of strength after two consecutive years of robust growth during the industry recovery.

The consistent inroads our teams have made over time, including during previous economic slowdowns.

to diversify our presence in emerging and non-commercial channels will help us navigate through future market volatility and uncertainty.

Additionally, the team plans to leverage the planters and Genio brands to make further gains in the convenience and K-12 channels respectively.

Our international business had a challenging year in 2022.

but we expect a strong return to growth in fiscal 2023.

Demand for our products globally is robust and our production capabilities and inventory levels are healthy to support this demand.

We believe that many of the export challenges we experienced this past year will gradually subside.

Like many, we're currently monitoring the situation in China.

We are actively engaged with our in-country management team and are prioritizing the health, safety and well-being of our team members.

This team has been resilient in the face of numerous challenges and will continue to deliver growth with balance between retail and food service.

From an overall bottom line perspective, we anticipate earnings growth to be driven by our food service and international statements.

and improvements across the supply chain.

We expect to operate in a volatile, complex, and high-cost environment again in fiscal 2023.

which is why we are increasingly focused on reducing costs and inefficiencies as part of our One Supply Chain initiative.

We have a strong track record of consistently capturing approximately $75 million per year of supply chain savings through our continuous improvement programs.

Though these efforts continued over the last three years, the benefits have been masked by pandemic-related impacts.

labor shortages, industry-wide supply chain disruption.

and most recently broad-based inflation.

We will continue to identify and capture cost savings opportunities.

find efficiencies, and drive unnecessary costs out of our system.

We fully expect that over time these actions

addition to the benefits of broader market stabilization will result in more normalized operating margins for our business.

taking all of these factors into account.

We expect full year net sales of $12.6 billion to $12.9 billion and diluted earnings per share of $1.83 to $1.93 per share.

We have continued to benefit from our balanced business model, which is not heavily dependent on any one channel, protein, input, or product category.

We also have a dedicated, well respected, experienced and stable management team that has again proven their ability to navigate and grow our business in volatile market conditions.

Our long-term strategy to meet consumers where they want to eat with a broad portfolio of trusted brands and products will continue to be a key differentiator for our business.

helping to drive growth for our customers and operators.

At this time, I will turn the call over to Jason Smiley to discuss more detailed financial information and provide more color on key drivers to the fiscal 2023 outlook.

Thank you, Jim.

Good morning everyone.

I want to start my remarks by congratulating Jim Snead.

Jim was recently recognized as the 2022 Responsible CEO of the Year for Transformative Leadership by 3BL Media.

During the award ceremony

Dave Arman, CEO of 3BL Media, said, and I quote, The world needs

business leaders who are operating with their eyes wide open and using the power of their businesses to bring forward meaningful ESG programs and policies to operate in a transparent manner", end quote.

Jim truly embodies these characteristics.

We at Hormel Foods are honored to witness firsthand Jim's leadership style and be part of the difference our company's making to inspire change, lift communities, and bring people together. Congratulations Jim on this well-deserved recognition.

The company achieved the record full year net sales of $12.5 billion, up 9% from a year ago.

Net sales for the fourth quarter were $3.3 billion, a 5% decline from the prior year, which included an additional week.

Organic net sales increased 2% for the fourth quarter.

Operating income for the fourth quarter and full year increased 3% and 17% respectively, overcoming the additional week of sales last year.

Strong results from Genio Turkey Store segment, higher food service sales, pricing actions to mitigate inflationary pressures, and the inclusion of the planter's business were the primary drivers to earnings growth during the year.

Fourth quarter diluted earnings per share of 51 cents was comparable to the record quarterly earnings set last year.

Diluted earnings per share for the full year were $1.82, a 10% increase.

The company's actions to offset inflationary pressures were evident in the fourth quarter.

Operating margin of 11.2% was significantly ahead of 9.6% in the third quarter.

Operating margin for the year was 10.5% and improvement versus operating margin of 9.9% last year.

For the full year, SG&A as a percentage of sales fell to 7.1% from 7.5% last year.

Advertising spend increased 14% compared to last year with higher investments seen across every segment. We have stay in the luc randomized by counted at our Eycroftime Nyjah.

In fiscal 2023, we are again planning higher investments to support tea brands including Planters, Spam, Skippy, Columbus, Black Label, Hormel Pepperoni, and Genio.

Net unallocated expenses in 2022 decreased due to planters' acquisition costs last year.

In fiscal 2022, higher interest expense and investment losses on the Rabbi Trust net of associated deferred compensation negatively impacted earnings by approximately $0.05.

The effective tax rate for the year was 21.7%.

compared to 19.3 percent last year.

The effective tax range for fiscal 2023 is expected to be 21% to 23%.

The company again generated strong and consistent cash flow with operating cash flow increasing 13% compared to last year.

We generated more than $1 billion in cash from operations, allowing us to invest in future growth, return a record amount of cash to shareholders in the form of dividends, supporting ongoing business needs, and increase our cash balance to nearly $1 billion.

We invested $279 million in capital projects in 2022.

The company's target for capital expenditures in 2023 is $350 million, which includes investment in value-added capacity, technology, and automation to increase production and drive long-term savings and efficiencies.

As Jim mentioned earlier, we recently approved another significant expansion to our operations in China, which we expect to come in operation in fiscal 2024.

We returned a record amount of cash to shareholders in the form of dividends in 2022.

We paid over $550 million in dividends during the year, including our 377th consecutive quarterly dividend effective November 15.

We announced a 6% increase in the dividend for fiscal 2023, marking the 57th consecutive year of dividend increases.

Our strong financial position also allows us to continue sharing our successes with our team members.

For fiscal 2022, we will share approximately $20 million with the team including our annual profit sharing for the 84th consecutive year.

Remaining investment grade is a top priority for the company.

The company ended the year with $3.3 billion of debt.

On a net basis, we're below our stated goal of 1.5 to 2 times EBITDA.

Our first debt repayment related to the planter's acquisition is due June 2024 with a fixed rate of 6-5 basis points.

Our total outstanding debt is fixed with an average yield of 1.7%.

As Jim previously mentioned, we expect sales and earnings growth in fiscal 2023.

I want to revisit some of the comments we made in our third quarter earnings call in the context of our fourth quarter results and outlook for 2023.

Heading into the fourth quarter, we cited the impact of an escalation in certain operational, logistical and inflationary costs.

Generally, these assumptions played out as expected and we anticipate similar trends in fiscal 2023.

We made additional progress across the supply chain during the fourth quarter and are becoming more efficient and productive.

Fill rate improved compared to last year and the third quarter.

We continue to see increased applicant and hiring flow at our production facilities.

Our focus is on onboarding and training near team members and creating a best-in-class experience throughout our operations.

Freight and warehousing expenses remain elevated during the quarter.

We saw signs of moderation in the domestic freight environment as truck availability improved.

Though higher diesel prices offset a portion of this benefit.

Higher warehousing expenses were driven by recovery in our inventory levels and industry-wide labor challenges.

In 2023, we expect some of this pressure to be offset by savings from the work the team has been doing to control freight expenses and expand our logistics network.

Prices on key protein inputs generally declined during the quarter except for pork trim.

Higher price inventory was a headwind in the quarter as we worked through inventory produced during the summer commodity peaks.

Protein prices are expected to remain volatile in fiscal 2023.

Additionally, we expect packaging, energy and labor costs to remain elevated.

or increase in 2023 and for upstream challenges to persist.

Actions by our OneSupply chain team will be key to managing and mitigating additional cost escalation in these areas.

Beginning in fiscal 2023, our Turkey business will primarily reside in the retail and food service segment.

HPAI has re-merged this fall.

And this unprecedented event has affected our vertically integrated supply chain at about one third of the magnitude of the spring event.

We now anticipate the impacts for HPAI to reduce production volume in our Turkey facilities through at least the first half of fiscal 2023.

Breast meat prices remain historically high and have yet to moderate.

Our team has done an exceptional job managing through disruptions caused by HPAI.

Reflected in our guidance range are assumptions for higher pension expense and higher feed costs for our Turkey business.

Taken together, these costs are approximately 15 cents of headwind specific to fiscal 2023.

In addition to these costs,

We have planned incremental investment against one supply chain and go forward supporting areas such as infrastructure, automation, data analytics, brand support and investment in innovation capabilities.

In closing, I am extremely excited about Go Forward and our plans to unlock even more potential from our now $12 billion on common company.

We have a long track record of successfully evolving our company, which is a credit to our strong management team and our inspired team members around the world.

Better aligning our structure with our strategy, which is at the core of this transition, positions us well into 2023 and for the long term.

Said simply, Go Forward ensures that we will continue to deliver on our commitment to our team members, customers and shareholders.

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

Thank you. We will now begin the question and answer session.

To ask a question, you may press star 1 on your touch tone phone.

If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. If it also asks you, please limit yourself to one question and a single follow up.

Today's first question comes from Peter Galbo with Bank of America. Please go ahead.

Hey guys, good morning. Thank you for taking the questions.

Jim, I'm just curious, like in the overall protein complex and understanding that, you know, protein is now a much smaller portion of your overall business than maybe it was historically, but, you know, your single biggest input is still pork and...

That seems to have been less deflationary at this point than the other proteins. Beef is down pretty substantially. Chicken obviously has come off materially. Just curious your outlook over the next 12 months. What is it going to take to get some of these pork prices and particularly the cuts that you buy to kind of match the other proteins that we're seeing in terms of how deflationary they've been.

and maybe how that might end up flowing through your business both from a top line and margin standpoint. Michael Bock Yeah, thanks Peter. Good morning. PORC is still a very important part of our complex as you described. And for us, we think that PORC still represents a great value to consumers as we're...

Looking into 2023 and markets, you know, markets, although we expect some moderate relief, are still going to run well above five-year averages. And, you know, we've also seen a lot of volatility, you know, throughout the last several years. And that's what we really have talked about is...

You know, it's not so much the point to point, but some of the volatility that occurs. You know, the other thing that we're watching very, very closely is the export element in terms of what's happening with pork. You know, so one of the things to consider is, you know, as turkey prices are higher.

We're seeing, you know, bony and hams be exported at an accelerated rate. And then the other thing is, you know, just thinking about the continued labor challenges that are out there. And so, you know, one of our key inputs across a lot of our business is pork trim. And if the labor's not there to do the necessary boning to get the trim, then we're not going to see that relief.

So there are a lot of variables at play, but we know that there's things that we can control. We know that our brands are going to remain strong. The work that we're doing to drive that demand is very successful. And now we just need some of these other variables that are outside of our control to play out more favorably for us.

Got it. No, that's helpful. Thank you. Just maybe if I could ask a two-parter just on some of the moving pieces in the guidance for 23. Of the 15 cents you mentioned that I think is a headwind from pension and Turkey, can you just break down for us what exactly the pension piece is versus the feed costs? Then also just within the guidance, I don't think I heard any mention on.

On Megamax, I think avocado prices have gotten more favorable, so any commentary there as well. Thanks very much. Good morning. The pension and feed costs definitely headwinds as we go into 2023. The split between the two is about 10 cents related to feed.

and five cents related to the pension costs. And as it relates to our Megamix business, we expect avocado prices to continue to go down, so that will translate into positive impact for us on our Megamix business.

Thank you, and our next question today comes from Ben Ferrer with Barclays. Please go ahead.

Good morning, everyone, and thanks for taking my question. Could you elaborate maybe a little more on the dynamics and what you're seeing amongst consumers around the elasticity? So, you've talked a little bit about it in the prepared remarks, but it would be nice to understand what's kind of embedded within your guidance on top line.

how much of a decline in volume you kind of anticipate based on the pricing you've done more recently, which obviously still remains a tailwind, particularly in the first fiscal half because of the prices that you've just implemented more recently. So that would be my first question. Thank you. Yeah. Good morning, Ben. So, I mean, it varies category by category, as you know. We've got some categories where the elasticities are performing, but primarily the elasticity of equipment? so everyone's efficacy varies in terms of Soft dug output and theREAD value. I launched a tons inside size how you bought you you know wanted to buy footprint after come and get started.

historical levels for elasticity. And so that's a really, really good thing. The other part that we need to make sure we're thinking about is our food service business. You know, a significant part of our overall portfolio, you know, that business, the demand continues to remain strong, you know, portfolios well positioned and that team's just doing a...

a great job not only driving new demand, but also taking share. Perfect. And then just on the capex number, can you elaborate a little bit on like what part of that is, how much is that maintenance, how much is maybe what you didn't execute or initially maybe plan to execute.

that. The maintenance portion is fairly consistent with what we have on a yearly basis at about $125 million of that number.

And then in terms of rollover, we certainly have pieces coming over from last year which is relating to our spam and our China expansion that we're doing.

Just on that note, Ben, as we've said in our comments, spam capacity will come online the early part of 2023. And then really the China capacity that Jacinth references won't really come online until 2024.

Okay, thank you very much. Thank you. And our next question today comes from Ken Zaslow with Bank of Montreal. Please go ahead.

Thank you.

Hey sane Medicemen.

I can.

Two questions. One is, when you think about your pricing action

Which categories have you taken pricing to cover the cost? Which ones do you still need to take pricing to cover the cost? And then I have a follow-up. And then I have a follow-up.

Yeah, you know, I think as you think about our portfolio, again, going back to our legacy grocery products portfolio, we've taken significant pricing but haven't quite covered down all of the inflation that we're seeing. But you know, as part of that, and you know this, Ken, is we're being very sensitive to some of the price gap.

about our overall portfolio, that's probably the biggest gap that we have.

Okay.

You gave guidance kind of on the top line. You didn't give a feel for the operating profit, which ones of the divisions you'll see. Even if you do high, low, medium, more than average, less than average, any sort of commentary on the profit growth outlook by division would be quite helpful, just particularly given that you're changing divisions and we don't have.

the same sort of history of understanding how those margins will kind of evolve. Any sort of commentary on that would be really appreciated.

Yeah, I think in our prepared remarks, Ken, we talked about growth really being driven by food service and international. As I said, we expect our food service business to remain strong. Our current demand is very positive, our portfolio is well positioned. Our international business, we expect to bounce back as some of those headwinds.

moderate. The retail business, which is experiencing the biggest change in this new operating model, is certainly going to have the impact of some of the feed costs that Jacinth is experiencing.

has talked about. So, you know, consistent with what we said in the prepared remarks, to really expect the drivers of the growth to be food service international.

Okay, so when you were talking about it, and I don't want to ask a third question, I understand that, but when you were talking about it, you were talking about the sales or the operating profit. I thought during the commentary you were mostly talking about sales, but you think it applies to the operating profit as well. I just want to clarify and then I'll leave it there. Yeah, think about both of them that way, Ken. Okay. Okay, so when you were talking about it, you were talking about the operating profit as

talking about it and I don't want to ask a third question I understand that but when you were talking about it you were talking about the sales or the operating profit I thought during the commentary you were mostly talking about sales but you will you think it applies to the operating profit as well I just want to clarify and I'll leave it there yeah think about both of them that way okay thank you

Yeah, thank you very much. Thank you and the next question today comes from Robert Moscow with Credit Suisse. Please go ahead

Hi, I actually have a bunch of questions here. You said that feed costs are going to be the biggest headwind for retail in fiscal 23. Is that because... B?W

Turkey, like the majority of Turkey, will be lumped into it.

And you know just in the context of all these other retail businesses that are now catching up to margins, it just strikes me that the US retail outlook is pretty soft. Like most of your packaged food peers are catching up and exceeding last year's gross margins because of all the pricing they have taken. So what is different here? Is it just turkey or are there other things?

Hello? Hello? Hey, and pardon me everyone, this is the conference operator. Looks like we've lost the speaker connection. I'm going to put the music back on and we'll be right back with you. We ask you please hold the line. Thank you. I can't wait to hold you...

And everyone, we thank you for your patience. We've reconnected the speaker location.

Mr. Moskow, if you can please repeat your question, sir. Thank you.

Sure. So it was a question about the guidance for retail for I guess for profits to be kind of flattish or maybe even down in 23. And you said it was because of feed costs. Is that because the majority of Genio will end up in retail?

And X that, would you have expected retail profits to grow? Because in comparison to all these other US packaged food companies, it seems like the next 12 months is characterized by pricing catching up to cost and gross margins re-expanding.

Yeah, I think the way you're describing, first of all, our apologies. Secondly, the way you're describing it is correct in that the feed costs as you think about the value added business, the whole bird business, a lot of the commodity business that will be flowing now into retail will be impacted by the market.

by those higher fee costs as just since described. So, I mean, absent that, you know, the rest of the business as we think about the pillars are very positive.

Okay, and could you help us a little bit just on your outlook for Turkey in fiscal 23 because it must be a pretty wide range of outcomes given the uncertainties around AI and you know it is your outlook different for commodity than it is for value-add? Is it still very positive for commodity and you know weak for value-add? How should we think about it?

Yeah, your opening statement is correct again, Rob, is that there's a lot of uncertainty as we think about the JOTS business going forward. You know, on our last quarterly call, we talked about us being back to more normalized levels after the first quarter. Now we're talking about the back half of the year.

And then everything that you just described really all depends on the meet availability, you know, in our system and then what's available elsewhere. So, there is just a lot of uncertainty in the jobs business throughout 2023.

Can I assume that you're assuming flat profits in Turkey just as a starting point for 23? Or how should I think about it?

Yeah, I mean I think that's a good starting point. You know, we've got feed costs, you've got breast meat markets, you've got supply. There's just so many variables there as we progress throughout the year. We'll certainly be keeping you well advised.

Okay, thanks.

And our next question today comes from Tom Palmer at JP Morgan. Please go ahead.

Thanks for the question. I wanted to get some clarity maybe on the expected earnings cadence for the year. You made mention, for instance, of certain port cuts rolling over. It sounds like maybe we see more of a flow through of that in the first quarter than we did in the fourth quarter. At the same time, there's some operational changes underway. Maybe those present some initial cost headwinds. So, how does this shake out just as we think about earnings progression for the year?

Yeah, good morning, Thomas. As we're thinking about, you know, the earnings growth that we described, we expect it to be fairly evenly distributed throughout the year, half one and half two. You know, clearly we've identified the major impacts that are out there in terms of feed and the pension costs that we've already talked about several times.

As we go throughout the year, we've talked about the need to really now find some supply chain savings. We've talked about the fact that we expect fill rates to improve, continue to improve as we progress. We've got some pricing that will continue to roll forward. We expect to moderate and improve throughout the year.

And so, you know, there are some things that will happen sequentially, but as we're looking at the business, we do expect it to be pretty evenly distributed between half one and half two.

Understood. Thank you. And then I just wanted to ask on the cash balance approaching a billion dollars, you highlighted that there's really not any near term debt due and it's pretty well cost. So how should we think about deploying this? I mean, is this

you'll retire some debt in the coming year or is it more this is put aside as a way to effectively

fund M&A without having to go to capital markets and maybe a higher interest rate environment. And then just with regards to that M&A side, I think you talked about international being an opportunity at the investor day. Is that still the priority or just given macro uncertainty, should maybe domestic be more of a priority? …

Good morning, Tom. So our capital allocation policy and approach will remain, it still remains the same. And so yes, I mean, we're happy that we continue to generate very strong cash flow and we will continue to deploy it strategically as it relates to paying down the debt. We still believe that is not the best use of our cash today.

And, you know, our first payment doesn't come due until 2024. And so, again, we'll continue to be strategic. We're continuing to look at opportunities from an M&A perspective and aligning those with our six strategic priorities. And so that is really how we'll think about deploying our funds, you know, paying our dividends continuing to remain.

interested in international opportunities. We believe that we can continue to leverage what we've built in, you know, Asia Pacific, China. We've talked a lot about snacking and entertaining as we've built out the SCPI portfolio, the planters portfolio, you know, also the work that we've done in Brazil. So international certainly remains a key.

a key area for us as we're thinking about the acquisition front. Great, thank you. Thank you, and our next question comes from Rupesh Parikhal with Oppenheimer. Please go ahead.

Good morning and thanks for taking my question. So I want to just go back to the top line growth of one to three percent growth. I was just curious if you can just again walk through the key puts and takes here. At least to me it seemed a little lighter than we thought going into this year.

Well, good morning, Rupesh. I think, you know, there are, just like you described, lots of puts and takes. We do know that we're going to have some positive impact from pricing. We expect strong growth, food service and international. We are bringing more capacity online in 2023. For more information, visit www.fema.gov

But then we also know that we've got elasticities that will be somewhat of an offset. But as we've already talked about, really the biggest wild card in terms of the top line for next year is jocks.

And so knowing that we're dealing with this unprecedented fall event, and it's already pushed back, you know, what we expect to be more normalized level by a quarter, you know, we have to wait and see what happens in the springtime. And so really that's the biggest unknown as we think about our sales outlook in 2023.

Okay great, that's helpful. And then just on the US consumer, obviously you guys are seeing great strength in your grocery products business, and you are seeing strength in food service. So just curious how you are thinking about the consumer just based on your vantage points in both channels.

As we're thinking about 2023, it's continued strength. The brands are doing well. All of the scan data for the most recent 13 weeks are showing really positive dollar sales growth. As you said, the food service business just continues to do really, really well.

not only finding new opportunities, but they're also doing a really nice job of taking share.

Great, thank you.

And our next question today comes from Michael Lavery with Piper Sandler. Please go ahead.

Thank you.

Thank you. Good morning. I just wanted to unpack pricing a little bit and I guess just would love to understand in your guidance.

Does it factor in, can you quantify roughly what amount of pricing is included in the growth outlook and how much is that just, are you counting on just the pricing you've already taken flowing through rolling into next year or do you anticipate new pricing actions on top of that? Let me get a click to Hopefully I didn'tager that, it's today anyway. It's not this one. It's from a gradientDI dia in temQL.

Yeah good morning Michael. You know what we've got factored in there right now are the pricing actions that we've that we've taken and so again if you think about the grocery products pricing that went into place in the fourth quarter our Genio turkey store pricing that we put in place really also in the in the fourth quarter.

On the refrigerated side of the business, we've taken pricing on pepperoni. We've got some pretty significant wrap-around pricing there.

And as we're thinking about 2023, you know, just what I said earlier is we're really watching the price gaps in the categories. We have to be very responsible. We are seeing some gaps close. And we're also looking at those areas where we can be a bit more precise and strategic.

What we have in there today is already what we've taken, but we are assessing where there are those opportunities and how far it's necessary going forward.

Okay, thanks. That's helpful. And –

Just on the margin outlook and maybe not necessarily specific to next year or fiscal 23, it seems like you are guiding for some modest margin expansion. But as you think about just where margin levels were two or three years ago, how much can you restore that or how long does it take? What's sort of the outlook as far as

the margin builds going forward. Yeah, you know as we're thinking about it, you know that the headwinds that we've covered down, or had to cover down over the last several years are pretty significant. And the team's done a great job when we think about some of the commodity costs that we've had. You know, we've talked a lot about freight and warehousing costs.

So, you know, as we think about relief from some markets, you know, we've got still incredibly high markets, you know, some of the packaging costs, we've got to do a better job at taking costs out of our supply chain and our operations. And so it's all of those things that, you know, we need to focus on but also get some moderation on. Learn more atAr ten-Pass optimal counselor dot com Phillip

Which, you know, to say it's going to happen in any specific point in time, if we've learned anything over the last three years, that's really hard to do.

But, you know, thinking about the things that we can control and focusing on those things is really what's going to allow us to continue on this journey of margin expansion.

Okay, great. Thanks so much.

And our next question today comes from Eric Larson at Seaport Research Partners. Please go ahead.

Yeah, thanks. I hope everybody had a, thanks for taking my question. Hope everybody had a good turkey day. I was thinking that you could have given your employees a really nice non-taxable bonus just by giving them a turkey this year. You should have called us sooner, Eric. Yeah, exactly. So, Jim, I like others are, we're just kind of struggling to kind of.

Business your commodity sales your your commodity pork shells, which I think you now have effectively by contract

don't think you have much of that anymore and I'd like you know an update on that as well and then the commodity sales also for Genio I know they don't have a huge food service business but why would why would food service not participate in some of the ups and downs in the commodity pricing market given that you know neither retail nor food service would be responsible for that commodity business solely so

How do the commodity sales for all the stuff kind of land in your new retail, food service, international structure? Yep, great question, Eric. So a couple of things. As we head into this new operating model, clearly we're going to continue to provide clarity and education. You know, that's the key takeaway in all of this.

is really about how we are able to align our strategy with our structure. And, you know, although we've had all of our different reporting segments historically, we haven't had it as well aligned as it could be. So that's really where we're heading. David and the team will obviously be spending a lot of time on the education front to make sure everybody understands what is where and why.

You know from a from a genial perspective You know as we think about how that commodity business in particular falls. It will fall between our retail and international business.

And so there will be elements that will fall in both. The other part of it, as you mentioned, is the food service piece. There's still a significant Genio business in our food service segment.

And then the other part you mentioned was just in regards to traditional pork commodity sales. And that business, I mean our team has done just a great job over the last number of years finding ways to really de-risk the business, de-risk the commodity side. And right now we're less than 10%.

And so that's a journey that we've been on for a very long time. We continue to stay focused on that and the team's just done a great job. So hopefully that gives you a little more clarity, but just know as we get into 2023, we'll have those opportunities for education and further discussion.

Okay, thanks guys. I appreciate the time. And our next question today comes from Adam Samuel, single at Goldman Sachs. Please go ahead.

Good morning everyone, this is Arthur on for Adam. If you could just talk to us about how Jennie Oh performed relative to your expectations.

It looks like volume declines weren't nearly as much as we had anticipated and you had noted in the last quarter's call. And if you could also give us some color on...

to whatever extent you can, margin headwinds from fixed cost under absorption and how pricing, specifically commodity pricing, affected that or offset that. Thank you.

Yeah, good morning, Arthur. I would say that our Genio business was actually in line with our expectations. What we had said for the back half of last year when we first started to see the outbreak was that we were going to have a 30% decline in volume in the back half of the year. And that's almost exactly what we saw.

The volume piece was accurate. You know, clearly the drivers were what happened with the breast meat market, obviously whole birds. So there's always a lot of moving parts, but with say that by and large it met our expectations.

And then I'm sorry I missed the second part of the question.

Just to what extent fixed cost under absorption was ahead went on margins and what offset you had on pricing.

Yeah, you know, Arthur, I think David is going to have some follow-up calls, so maybe we'd be better served to handle that there. Okay, thank you.

Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the men and continue for any closing remarks. Well, thank you all for joining us this morning. As we close the book on our fiscal 2022, I want to once again thank our team for delivering such strong results for the fourth quarter and full year.

I also want to thank the entire team for their hard work as we embark on our new operating model. We still have work to do, but their efforts to date have been nothing short of outstanding as we create the Hormel Foods of the future.

As we go forward into 2023, I want to wish all of you a happy, healthy, and safe holiday season.

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