Hormel Foods Corporation (NYSE:HRL) Q1 2024 Earnings Call Transcript
Hormel Foods Corporation (NYSE:HRL) Q1 2024 Earnings Call Transcript February 29, 2024
Hormel Foods Corporation beats earnings expectations. Reported EPS is $0.41, expectations were $0.34. Hormel Foods Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: [Call starts abruptly] Ladies and gentlemen and welcome to the Hormel Foods Corporation First Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, February 29, 2024. I would now like to turn the conference over to David Dahlstrom, Director of Investor Relations. Please go ahead.
David Dahlstrom: Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2024. We released our results this morning before the market opened around 6:30 a.m. Eastern Time. A copy of the release can be found 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 first quarter results and give a perspective on the rest of fiscal 2024. Jacinth will 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 1 question with 1 follow-up. If you have additional questions, you are welcome to rejoin the queue. At the conclusion of this morning's call, a webcast replay will be posted to our investor website and archived for 1 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 Investors section.
Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance on a consistent basis. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Non-GAAP figures adjust for the costs associated with the company's transformation and modernization initiative. These non-GAAP measures include adjusted operating income, adjusted operating margin, adjusted SG&A as a percent of net sales and adjusted diluted net earnings per share. Discussion on non-GAAP information and reconciliations to the GAAP results are detailed in our press release which can be accessed from our corporate or investor website.
I will now turn the call over to Jim Snee.
Jim Snee: Thank you, David. Good morning, everyone. We delivered strong results in the first quarter, led by better-than-expected performance in each of our segments and we have made good initial progress on our work to transform and modernize our company. We also achieved broad-based volume growth across our businesses, reflecting the strength of our leading brands, robust demand for our foodservice products and momentum in our Planters snack nuts business. These results demonstrate our team's meaningful execution against our strategic priorities, the value of our balanced business model and marked improvements in our supply chain. Our first quarter results were very encouraging. We grew volume in each of our segments with overall volume increasing 4%.
Net sales grew 1%, led by another excellent quarter from our foodservice team. Adjusted operating margin increased compared to last year reflecting higher gross profit and disciplined cost management. Diluted net earnings per share was in line with last year, while on an adjusted basis, we grew our bottom line and cash from operations nearly doubled compared to the first quarter of last year, a direct result of our actions to better manage working capital and grow earnings. We have a clear and achievable path to deliver earnings growth and improve our business over the next 3 years. And as we outlined at our recent Investor Day, we are focused on 3 enterprise objectives to accelerate profitable growth. First, restoring dependable operating income growth from our current businesses; second, driving savings through transformation and modernization; and third, capturing incremental value through our investments in the business.
Our first quarter results demonstrate the strides we are making in each of these key focus areas. First, our results indicate progress towards restoring sustainable and dependable bottom line growth with momentum across the portfolio. Taking a closer look by business, foodservice is off to another fast start. Volume and net sales growth were broad-based across numerous categories, led by Jennie-O Turkey and double-digit gains for products such as Hormel BACON 1 cooked Bacon, Pepperoni, Austin Blues Smoked Meats and Cafe H globally inspired proteins. Segment profit increased 10%, driven by volume, mix and favorable logistics expenses. We continue to operate from a position of strength in foodservice due to our long-standing relationships, differentiated product portfolio, innovative solutions and direct sales team.
This was again acknowledged by the industry in January when we received the Distributor's Choice Award for strategic partnership by the International Foodservice Distributor Association. This honor recognized our team as the most strategic partner across the foodservice landscape. We also delivered a solid quarter in the convenience store channel led by our Planters business. Volume was strong for our snacking business and convenience driven by positive takeaway for both the Planters and Corn Nuts brands. We expect our convenience store business will continue to be a growth catalyst in fiscal 2024, led by expanded distribution of our flavored cashews, innovation in corn nuts and better service levels on planters, peanuts and trail mix items.
We also plan to further leverage the momentum in our snack nuts business to increase placements of our other items across the convenient store footprint. Our International business is also off to a better-than-anticipated start to the year as volume and segment profit both increased compared to last year. Results this quarter were very encouraging, particularly given the challenging conditions the team faced in fiscal 2023. We remain confident the International business will further accelerate over the course of the year, driven by more normalized shipments of SPAM and easing of headwinds impacting our commodity exports and growth from our partnerships around the world. In our Retail segment, our leading brands, execution in the marketplace and recovery in Turkey supported volume growth for the quarter.
Demand was strong for many products, including Skippy peanut butter, Planter Snack Nuts, Wholly dips, Herdez and La Victoria salsas, refrigerated entrees and Hormel pepperoni which all grew volume and net sales during the quarter. Additionally, Sir Can-A data noted several positives for the quarter as we gained or maintained share across many of our products in key categories, including the SPAM family of products, Skippy peanut butter, Hormel Black Label Bacon, Jennie-O Ground Turkey, Hormel pepperoni, Planter snack nuts, Herdez salsas and sauces and Dinty Moore stew. While we expect our retail business to face incremental pressure from whole bird turkey dynamics and like many others in the industry, an uncertain consumer backdrop. Our team remains focused on winning with our consumers and our customers, better allocating our resources to drive profitable growth and improving the margin structure of the business.
Underpinning the strong starts from our businesses, was improvement across our supply chain as we reverse the inefficiencies and higher operating costs that we absorbed this time last year. Our supply chain improvements resulted in lower freight and warehousing expenses, lower distressed sales and higher investment income resulting from a 4-day reduction in our cash cycle. Finished goods inventory was down on both a volume and dollar basis at the end of the first quarter and total inventory was down almost 9% compared to last year. In addition to forward progress on inventory management, fill rates benefited from the increased efficiency and overall health of our one supply chain. First quarter retail and foodservice fill rates increased compared to both the prior quarter and prior year.
And our fill rates have surpassed 97% to begin the second quarter, marking the first time since March of 2020 that we have achieved this level of service. Turning to our second key strategic area, advancing our transformation and modernization initiative. This includes the areas of supply chain efficiency, portfolio optimization and data and analytics. We're in the early innings with these efforts but we are pleased with the progress our team has made thus far. Notably, within our planned work stream, we are implementing a new end-to-end planning process and are integrating new planning technology. In the buy work stream, we are realizing the benefits from our new procurement and productivity programs with further savings expected across many categories, such as logistics, warehousing and supplies.
Under the make work stream, we are standardizing our ways of working across the manufacturing network. We are also continuing to take actions to optimize our refrigerated and ambient distribution networks within our move work stream. We made progress on our total company effort to improve our portfolio. Identifying approximately 10% of the items to be optimized. Throughout the year, we expect to use our enhanced data and analytics capabilities to identify more opportunities to better our portfolio. And to support these specific work streams and the broader goals of the organization, we formed a data and analytics office focused on creating easy access to reliable and consistent technology, data and analytics. Executing our transformation and modernization initiative remains a critical piece to our projected growth over the next 3 years and I'm pleased with the team's early progress.
Moving on to the third key focus area, capturing value from our investments, where our progress was highlighted by the strong momentum in our Planter snack nuts business. In the first quarter, Planters volume and dollar share maintained positive momentum, while total points of distribution and household penetration grew. We also continue to support the brand via higher ROI advertising and an always-on strategy. Most recently, with the launch of the Planters Ah Nuts! campaign that went live in January. Innovation remains a point of focus for this business. One example is our flavored cashews line which is delivering against our key performance indicators and remains on track to achieve its plan for the year. Importantly, this product line continues to over-index with younger consumers which is driving new consumers and excitement to the Snack Nuts category.
Over the next few weeks, we will be launching additional innovation including a salt and vinegar line extension to our flavored cashews and a new-to-market offering, Planters Nut Duos which has the potential to be a significant contributor to the Snack Nuts category. We also continue to innovate with new varieties of Corn Nuts, including Loaded Taco Flavored corn nuts and Kickin' Dill Pickle which is expected to launch in time for summer. From a profitability perspective, we continue to put a heavy emphasis on redistributing our trade dollars to higher ROI promotions and channels, while simultaneously shifting mix toward innovation and premium nut varieties. These are just some of the high priority plans we have in place to keep the momentum going for our Planters Snack Nuts business in fiscal 2024 and beyond.
We continue to take actions as the category leader to support the Planters and Corn Nuts brands and drive growth for our business, the category and for our customers. In addition to the Planters business, we have many opportunities to capture incremental value from other investments and initiatives this year and into the future. This includes driving further benefits from the Jennie-O Turkey Store transformation, our go-forward initiative and the recent investments made in capacity and automation. While we realize that 1 quarter does not make a year and there remains significant work ahead, we are confident that we are on the right track to deliver on our commitment to improve our business and increase long-term shareholder returns. Now shifting to our outlook.
We are reaffirming our full year net sales and earnings expectations. From a top line perspective, we expect net sales growth of 1% to 3%. This continues to assume volume growth in key categories, higher brand support and innovation and our current assumptions for raw material input costs. In retail, we expect higher net sales across many of our verticals. Targeted retail pricing actions will be effective by the end of the second quarter and are expected to impact our results in the back half of the year. In foodservice, we expect broad volume growth similar to the first quarter, led by turkey, pepperoni and bacon. This volume growth, coupled with higher raw material input markets year-over-year should support net sales gains. We expect net sales increases in our international business to be driven by the branded export business led by refrigerated items, Skippy and SPAM and the retail and foodservice channels in China.
From a bottom line perspective, we are also reaffirming our diluted net earnings per share and adjusted diluted net earnings per share outlooks. Consistent with our initial outlook, we expect continued growth in foodservice. Improvement in our international business and benefits from innovation in retail. Our full year outlook also assumes higher salaries, normalized employee-related expenses and costs associated with planned investments in the business. Diluted net earnings per share and adjusted diluted net earnings per share are expected to decline year-over-year in the second quarter and grow in the back half of the year. At a high level, we are assuming our stronger-than-expected start to be partially offset by incremental earnings pressure coming from our whole bird turkey business.
Jacinth will provide further details on these assumptions in her remarks. Taking all these factors into account for the full year, we expect net sales growth of 1% to 3%. Diluted net earnings per share to be $1.43 to $1.57 and adjusted diluted net earnings per share to be $1.51 to $1.65. And we expect a benefit to net earnings from our transformation and modernization initiative. In closing, our strong start to the year reflects our team's ability to execute our clear and achievable plan. We remain focused on our strategic priorities and delivering on our commitment to improve our business and drive long-term shareholder returns. At this time, I will turn the call over to Jacinth Smiley to discuss detailed financial information related to the first quarter and additional color on key assumptions and our outlook.
Jacinth Smiley: Thank you, Jim. Good morning, everyone. We delivered strong results in the first quarter, led by better-than-expected performance in each of our business segments. During the first quarter, we grew volume 4% and across all of our segments. Net sales for the first quarter were $3 billion, a 1% increase compared to the previous year. Gross profit increased 3% driven by higher net sales and lower logistics expenses. Gross profit as a percentage of net sales increased to 17% compared to 16.7% last year and 16.1% in the fourth quarter. Both our retail and foodservice teams drove better margins quarter-over-quarter and compared to last year. First quarter SG&A increased 8%, reflecting incremental investment in our transformation and modernization initiative and higher employee-related expenses.
Adjusted SG&A as a percent of net sales was marginally higher compared to last year. Advertising investments are expected to be up significantly in the second quarter and increase for the full year. We are actively supporting our brands in the marketplace, including the SPAM, Planters and Hormel Chili brands. Equity in earnings of affiliates increased 3%, primarily due to the inclusion of minority interest in Garudafood and growth from our partnership in the Philippines. Operating income for the first quarter was $284 million and adjusted operating income was $295 million. Adjusted operating margin of 9.8% increased 10 basis points compared to the first quarter of last year. The effective tax rate was 23.4% compared to 22.6% for the previous year.
Our prior year effective tax rate benefited from the impact of certain discrete items and higher federal deductions. The effective tax rate for fiscal 2024 is expected to be between 21% and 23%. The net result of all these factors was diluted net earnings per share of $0.40 and adjusted diluted earnings per share of $0.41. Upside this past quarter compared to our expectations was driven by broad-based volume growth, strong results for all of our businesses, improvement across supply chain and below-the-line favorability. Turning to cash flow. Operating cash flow of $404 million increased 98% compared to last year. This was a direct result of our successful actions to rectify the inefficiencies caused by elevated inventory levels last year and underlying business growth.
Overall, we drove a 4-day reduction in our cash conversion cycle. We paid our 382nd consecutive quarterly dividend effective February 15 at an annual rate of $1.13 per share, an increase of 3%. We invested $47 million in capital projects during the first quarter, including investments in our Jennie-O Turkey store transformation. Our outlook for capital expenditures in 2024 remains at $280 million. We ended the first quarter with $982 million in cash and short-term investments and $3.3 billion of debt. We plan to utilize a combination of cash on hand and debt issued in the second quarter to pay our $950 million note due in June. We have accounted for a higher interest expense in our outlook and expect to remain within our stated goal of 1.5x to 2x net debt-to-EBITDA.
I would like to further highlight the progress we have been making on our transformation and modernization initiative which is expected to drive at least $200 million in operating income by 2026. Through the first quarter, we made great progress and remain on track to capture our full year savings target for fiscal 2024. The work has intensified in the second quarter with the expectation that savings capture will accelerate throughout the year. This year, we are highly confident in our ability to capture direct savings from our productivity programs which are targeting packaging, ingredients and other supply categories. Continued benefits from the work we have done lowering logistics expenses across our network, including lower contracted freight rates, optimized routes, increased truck weights and reduced reliance on third-party warehousing.
Benefits from lower distressed sales as we make improvements to our inventory management planning and manufacturing processes. Value derived from new capabilities and ways of working, including integrated business planning and from the implementation of our standardized and proprietary manufacturing system across our network and benefit from minimizing complexity and reducing costs through portfolio optimization. This is a truly exciting and important time for our company as we build toward our future. Transitioning to our outlook. We are reaffirming our full year net sales and earnings expectations. The supplement what Jim reviewed earlier, I will share some additional color on our assumptions for the rest of the year. From a pork perspective, our outlook remains unchanged.
The USDA is projecting modestly higher production and exports in 2024. Cold storage levels for pork continued to trend below last year and historical averages which we expect to be supportive of pork markets. We assumed full year pork input costs to be higher than last year and remain above 5-year averages. Specific to turkey, overall inventory levels have recovered despite lingering impacts from cases of HPAI in the fall and early winter. Barring a significant supply disruption this spring from additional outbreaks of HPAI, we are in a strong position to service our customers and attract new business opportunities. We made good progress regaining value-added Turkey distribution in the retail and foodservice channels during the first quarter and we expect this to continue for the rest of fiscal 2024.
On the commodity side of the business, whole bird turkey markets have stabilized below our initial forecast. Consequently, we have included in our outlook, incremental earnings pressure from lower-than-expected market pricing. We began absorbing this impact in the first quarter and expect continued pressure for the balance of the year. Net-net, we now expect approximately $0.15 of earnings headwinds from our Turkey business in fiscal 2024 which is an update to the $0.10 impact we called out on our fourth quarter earnings call. Most of this $0.15 headwind will impact quarters 2 through 4. In the second quarter, we expect earnings to be lower compared to last year and lower relative to our expectations heading into the year primarily related to our whole bird turkey business.
We remain confident in our growth outlook for the second half of the year, expecting all segments to deliver profit improvement in addition to benefits from our transformation and modernization initiative. To wrap up our commentary this morning, I want to extend my gratitude to each and every member of our dedicated team. Your hard work has been instrumental in delivering a strong start to the year and contributing to the momentum in achieving our strategic objectives to improve our business for the long term. At this time, I will turn the call over to the operator for the question-and-answer portion of the call.
Operator: [Operator Instructions] First question comes from Rupesh Parikh from Oppenheimer.
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