Good morning, ladies and gentlemen, and welcome to the Hormel Foods Corporation Fourth Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, November 29, 2023. 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 2023. We released results this morning before the market opened around 6:30 a.m. Eastern Time. If you did not receive a copy of the release, you can find it on our website, hormelfoods.com, under the Investors section. On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; Jacinth Smiley, Executive Vice President and Chief Financial Officer; and Deanna Brady, Executive Vice President of the Retail segment. Jim will review the company's fiscal 2023 fourth quarter and full year results and provide a perspective on our outlook for fiscal 2024. Jacinth will then provide detailed financial results and further commentary on our outlook. Deanna will join Jim and Jacinth for the Q&A portion of the call. The line will be open for questions following Jacinth'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. At the conclusion of this morning's call, a webcast replay will be posted to our Investor website and archive for one year. Before we get started this morning, 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 Investor section. Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance. The presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Non-GAAP figures adjust for the impact of an adverse arbitration ruling, non-cash impairment charges, and costs associated with the company's transformation and modernization initiative. These non-GAAP measures include adjusted operating income, adjusted operating margin, adjusted selling, general and administrative expenses as a percent of sales, adjusted diluted net earnings per share, and net debt to EBITDA. Discussion on non-GAAP information and reconciliation to the GAAP results are detailed in our press release and earnings supplement, which can be accessed from our corporate or Investor website. I will now turn the call over to Jim Snee.

Thank you, David. Good morning, everyone. Fiscal 2023 was a challenging year for the organization as we navigated an environment that remained volatile, complex and high cost; regardless, our results did not meet our expectations. We still achieved our second consecutive year of net sales in excess of $12 billion, continued to reinvest in the growth of our leading brands, drove strong operating cash flows of $1 billion, returned a record amount of cash to our shareholders in the form of dividends, and achieved the safest year in our company's history. We also made further progress on our evolution as a global branded food company, including the implementation of our Go Forward operating model and the integration of Jennie-O Turkey Store. As we turn the page to fiscal 2024, there is urgency across the organization to improve our business. And as we outlined at our recent Investor Day, we have identified a clear, realistic and achievable path to return the business to its historical earnings trajectory. Our focus going forward is clear: first, restore sustainable and dependable bottom-line growth from our current business; second, drive savings by minimizing complexity and reducing costs; and third, capture incremental value from our investments. Our first milestone will be our performance in fiscal 2024, which is expected to be an investment year for the company. As with any year, success will be predicated on how we execute against our strategy. First, we must drive focus and growth in our Retail business, our nearly $8 billion powerhouse of leading brands, talented people and strong capabilities. Our Retail team has made tremendous progress implementing the Go Forward structure, which involved combining seven retail businesses and standing up our Brand Fuel center of excellence. Importantly, the Retail team now operates with a single vision and clear strategic…

Thank you, Jim. Good morning, everyone. Full year net sales were $12.1 billion, the second highest net sales achievement in our history. We also delivered $2 billion in gross profit for the year. Full year selling, general and administrative expenses increased compared to last year primarily due to an adverse arbitration ruling. On an adjusted basis, selling, general and administrative expenses as a percent of net sales finished comparable to the prior year at 7.1%. Advertising investments for the fiscal 2023 year were $160 million compared to $157 million last year. We have planned another increase in advertising investments in fiscal 2024 as we continue to support our leading brands in the marketplace. For fiscal 2023, equity in earnings of affiliates increased due to significantly higher results from MegaMex Foods. Operating income for fiscal 2023 was $1.1 billion, and adjusted operating income was $1.2 billion. Operating margin and adjusted operating margins were 8.9% and 9.8%, respectively. The tax rate for fiscal 2023 was 21.8%, marginally higher than last year. The effective rate for fiscal 2024 is expected to be 21% to 23%. For the full year, diluted net earnings per share were $1.45. Excluding the impacts of an adverse arbitration ruling, non-cash impairments, and investments in our transformation and monetization initiative, adjusted diluted net earnings per share were $1.61. We remain committed to dividend growth, investing in our business and maintaining an investment-grade rating. Our consistent cash flows of more than $1 billion in fiscal 2023 and a disciplined financial strategy directly support these commitments. In fiscal 2023, we returned a record $593 million to our shareholders in the form of dividends, including payment of our 381st consecutive quarterly dividend effective November 15th. We also recently announced an increase in the annual dividend of 3% to $1.13 per share for…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Adam Samuelson from Goldman Sachs. Please go ahead.

Yes. Thank you. Good morning, everyone.

Good morning, Adam.

Hi. Good morning. So, Jim, there's a tremendous amount of detail in the outlook. I was hoping first to, if you could help maybe just frame a little bit more clearly kind of the high- and low-end of the guidance range, which is quite wide and quite wide relative to the sales outlook which is fairly narrow. So help us, first, maybe understand kind of what happens in the market, in the business, in the external environment that gets to the high-end of the range relative to the low-end of the range, which would be a pretty meaningful step down in operating earnings relative to what you did in fiscal '23, maybe to start.

Great. Yeah, thanks, Adam. I think, the best place to start is to remember that, I mean, our underlying portfolio here is showing growth. And as we called out in the remarks, there is a significant downturn in the turkey business, especially in Retail, with the biggest impact we expect in Q1 and Q4. More specifically to your question about how we think about the range, the range is consistent with what we've had in the past. And we take into account all of our traditional assumptions. But as we think about what could move us higher, better-than-expected volume mix, depending on what does happen with the turkey market, we've got this fall outbreak that just continues to escalate, that can certainly have an impact going forward. The other part is, as we think about the work that's underway already for some of our savings initiatives, our ability to over deliver there. On the flip side, the same holds true on turkey markets, right? If we continue to see some of those declines, that would take us to the other side. And then, I think the part that we're all watching very closely is what's happening with some of the macro issues. In our business specifically, what's going to happen in our International business, the China recovery. When we think about price elasticities in Retail, how do those impact the business for 2024. And so, those are the things that we're thinking about and watching. But, again, when we roll this business up, we feel like we're in a good place that we've built in the right amount of risk when we think about the turkey business, the right amount of growth in the underlying portfolio which, from a retail perspective, absent turkey, we're seeing growth across almost all of the retail verticals. Foodservice will continue its strong performance. And we do expect International to start to recover after Q1. So hopefully, that gives you a little bit more clarity on that range.

That's helpful. And then, maybe just touching on the price elasticity point, because I think incremental pricing actions are going to -- prove to be increasingly uncommon in the food space moving into 2024. So, any additional color or description on where those are in magnitude or are they already in place in the market? And just to confirm that excluding turkey, you think your Retail volumes are growing in fiscal '24?

,:

Thanks. Good morning. As we think about pricing, we've had a lot of pricing over the last two years. A lot of that pricing has been reactive. And as we sit here today, we are in a position to be thinking about it proactively. First of all, we'll be leveraging our modernized revenue growth management practices and really taking a robust look at our flagship and our rising brands, which are designed to drive higher growth. We're investing in those brands for growth. And as we think about those brands and their position in the category, we'll be thinking about the COGS and whether the commodity inputs to those areas are suggesting an increase. We'll also be thinking about what is our long-term ambition and what are the needs for us to be able to invest into these brands to continue to grow. And so, some of that will require some consideration in regards to pricing so that we can have additional dollars for trade as well as advertising and innovation. As we think about elasticities, elasticities in our mind and what we're seeing are back to the pre-COVID levels. And so, it's important that we take those elasticities very seriously because they are moving, and moving pretty quickly. The other factors that we're thinking about is our position in the category. And definitely at this point, we'll be more targeted and surgical about our reaction. And then my final thing is, it doesn't have to be price as well. There's obviously trade. And trade, prior to COVID again, was pretty -- there's a lot of categories that are pretty inelastic. And so, there are dollars to be considered from a trade perspective that we can redirect those dollars into other tactics that will enable us to grow the business. Thanks.

Okay. I appreciate all that color. I'll pass it on. Thanks.

[Technical Difficulty] We're not receiving any response from Mr. Galbo's line. We're moving over to the next question. Our next question comes from the line of Rupesh Parikh from Oppenheimer.

Good morning. Thanks for taking my question. So, Jim, I just want to go back to your comments on, you talked about slowing consumer demand. So, just more color on what changes you're seeing in consumer behavior lately?

Yeah, I mean, Rupesh, I think the elasticities that Deanna is talking about, we know that we're back to pre-2019 level. So, we have to be thoughtful about how we're -- what levers and how we're pulling them, when we think about pricing, when we think about promotion, when we think about advertising, making sure that we are connecting with that consumer to drive the demand. But -- I mean, we also understand the amount of pricing that's gone into all these categories over the last couple of years, and it's been very, very significant. And I don't believe that consumers have fully digested all of the pricing that has still come through. So, I think it's a work in process. To Deanna's point about our positions in the category, that's really, really important as we think about those number one and number two positions that we hold. But through all of it, I think, again, the key takeaway here is this underlying portfolio, ex-turkey, in Retail especially, is planned to show volume growth in 2024.

Okay, great. And then maybe just one follow-up question. So, as you look at the environment for the coming year, how do you think about the promotional backdrop and competitive backdrop? Like, how do you think that evolves from here?

Yeah, Rupesh, I am going to let Deanna maybe elaborate on that a little more consistent with what she said the first time. So, why don't you go ahead, Deanna?

Good morning, Rupesh. Thanks, Jim. It's really category by category. We've got areas of the business that I'll say are somewhat consistent with where the promotional activity has been. We have other areas and other categories where it is increased. So, think of lunch meat, think of chicken, poultry areas, we're seeing more aggressive pricing and promotion activity, which is a little counterintuitive. When we think about it holistically though, from a promotional standpoint, there's an opportunity to reset promotions to ensure that we have the most effective promotions for the consumer, for the customer, and for our brands and business. And so that's really the evolution of our revenue growth management and our pricing teams working hand-to-hand with our customers and customer teams is really ensuring that we have the best and most productive promotions out there. That's really what's going to be impactful to helping drive the business for growth and not just continue to dissolve base business and lower the category both in volume and dollars. Thank you.

Great. Thank you. I'll pass it along.

Thank you. We have our next question coming from the line of Peter Galbo from Bank of America. Please go ahead, sir.

Hey, guys. Good morning. Can you hear me okay?

Yeah, we can hear you, Peter.

Great. Thanks. Maybe just one quick one clarification. Jacinth, did you give a net interest expense guide at all on the quarter -- I'm sorry, for the year? I think you have a bond that's going to come due in June that will need to maybe be [refied] (ph). So, maybe if you could just elaborate on that?

Yeah, good morning, Peter. So, yes, we do have that's coming due -- we have $950 million coming due here early June. We did not give guidance on the interest numbers. We certainly are working through and looking at options to pay down that debt. We haven't landed in a spot yet. What I can tell you though, we have definitely baked in higher interest expense in the numbers that we have guided to here for the year.

Okay, got it. That's helpful. And then just maybe, Jim, in the conversation around elasticity, I guess what's been more notable is just the impact from kind of the reduced SNAP payments maybe took a bit more time to start impacting volumes than others expected. Can you just talk about what you're seeing in real time? [indiscernible] I would think at least some exposure there, but what kind of the SNAP impact has been? And then maybe when you think it starts to get better or even modestly flip to a tailwind? Thanks very much.

Yeah, great. Thanks, Peter. I mean, I think the macro discussion has been filled with a lot of different information. When we think about some of the economic uncertainties that are showing up in these elasticities, we have talked about the reduction in SNAP, obviously, we're talking about interest rates being high, and as rates go up, that's taking more people's money, student loan mortgages, which all of that can lead to a depleted or lower position. And -- so, what's interesting for us is, I think, again, as we go through this category by category, we're seeing different behavior in these different categories. And so, we have some premium categories that continue to do very well. To your point, I think in the short term, some of the center store items have been pressured and there could be a link back to some of the reduced SNAP or other -- the macroeconomic issues. I think, again, to Deanna's point, our job is to be able to restore that growth and how do we do that by connecting with the consumer, reminding them of the value of our portfolio and making sure that we're pulling the right levers, whether it's promotion or advertising. Those are the things that we do. And so, we appreciate and understand that there might be some short-term impact, but we also know that we know how to navigate through this situation. And then, I would -- I don't know, Deanna, if there's anything that you would want to add to that conversation.

The only thing I would add is, it's very fluid. We're watching it all very closely. I was talking to Jim and Jacinth yesterday, and I commented that I didn't used to keep such a close eye on the four-week turns, but in this environment, four weeks actually are signaling things. An example is, the last four weeks in our convenient meals and protein category showed an improvement over what we saw in the fourth quarter in some of those areas where we felt that there was pullback from the consumer. And so, we're keeping a close watch really on all our categories, our consumer, and working closely with our customers to navigate the macro environment that the consumer is facing. Thanks.

Thank you.

Thank you. We have our next question coming from the line of Michael Lavery from Piper Sandler. Please go ahead.

Thank you. Good morning. I just wanted to touch on turkey again. It's obviously unusual seasonally to have some of the pricing pressure that you're seeing, but it seems maybe even a little bit more unexpected coupled with the resurgence in the avian flu. I guess, what does it take for pricing to recover? And then, you had mentioned how you've been factoring in the price pressure in your outlook. I guess maybe can you give us any sense of what conservatism is there? Or if pricing were to improve, how much of an impact that could have, and maybe just to -- try to put it in some context?

Yeah, I think, Michael, the question you're asking about what's it going to take. I think the turkey supply situation is in a unique situation right now because we had supply coming back. And obviously, as supply was coming back, there was a lot of work being done to restore the demand side of the business. And I don't think those were yet perfectly aligned. So, I do believe from a supply side, as we sit here today, the supply is adequate to support the business. Now, how long does it support the business? How long do some of these outbreaks last? I think that -- those are the uncertainties and the volatility that we talk about in this outlook. And so, as we do think about what we've built in to our outlook, we expect the turkey headwind across the enterprise to be about $0.10. And big part of that is it's a high volume business when we think about the whole turkey business. Again, you go from all-time high to dropping below a five-year average, and then, where does it go from here. And so, as we sit and -- as we sat and worked through it, that was our estimate in terms of the impact of the business. Now, I think the other part of this to remember is, our job is to continue to set this business up for success. And so, we continue to talk about right-sizing and optimizing this business' portfolio so that it does become more demand-driven, more value-added. Think about lean ground turkey, the work that we're doing on the Foodservice side of the business, work in the K-12 channel. So, I mean, all of that factors into our outlook as we're thinking about that in 2024.

Okay, that's really helpful color. And just to follow up on the kind of three-year plan, and I guess two parts to it. So, apologies if I might have missed this, but did you quantify what the expected savings level is over the three years? And then, of the $250 million spend you called out, can you give a split of what would be CapEx versus operating?

Yeah, so the last question, Michael, we'll probably have David follow up on the split for you. He can have those conversations. I do want to just take a step back here and just review the work that we've been doing and the path that we've been on and why this is so important to us. We go back to the One Supply Chain initiative back in 2018. That was more structural to provide consistency and one look across the entire enterprise. Now, we followed that up with Project Orion, which was to update, modernize our foundational ERP system across our support areas, HR, finance, and accounting. And we wanted to get to supply chain, which clearly we never got to because of COVID. And so, as now we're talking about this transformation and modernization, in a lot of ways, it's a continuation of really finishing the work that we've started. And so, the order-to-cash, end-to-end planning, those things were always in scope. But as we've progressed, what we've really been able to do is enhance the work that we want to do. And so, think, portfolio optimization is something that initially wasn't in scope for us. So that is an enhancement. And so, it is a continuation in some ways. It's an enhancement, and it's an acceleration. So, we've been doing a lot of this work and our goal now is to finish the job. And Jacinth, I guess, so any of the financial numbers that you want to add?

Yeah, no, certainly. Good morning. So, to add to what Jim has just stated here, we laid out a plan that gets us to $250 million over the three years in operating profit. And so, the way we are thinking about that, there is $200 million squarely focused on the supply chain component, which is around the plan, buy, make, move pieces of the workstreams that we're working through, and that will show up in a couple different places. Pieces may show up in our -- in COGS and other piece may definitely will show up through the -- and ultimately through the margin line, but really driving margin expansion for the business and getting us back to our margin profile and growth rate for the company. Then there is another $25 million of that, that is around the strategic value capture of the business. And then, more than $25 million or so is then the underlying core business that will grow over that period of time. So, all in all, over $25 million -- $250 million of expansion from an operating margin perspective. And it doesn't stop and we have that going out to 2026 is how we've messaged it. But what we should think about is that it doesn't just stop there, that the benefits will carry on beyond 2026.

We have our next question coming from the line of Ben Bienvenu from Stephens Inc. Please go ahead.

Yeah, thanks very much. I want to ask about the International segment. You talked about the weakness being more pronounced in the first quarter and then that you expect it to get better after that. Just curious about your assumptions that go into your confidence level around that business improving beyond the first quarter.

Yeah, thanks, Ben. There's a couple of things at play there that have us confident beyond Q1. The first thing is when we talk about some of the impact of the price elasticities on our branded business, we've done a lot of work to, again, pull the right levers to drive demand, and we've been able to have a positive impact. And so, we do believe that we'll see the branded export business pick up beyond Q1, and that'll carry us through the balance of the year. The second part is this improvement in our business in China. And so, it's early in 2024, but we are seeing some moderate improvement across Foodservice and Retail. But we're expecting that to accelerate as we move throughout the year. And then, the third thing really is there was a commodity impact to International this year. And so, as we continue to build demand on turkey and other pork items elsewhere, that's less that International will be exporting at lower margins. So, we will expect to see that improvement also as we progress throughout the year. So, really those three factors are what are leading to us to have that optimistic outlook beyond Q1.

Okay, great. Thanks very much. My second question is related to FY '25. You carved out the -- and quantified the $0.08 of non-recurring costs in 2024. Would you expect to be back to GAAP guidance in FY '25?

Good morning. So, the short answer to that is no. So, over this period, we're executing the transformation and modernization, which we have, at the moment, [bookend] (ph) until 2026. We will be in a non-GAAP reporting methodology during that period of time, primarily to just really give good visibility to the underlying core performance of our business and so that there is no confusion there, and then to be able to bucketize the savings that's being driven by the transformation and modernization.

Thank you. We have our next question come from the line of Ben Theurer from Barclays. Please go ahead.

Yeah. Good morning, Jim, Jacinth and Deanna. Thanks for taking my question. The first one is on Foodservice, actually, and just to understand how you can potentially further accelerate this business, given the strength you had throughout the year and again in the quarter. It's becoming a really important piece of the equation representing almost 50% of this year's profits. So, just wanted to understand what are like the opportunities you're seeing within Foodservice to really keep that growth momentum into 2024 as it helps offsetting some of the pressure on the Retail channels? That would be my first question.

Yeah, great. Good morning, Ben. The biggest thing as we head into '24 for Foodservice, a lot of the industry indicators are really stable, and in some cases, improving. And so, we think that for us, obviously, allows us to continue to run our business the way we always have, because it's well-positioned and I know it's a bit repetitive. But when we talk about the portfolio that we've designed to solve for operator challenges and limited labor, I mean, that continues to be in our wheelhouse and in our sweet spot. But then, also, thinking about innovation, in our Investor Day, we've talked about the innovation that the team is working on and introducing to the marketplace, continuing to find different categories to make a difference for those operators. The other thing is we've talked about the value-added capacity that we have in key categories such as bacon, pizza toppings, and turkey. And then, this continued evolution of the work that they're doing in the C-Stores with the addition of Planters and a more retail-focused portfolio there. And all of that's complemented by leaning into a world-class culinary team, innovation team, and really this food-forward mentality, if you will. So again, when you think about all the different pieces that can impact Foodservice, it really does remain well-positioned for growth in fiscal year 2024.

Okay, perfect. Thank you very much, Jim. And then, a quick follow-up for Jacinth on the guidance. Can you give us or share us your expectations as it relates to, one, CapEx, and two, just corporate expense in fiscal '24? How we should think about these two items?

Yeah, good morning. So, from a CapEx perspective, CapEx will be in-line with prior year, and we're expecting it to be around the $280 million mark, with some critical projects, including growth for Planters, our transformation and modernization initiative that that we're undertaking would be some of the core tenants of the major projects that we'll undertake for 2024. And then...

I would just interrupt there, Ben, I think we did talk about this in our Investor Day is that, we've got, as I just mentioned for Foodservice, available capacity. So, some of the CapEx investments that we've been making over the last several years, we won't have to make this year. And so, while the dollar amount remains the same, the mix of projects in there will be different.

Yeah. No, that's exactly right. And I think as we think about how we are spending those dollars, I know year-over-year -- and I've gotten the question before in terms of the expectation that we'll spend more, and to Jim's point, because we have made such an investment over the past few years, we do have that capacity. And now those assets that are currently working for us. From a corporate expense perspective, I mean, that will be a little bit -- that'll be increased definitely year-over-year. When we think about the labor agreement that we just entered into, we're continuing to invest as well in our people. So that will increase our SG&A. And then, from just overall benefits and compensation also takes us up year-over-year.

And the work that we're going to do to support our brands, Ben, when we think about advertising and continuing to support the brands in the marketplace, that remains high, high priority for us.

Thank you. This concludes our Q&A session. I'd now like to turn the call back over to Mr. Jim Snee for final closing comments.

Yes, thank you. And I want to thank all of you for joining us today. While 2023 didn't play out quite like we had planned, there were a lot of great accomplishments that will set this company up for future success. I remain confident we have the right strategy, brands, people, and culture to deliver growth well into the future. Again, thank you for joining us today, and I hope you all have a happy holiday season.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines. Have a lovely day.