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Text: If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investors section.
On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; and Jim Sheehan, Executive Vice President and Chief Financial Officer.
Jim Snee will provide a review of the Company's current and future operating conditions, commentary regarding each segment's performance for the quarter and update on the impact to the company of the COVID-19 pandemic and a perspective on the balance of fiscal 2021.
Jim Sheehan will provide detailed financial results and commentary regarding the Company's current and future financial condition.
As a courtesy to the other analysts, please limit yourself to one question with one follow-up.
It will also be posted on our website and archived for one year.
Before we get started, I need to reference the Safe Harbor statement.
It can be accessed on our website.
As we approach the one-year mark of the pandemic, I want to express my gratitude to our plant professionals for their continued dedication, energy and focus.
They continue to be the true heroes of our company during this time.
On our last earnings call in November, we were witnessing an increase of COVID-19 cases in the United States.
Our number one priority has been to keep our team members safe, and we have been very focused on our best-in-class preventative measures and on educating our employees through our awareness campaign keep COVID out.
As the pandemic evolves and the vaccine becomes more widely available to our team members, we'll continue to keep the health and safety of our team members as the top priority.
We were among the first to offer a COVID pay program to allow those who are ill or had symptoms to stay home from work and still be paid.
Additionally, we paid $11 million in fiscal 2020 and unconditional bonuses to our team members to provide further financial security.
Our program has resulted in minimizing the spread of COVID in our workplaces and our communities.
Recently, we have been encouraged to see cases decline and the number of team members on our COVID pay program drastically decrease.
This gives us increased optimism as we head into the second quarter.
We were pleased to announce the entry into a definitive agreement to acquire the Planters business last Thursday.
We have many leading brands that Hormel and the acquisition of the Planters snack nut business will be an excellent addition to our Company.
Over the past 10-years, we have made numerous acquisition, all of which are meeting our strategic objectives.
The performances of MegaMex, Wholly, SKIPPY, Applegate, Justin's, Ceratti, Fontanini, Columbus and Sadlers give us a high level of confidence in our ability to successfully integrate, operate and grow the Planters business.
The acquisition of Planters is the perfect strategic fit.
The addition of this iconic brand in high-margin business continues our evolution as a global branded food company, moving us further away from a commodity-oriented meat-centric company.
As one of our biggest brands, we will give it a high level of focus and attention.
Our core competency and brand stewardship will be key to our success and unlocking the power of the Planters brands.
We know how to manage brands and Planters is right in our sweet spot as we know Planters is more than simply peanuts in the jar.
Planters also perfectly complements, enhances and expands our existing snacking business.
Joining brands like Hormel Gatherings, Columbus, Wholly and Herdez.
There are numerous opportunities to leverage the consumer insights from both portfolios to drive further innovation and improve growth for our entire snacking business.
The Planters business gives us another iconic brand to grow and increases our scale in key areas such as center store and convenience stores.
Integration into our direct sales force is a high priority and we know there are immediate opportunities to improve distribution and drive sales growth.
Another priority for us is to integrate the business into our One Supply Chain and Project Orion platforms.
We expect synergies from this integration for the Planters business and for our existing business.
There is a lot to love about this acquisition and I'm excited for the transaction to close, so we can begin to give the Planters business the attention and focus it needs to grow.
Now turning to our first quarter.
Our team generated strong top line growth with sales increasing 3% to a record $2.5 billion all four segments delivered sales growth and achievement that hasn't been accomplished since 2016.
Incremental supply chain costs related to COVID-19 of $15 million were the primary reason for a $13 million decline in pre-tax earnings.
Net earnings and diluted earnings per share declined 9%, due primarily to incremental supply chain costs and higher tax expense.
As in prior quarters, we continue to strike a balance between the consumer demand we are seeing and our supply chains ability to meet that demand.
We increased production levels this quarter through a combination of improving efficiencies; bringing on new capacity and further leveraging our strategic supply chain partners.
We expect this steady improvement to continue throughout the year, we have been successful in a number of critical categories and we will continue to make progress across the portfolio.
Our retail business continued to perform extremely well with sales increasing 13% for the quarter.
Brands such as SPAM, SKIPPY, Hormel chili, Hormel Black Label, Applegate, Hormel pepperoni, Lloyd Hormel fully cooked entrees and Justin's all delivered very strong growth.
Most encouraging was the sales growth we saw from the Jennie-O brand every major retail category, including Jennie-O lean ground, turkey burgers, Oven Ready items, Bacon and marinated meats grew.
The Jennie-O brand continues to resonate with consumers and the efforts we have made on gaining back customer distribution are paying off.
Our e-commerce business continues to be a bright spot as it almost doubled in the last 12-weeks according to IRI.
We grew share in several key categories and have a high level of momentum in online grocery pickup, delivery and direct-to-consumer.
Our deli channel sales increased 7% this quarter; Columbus branded products led the way with exceptional growth from grab-and-go items.
The opening of our new plant in Omaha this quarter, which produces Columbus charcuterie products will provide much needed capacity for this business.
While the Columbus brand was the clear leader for us this quarter in the deli, our team generated growth in every deli segment they compete in, including grab-and-go, prepared foods, behind-the-glass and fresh sliced deli meats.
Our party tray business also grew volume in sales over the holiday season, despite fewer group gatherings, a testament to our team's ability to keep this brand relevance.
We saw a positive signs of recovery in foodservice this quarter even as the business declined 17%, compared to last year, due to the continued impacts of the pandemic on the industry.
We continue to see strength in our business with an important segments such as Pizzeria, QSRs and convenience stores.
Our direct sales force also made excellent progress pivoting to high growth areas, such as commissary's and ghost kitchens as they secured new distribution with both distributors and operators.
Turning to the segments.
Grocery Products delivered very impressive results this quarter.
We saw top line strength across many of our brands, including SPAM, SKIPPY, Hormel Compleats and Herdez, which led to volume increases of 4% and the sales increases of 7%.
We implemented a price increase for our SKIPPY business this quarter, once again demonstrating our ability to price in our categories.
We are also encouraged with the performance of our recent innovative new items, including SKIPPY Squeeze, SKIPPY No Sugar and SKIPPY with added protein spreads.
Our MegaMex joint venture had a strong performance this quarter as well, but equity and earnings increasing by 31%.
This growth was led by our retail brands, such as Wholly, Herdez, CHI-CHI'S and La Victoria.
In addition to the MegaMex results, the 35% increase in segment profit was driven by higher sales and a favorable mix.
Refrigerated Foods volume declined 2% and sales increased 1%.
Our retail and deli teams overcame steep year-over-year declines in our foodservice business to deliver growth for our value-added business.
Applegate had a particularly strong quarter with growth fueled by both category momentum and share gains across core categories such as Frozen Branded Chicken, Breakfast Sausage, Bacon and Hot Dogs.
I continue to be optimistic about the momentum we are building in the Applegate business.
We also delivered excellent results in our Hormel pepperoni business both in foodservice and retail.
Our teams continue to optimize the brand by focusing on our core products in the category and simultaneously leaning into our new Cup N' Crisp innovation.
We plan to maintain our advertising efforts for Hormel pepperoni to ensure we retain the households we gained during the initial pandemic buying.
Refrigerated food segment profit declined by 16%, due to lower foodservice sales, a significant decline in commodity, profitability and increased supply chain expenses due to COVID-19, profitability was also impacted by one-time start-up expenses related to our new plant in Omaha.
Jennie-O volume decreased 2% and the sales increased 1%.
We saw exceptionally strong retail and whole bird sales, which overcame significant declines in the foodservice and commodity.
Our retail business grew double-digits this quarter with growth coming from almost every category in which we compete.
We have taken price increases across our portfolio and expect those to be effective late in the second quarter.
Whole bird volumes increased by strong double-digits, due to a very positive holiday season.
Our foodservice business was impacted by lower K through 12 and college and university business in addition to continued weakness in the foodservice industry.
Jennie-O Turkey Store segment profit declined 30%, lower foodservice sales increased supply chain costs related to the COVID-19 pandemic and higher freight expenses were key drivers to the lower profitability.
Grain prices increased significantly during the quarter, but only had a modest effect on earnings.
We expect the primary impact of higher grain prices to affect the coming quarters.
In addition the pricing action, we have taken additional actions to manage higher corn and soybean meal costs.
International volume decreased 5%, sales increased 13% and segment profit increased 61%.
Once again the strong sales and earnings performance was led by our retail and foodservice business in China.
SPAM, SKIPPY and beef jerky were all key drivers to growth in China, we remain very positive about the short and long-term prospects of our China business.
We also saw a strong branded exports for brands like SKIPPY and SPAM.
Similar to prior quarters, our affiliated businesses in the Philippines, South Korea and Europe continue to show high levels of growth.
Looking to the balance of the year, I'm increasingly optimistic about delivering sales and earnings growth.
As such we are establishing fiscal 2021 guidance for the full-year at $1.70 to $1.82 per share.
As a reminder this guidance range does not include the impact of the acquisition of Planters.
Similar to prior quarters, we believe there are three key drivers to our near-term and long-term performance.
Retail dynamics, the recovery in the foodservice industry and the performance of our supply chain.
Our retail deli and International teams need to maintain their momentum and outperform their respective categories.
Our brands continue to gain new households and our repeat rates remain very strong.
The depth of repeat, those consumers purchasing our brands multiple times is incredibly positive, but almost all new buyers for our brands making two or more repeat purchases during the first quarter.
As a whole, our brands continue to make household penetration gains with brands like Herdez, La Victoria and Columbus increasing household penetration by over 20%.
For the foodservice channel, we are optimistic about our foodservice recovery and confident in our ability to gain share during the recovery.
During the pandemic operators have been looking for products to simplify their food preparation, save time and minimize labor, all while preserving the flexibility to add their own unique touch to a menu item.
Our direct sales force continues to meet their needs with products like Hormel Fire Braised meats, Sadler's authentic smoke barbecue and Hormel, Bacon 1.
The recent trends we are seeing in our foodservice businesses are positive.
We have been able to react quickly to increase demand as cities and states have these dining restrictions, allowing patrons to return to their favorite restaurants.
We also anticipate our non-commercial business such as K through 12 schools, colleges and universities and healthcare to recover as the pandemic subsides.
The most encouraging signs we are seeing are in our supply chain.
We made excellent progress on increasing capacity to meet the high levels of demand from our customers.
Steady week-over-week improvements, lower levels of absenteeism, new capacity and a continued vaccine rollout are all reasons we have a positive outlook.
Our supply chain team hit two major milestones this quarter, with the opening of our new dry sausage production facility in Omaha, Nebraska and the opening of our pizza toppings expansion at Burke.
Both projects were on time and on budget, which is truly amazing considering both projects were constructed primarily during the pandemic.
Our plant teams have made progress on labor availability and in almost every location, our labor situation has improved.
We expect that trend to continue into the second quarter and beyond, as the vaccine becomes widely available for our team members.
We now have a higher level of visibility into the coming quarters and remain confident in our team's ability to deliver our sales and earnings guidance this year.
Record sales for the first quarter were $2.5 billion, an increase of 3%.
COVID-related direct expenses of $15 million were the primary driver to pre-tax earnings declining $13 million or 5%.
Absent the COVID expenses pre-tax earnings would have increased; total COVID expenses have started to decline from the prior quarterly run rate of $20 million.
This was driven by higher volumes through our production facilities and improved efficiencies in our logistics network.
Earnings per share for the first quarter was $0.41, compared to $0.45 last year.
On an after-tax basis, first quarter results reflected approximately $0.04 per share in incremental COVID-related costs and higher tax expense.
SG&A, excluding advertising was 6.6% of sales, down slightly, compared to the prior year.
Advertising spend for the quarter was $34 million, compared to $35 million last year.
We continue to invest in our leading brands including SPAM, SKIPPY, Hormel pepperoni, Black Label and Jennie-O.
Operating margins for the quarter were 10.9%, compared to 11.8% last year.
The decline was driven by COVID-related expenses and a continued to impact from lower foodservice earnings.
Unallocated expenses included deferred compensation expenses related to tax settlement and deal fees.
Our effective tax rate for the quarter was 19.7% last year's rate of 16.3% was affected by the large volume of stock options exercised in the quarter.
Excluding the impact from the Planters acquisition, we expect the full-year tax rate to be between 20% and 21.5%.
Cash from operations was $206 million during the quarter, a 9% increase.
Even with record sales inventory levels continue to gradually improve throughout the quarter, due to improvements in operations, labor availability, internal capacity expansions and increased use of strategic manufacturing partners.
We expect inventories to continue to build throughout the second quarter.
There is a risk for inflationary pressure on freight expense, both domestically and internationally.
However, we expect improved efficiency factors to offset some of the higher freight costs.
We paid our 370th consecutive quarterly dividend effective February 16th at an annual rate of $0.98, a 5% increase over the prior year.
During the quarter, the company repurchased 200,000 shares for $9 million.
Capital expenditures were $40 million in the quarter, we opened the pizza topping expansion of Burke and the new dry sausage facility in Omaha.
Work is also under way to expand our pepperoni capacity.
The Company's target for the capital expenditures in 2021 is $260 million.
Last Thursday, we announced the definitive agreement to acquire the Planters snack nut portfolio for an effective purchase price of $2.79 billion.
The transaction was structured as an asset purchase and included a $560 million tax benefit.
The adjusted 2020 EBITDA multiple on the effective purchase price of $2.79 billion was 12.5 times.
This acquisition is financially attractive, our disciplined approach to valuation allowed us to secure our leading brand at a multiple below the industry average, take advantage of historically low rates, increase our company sales by 10%, improve the profitability of the portfolio with accretive margins and responsibly leverage our balance sheet.
We expect to finance the transaction with cash on hand and a combination of long-term and short-term debt.
We will be able to borrow the funds at approximately 1.5%, and expect to be able to significantly deleverage the debt in 18 to 24 months.
We are targeting a 1.5 times leverage by 2023, and are very focused on retaining a strong investment-grade rating.
The cash flows from our existing business along with Planters allows us to maintain our long-term capital allocation strategy.
We will continue to prioritize returning cash to shareholders in the form of annual dividend growth.
Industry operating efficiencies, labor availability and production levels continue to improve during the first quarter, driving less volatility in the hog market, compared to the back half of 2020.
Hog weights are currently at historically high levels, which has led to balanced market conditions.
In 2021, the USDA is projecting pork production to increase 1%.
With an expected recovery in the foodservice industry and higher grain prices for the balance of the year, we anticipate hog cost to increase.
Our balanced mix of hog and pork supply contracts will help us manage the risk of higher prices.
The USDA composite cut out was in line with last year during the first quarter.
Recently, we have seen strength in the cutout supported by strong demand for pork domestically and internationally.
We continue to monitor export demand and ASF in China, Southeast Asia and Europe.
ASF continues to be a risk in the pork industry.
We have seen the disease could be successfully managed in areas with modern agricultural practices.
We expect higher prices for pork with less volatility than last year.
The strength of our brands and balanced approach to procurement, continue to be a competitive advantage.
Pork trim markets are expected to remain higher during the second quarter of 2021 and declined in the back half, as labor availability and processing plants improves.
Beef trim prices are expected to be lower in 2021.
We anticipate belly prices to be volatile in the near-term, driven by strong demand and foodservice industry growth.
Strong Chinese demand and drought conditions in South America continue to generate higher grain prices, which is expected to negatively impact Jennie-O Turkey Store.
Like the pork industry, we are closely watching the fundamentals for grain.
The primary factor, we are watching our global demand, planting intentions for the coming season and weather conditions in South America.
We managed grain costs through a combination of spot buying, derivatives and adjusting feed formulas.
Additionally, we have announced pricing action across all Jennie-O products to protect our profitability.
We are prepared to take additional actions as conditions change.
Fundamentals in the Turkey industry remain mixed, excess poult placements and cold storage are below year ago levels, while prices or commodity breast and thigh meat remain depressed, poult placements have been declining recently, which will likely lead to lower levels of supply.
Because the foodservice industry is a key outlook for breast meat as the foodservice industry recovers breast meat pricing is expected to improve.
We are finalizing the implementation plans for the Planters business.
We will have the HR and Payroll functions integrated by the closing date.
The finance and supply chain will be fully implemented within one year of closing.

user
qtrly net sales of $2.5 billion, up 3%.
qtrly diluted earnings per share of $0.41.
sees fy earnings per share $1.70 to $1.82.
qtrly grocery products volume up 4%.
qtrly grocery products net sales up 7%.
qtrly jennie-o turkey store volume down 2%.
qtrly jennie-o turkey store net sales up 1%.
hormel foods - international segment is poised to have a record year led by continued strength in china business, branded exports, global partnerships.
expect continued improvement throughout supply chain as labor availability improves and pandemic-related expenses begin to subside.
expect a recovery in foodservice business, given acceleration in shipments during recent weeks.
qtrly international & other volume down 5%.
qtrly international & other net sales up 13%.
continued escalation in grain prices will require additional actions.
qtrly international & other volume down 5% and net sales up 13%.

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