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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 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.
Once again this quarter, I want to recognize the heroic work of our production team members.
This team deserves much of the credit for our record sales results this quarter as they continued working to produce safe high-quality food for millions of consumers and customers.
Our number one priority has been to keep our team members safe and our cross-functional COVID-19 leadership team is ensuring we are on the leading edge of the country's vaccination efforts.
To date, we have fully vaccinated over 51% of our domestic workforce, which is well ahead of the country's vaccination rate.
We are encouraged by the rapid decline in cases in our communities.
From a top-line perspective, our balanced business model has again proven to be a winning formula as our team delivered record sales for the second quarter and first half.
In total, sales for the quarter increased 8% compared to last year, and the sales increased over 5% for the first half of the year.
A key driver of our sales performance is the rebound in our foodservice business.
As expected our foodservice team experienced a strong recovery and took numerous actions to properly position our organization to capitalize on the industry recovery.
For the quarter, foodservice sales increased 28%.
This reflects an increase of 1% over 2019 pre-pandemic levels.
This is a significant accomplishment, especially knowing where the industry was just a few short months ago.
Since the beginning of the pandemic, our foodservice teams have been doing their part to support the industry.
Within days of the crisis, we worked closely with our distributor and operator partners to assist their businesses in many different ways; whether it was a rebate program to offset food costs, extending payment leniency, helping adjust to the new takeout delivery and pickup environment or simply being available to personally check in with the restaurant tour to see how they're doing.
Our confidence in the industry recovery never wavered.
We know these actions benefited our distributor and operator partners and are playing a part in our outperformance of the broader industry trends.
During this difficult labor environment, our experienced and tenured direct sales force is helping operators meet their accelerating demand with products that simplify their food preparation, save time and minimize labor, all while preserving the flexibility to add their own unique touch to a menu item.
Products like Hormel Fire Braised meats, Sadler's authentic smoke barbecue, Fontanini authentic Italian meat, Hormel Bacon 1 fully cooked bacon, Wholly Guacamole and Jennie-O Turkey are uniquely positioned to meet this need.
The brightest spot in our foodservice portfolio has been our pizza toppings business.
Prior to the pandemic, we capitalized on the continued growth in this category, especially for premium products and invested heavily in capacity to meet future demand.
We've also been investing in plant-based offerings and are seeing growth from our plant-based pepperoni and crumbles products.
We are excited to leverage our expertise in the pizza toppings category to drive growth in plant-based toppings.
With our new capacity expansion effort and with additional pepperoni capacity set to open at the beginning of fiscal 2022, we are set up nicely to meet the consistent growth we have seen in this space.
With the foodservice industry recovery well under way, we will continue to strengthen our relationships with our valued partners, invest in our direct sales team and support the industry's return to growth with innovative, convenience and flavorful product solutions.
In addition to foodservice growth, our retail and deli businesses also remained healthy with demand elevated compared to pre-pandemic levels.
Total retail sales this quarter were flat to last year as we lapped the months when consumers were stocking their pantries in anticipation of the pandemic.
Sales finished up 16% compared to the second quarter of 2019.
And we continued to see strength from our leading brands such as SPAM, Applegate, Jennie-O, Black Label, Herdez and Wholly.
As a reminder, we experienced an immediate and sustained demand surge for our shelf-stable products in the Grocery Products segment at the onset of the pandemic.
The second wave of demand that impacted our perishable and refrigerated items happened weeks later in the third fiscal quarter.
Sales in the deli channel increased 4% this quarter and are up 9% over pre-pandemic levels.
Hormel Gatherings party trays delivered strong growth as consumers started to spend more time with family and friends, and consequently, are purchasing more products to entertain their guests.
The Columbus brand remains a cornerstone for our deli business, and it is now benefiting from the opening of our new plant in Omaha, which is providing much needed capacity.
Columbus is a leader in charcuterie, and we now have the capacity to continue expanding distribution.
Across the retail and deli space, our consumer takeaway metrics continue to be positive according to IRI.
Many of our brands have made large gains in household penetration, overall buy rates are improving and we are seeing an expansion in cross purchasing across our brands.
E-commerce sales grew double-digits in the last 12 weeks, according to IRI, and we are gaining share in important categories.
We will continue to increase our investment in this important channel.
Throughout the quarter, our supply chain continued to improve as we were able to increase production levels through a combination of gaining efficiencies, increasing capacities and leveraging our strategic supply chain partners.
Another area we have made great strides is in our distribution network.
Over the last year, we have opened a new Grocery Products distribution center, and, in recent weeks, have opened a Refrigerated distribution center serving the West Coast.
These strategic investments will reduce overall freight miles and costs, improve our customer service levels, support growth for our value-added businesses and reduce greenhouse emissions.
From a bottom-line perspective, operating income showed a slight decline.
We saw raw material and feed prices rapidly increase throughout the quarter.
We have taken pricing actions in many categories, but did not see the full benefit of these actions during the quarter.
As we have previously discussed, in volatile market conditions, pricing will lag the markets, which will shift profits to subsequent quarters.
Net earnings and diluted earnings per share were flat to last year.
A higher tax rate negatively impacted earnings by $0.01 per share compared to last year.
Turning to the segments.
Refrigerated Foods volume increased 3% and sales increased 17%, with growth coming from almost every division.
Value added sales increased 18%, driven by a significant recovery in the foodservice businesses.
As anticipated, we saw a rapid increase in foodservice demand as the quarter progressed.
Almost all categories within the foodservice grew sales, led by our pizza toppings portfolio and brands such as Fontanini and Bacon 1.
In fact, pepperoni, pizza toppings, Bacon 1 and Fontanini authentic Italian meats all showed growth compared to the second quarter of 2019.
We also experienced a recovery in the premium breakfast portfolio, with growth from our Old Smokehouse brand.
Additionally, we saw excellent growth from our premium prepared proteins, which include brands such as Austin Blues, Fire Braised, Cafe H and Sadler's.
These items are key to our pre-strategy, items that are pre-marinated, pre-cooked, pre-sliced and fully prepared.
As the industry recovery accelerates into the summer and labor remains the predominant challenge for most operators, our line of products offer convenient, safe, versatile and flavorful solutions.
Our retail and deli teams delivered a strong quarter on the top line, with growth coming from products such as Black Label bacon, Hormel Gatherings, Applegate, Lloyd's Barbeque, Hormel Pepperoni and Columbus prepared foods items.
Refrigerated Foods segment profit increased 32% due to higher foodservice sales, higher retail fresh pork profitability and decreased operational expenses due to abating COVID-19 cost pressures.
International delivered its fifth consecutive quarter of record earnings growth, with sales increasing 17% and segment profit increasing 6%.
The performance of the team in China remains impressive.
Foodservice volumes have recovered to pre-pandemic levels, driven by growth from SKIPPY, pizza toppings, and bacon items.
Retail demand for the SPAM and SKIPPY brands has also been outstanding.
The Company's innovative offerings including beef jerky, SKIPPY snacking items and two new SPAM varieties are providing additional avenues for growth, and we remain confident in the long-term prospects for our China business.
Branded exports also grew with growth coming from the SKIPPY and SPAM brands, higher foodservice sales and improved margins on the fresh pork items.
In addition, our partners in the Philippines, South Korea and Europe continued to experience elevated demand for shelf-stable products.
Grocery Products results were strong given the difficult comparison to last year due to the extremely high levels of demand experienced at the onset of the pandemic.
Even though volume declined 14%, sales declined 8% and segment profit declined 23%, we are encouraged by the segment's performance as we have seen sustained consumer demand for many of our brands compared to pre-pandemic levels.
Sales for center store brands such as SPAM, Hormel Chili, Compleats and Mary Kitchen hash were all over 20% higher compared to our second quarter of 2019.
We will continue to support our leading brands including SKIPPY, SPAM, Compleats, Herdez, Wholly, Justin's and Hormel Chili, and we're resuming promotional activity as inventory levels normalize.
Our MegaMex joint venture performed well, as equity and earnings increased 26%.
Both Herdez and Wholly brands grew as consumers looked for authentic and convenient Mexican products to enhance their at-home eating occasions.
The Herdez brand continues to outperform the salsa category.
This brand has grown households by 3 million since the start of the pandemic and has introduced industry leading innovation to the marketplace in recent years.
Following the highly successful performance of Herdez's Guacamole Salsa, we continue to expand distribution and grow share with two new product lines: Herdez Taqueria Street Sauces and Herdez Salsa Cremosas.
Recently, Herdez also entered the hot sauce market with the introduction of Herdez Avocado Hot Sauce, another versatile offering that can enhance any meal.
The Wholly brand had a strong quarter as well, as it continues to target consumers looking for convenient solutions to enjoy avocado offerings.
Our recent innovations, including Wholly Smashed and Wholly Diced Avocado products solve for that consumer need.
And as we saw across many of our refrigerated foodservice businesses, demand for avocado products in the channel started to return during the quarter.
Jennie-O volume decreased 3% and sales increased 2%, a recovery in the foodservice business and higher whole bird sales drove the sales increase.
Foodservice volumes were up double digits compared to last year.
Demand for Jennie-O retail products such as Lean Ground Turkey remained above pre-pandemic levels.
Jennie-O Turkey Store segment profit declined 54% due to the impact from higher feed costs.
Grain prices continued to increase significantly during the quarter, while pricing action had yet to be fully reflected in the marketplace.
Jim Sheehan will provide further commentary on the actions we have taken to manage higher corn and soybean meal costs.
Looking to the balance of the year, we are increasing our full year sales guidance range to $10.2 billion to $10.8 billion, and reaffirming our earnings per share guidance range of $1.70 to $1.82 per share.
As a reminder, this guidance range does not include the estimated impact of the pending acquisition of the Planters snacks nuts business.
Our diversified and balanced business model gives us confidence we can perform well in many different economic scenarios and market conditions.
We have a very positive outlook on the foodservice business as we head into the second half of the year.
We are well positioned from an inventory and capacity standpoint to meet the demand from our distributor partners and operators, and are confident in our ability to gain share throughout the recovery.
Additionally, we are increasingly confident that K-12 schools and colleges and universities will open and operate in a more traditional manner this fall.
This should benefit both Refrigerated Foods and Jennie-O Turkey Store.
We continue to see elevated demand in the retail, deli and international channels.
We expect to further benefit from pricing actions, increased capacities on key product lines and continued improvements in our supply chain.
This year, we have seen rapid increases in key input costs across our businesses, and we expect to operate in a high-cost environment for the remainder of the year.
Our experienced management team has a proven ability to navigate and grow our business in volatile and inflationary market conditions.
And once again, we will be leveraging our direct sales force to partner with our customers to mutually grow our businesses.
As a reminder, our operations were heavily impacted by plant shutdowns, supply shortages and lower production throughput caused by the effects of the pandemic in the back half of fiscal 2020.
This ultimately led to lower levels of inventory, which negatively affected the third and fourth quarters.
Through the strategic actions we have taken to improve all facets of our operations and based on our record first half performance, we expect to benefit from more normalized operations in the back half of fiscal 2021.
I am confident in our ability to continue growing and I'm looking forward to closing the acquisition of Planters next month.
Record sales for the second quarter were $2.6 billion, an increase of 8%.
First half sales increased 5% to $5.1 billion, also a record.
Pre-tax earnings increased 2% for the quarter compared to last year.
Diluted earnings per share for the quarter was $0.42 per share, flat to last year.
Second quarter results reflected approximately $0.01 per share in incremental COVID-related costs and $0.01 in higher tax expense.
SG&A, excluding advertising, was 6.5% of sales, down slightly to last year.
Advertising spend for the quarter was $31 million.
Operating margins for the quarter were 11.1% compared to 12.1% last year.
Higher raw material and feed costs negatively impacted margins, as pricing lagged input cost increases.
We have taken numerous pricing actions across the portfolio to protect profitability.
The actions will take place early in the third quarter with additional pricing actions likely.
COVID-related expenses were $6 million.
The impact of COVID expenses continued to decline.
Net unallocated expenses decreased due to higher investment income.
The effective tax rate for the quarter was 22.1% compared to 20.6% last year.
Excluding the impact from the Planters acquisition, we estimate the full year tax rate to be between 20% and 21.5%.
We built inventory during the quarter in preparation for higher demand and to support continued growth for the remainder of the year.
Our strategic action to build inventory was the primary driver of lower operating cash flow during the quarter.
We paid our 371st consecutive quarterly dividend, effective May 17th, at an annual rate of $0.98, a 5% increase over the prior year.
Share repurchases were minimal during the quarter.
Capital expenditures were $45 million in the quarter.
The Company's target for capital expenditures in 2021 is $260 million.
During the second quarter, we saw dramatic increases in pork and hog prices.
USDA composite cutout prices since January have increased more than $30, with all primals contributing to the increase.
Key inputs such as bellies and trim increased 57% and 76%, respectively, during the quarter.
Pork exports also set an all-time record in March due to African swine fever outbreaks in China, Southeast Asia and Europe.
We anticipate strength in pork markets due to continued export demand and a foodservice recovery domestically.
The USDA is now projecting pork production for the year to be slightly lower than 2020.
Industry operating efficiencies are expected to improve as COVID pressures abate; however, labor availability, tighter hog supplies and reductions in the sow herd [Phonetic] support higher markets.
Our balanced approach to hog import procurement mitigated cost volatility during the quarter.
In high-cost and volatile environment, the strength of our leading brands and balanced approach to procurement continues to be a competitive advantage.
The guidance range assumes elevated and volatile market conditions for the balance of the year, with some moderation heading into the fall.
We expect hog price in the USDA composite cutout to remain well above year-ago levels due to strong domestic and export demand, along with tighter hog supplies.
We anticipate prices to peak during the summer and gradually decline in the fall, consistent with the seasonal increase in harvest.
Deli prices are projected to remain higher than last year in historical averages.
We anticipate markets to stabilize near the current levels, but volatility due to lower cold storage levels and strong demand in the foodservice channel could cause inflationary pressure.
Pork trim prices are expected to moderate from the current levels, but labor shortages across the industry remains a key risk to trim prices as limited boning capacity directly impacts trim supply and pricing.
Due to the higher beef harvest levels in the summer months, beef prices are anticipated to be lower in the back half of 2020.
In response to global supply and demand imbalances in corn and soybean meal, we have taken strategic hedges to fully cover grain costs for the remainder of the year.
The positions also provide a benefit if markets decline.
These hedges, coupled with the previously announced pricing actions, are expected to protect Jennie-O's profitability.
Turkey poult placements and egg sets have declined.
Inventory levels are lower compared to last year.
The tightening of supply has led to higher whole turkey and thigh meat markets.
We have also recently seen an increase in breast meat prices.
A recovery in the foodservice industry remains the key driver for higher prices for this important market.
We anticipate inflationary pressure on freight in the back half of the year.
The tactical action to optimize our distribution network with two new DCs combined with improvements in load efficiencies will help mitigate a portion of the increase.
We have obtained the required regulatory approvals for the acquisition of the Planters snack nut business.
The scheduled close date is in June.

user
hormel foods reaffirming fy earnings per share outlook range of $1.70 to $1.82 per share.
reaffirming our fy earnings per share guidance range of $1.70 to $1.82 per share.
qtrly net sales of $2.6 billion, up 8%.
qtrly diluted earnings per share of $0.42.
q2 refrigerated foods volume up 3%.
q2 refrigerated foods net sales up 17%.
qtrly volume of 1.2 billion lbs. , down 3%.

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