Hormel Foods Corp., a Fortune 500 global branded food company, is reporting results for the third quarter of fiscal 2023. All comparisons are to the third quarter of fiscal 2022 unless otherwise noted.

Executive summary - third quarter

• Net sales of $3 billion.
• Operating income of $217 million, reflecting the impact of an adverse arbitration ruling totaling $70 million; adjusted operating income of $287 million.
• Operating margin of 7.3%; adjusted operating margin of 9.7%.
• Earnings before income taxes of $208 million; adjusted earnings before income taxes of $278 million.
• Effective tax rate of 21.7%.
• Diluted net earnings per share of $0.30; adjusted diluted net earnings per share of $0.40.
• Cash flow from operations of $317 million.

Executive commentary and outlook

"Our third quarter results reflect the strength of our leading brands, the value of our balanced business model and our team's commitment to improving our performance," said Jim Snee, chairman of the board, president and chief executive officer. "In an increasingly dynamic and competitive environment, we grew volume across all our segments, delivered adjusted net earnings per share ... in line with last year and made further progress addressing the near-term challenges impacting the business. This progress included reducing inventory, building momentum in the [Planters] snack nuts business and driving adjusted operating margin ... improvement compared to last year."

"The investments into our brands and continued improvement across our supply chain have generated positive performance in the marketplace," Snee said. "Volume growth for the quarter was broad based, driven by a recovery in turkey, strong demand for many of our foodservice items and growth from leading retail brands, including [Spam, Hormel Black Label, Planters] and [Hormel] pepperoni. Our Foodservice segment delivered another quarter of strong bottom-line growth, and the Retail segment delivered margins ahead of our expectations. Earnings growth from our U.S. businesses in aggregate was more than offset by significantly weaker-than-expected results in our International segment, supply chain disruption caused by a third-party logistics provider shutdown and an adverse arbitration ruling."

"We remain focused on driving volume and earnings growth, as well as delivering on our commitments to improve our business," Snee said. "The operating environment domestically and abroad continues to be dynamic, and we anticipate consumers and operators to remain highly intentional in their spending. As we close the year, we expect a strong finish from our Foodservice segment, incremental savings from a series of projects aimed at reducing costs and complexity throughout our system, and further synergies from our implementation of GoFWD. Additionally, we expect continued softness in our International segment and earnings pressure from heightened competition at retail. Our continued investments into our brands, disciplined financial strategy and balanced approach across our businesses position us well for future growth as we close a challenging 2023."

For the balance of the year, the company expects:

• Modest volume growth in the fourth quarter, which assumes growth from the Foodservice segment, continued recovery in turkey and improved fill rates in key categories.
• Fourth-quarter net sales to be between $3.1 billion and $3.6 billion. Full-year net sales are expected to be (4)% to flat, reflecting performance to date and current assumptions for raw material input costs in the fourth quarter.
• Fourth-quarter diluted net earnings per share to be down from last year, reflecting continued weakness in the International segment and lower Retail segment results. Full-year diluted net earnings per share are expected to be $1.51 to $1.57, and adjusted diluted net earnings per share are expected to be $1.61 to $1.67.

Update on strategic priorities

Protect & grow Hormel's core brands.

• Hormel grew sales in the marketplace for Hormel chili, Hormel Natural Choice lunch meat, Jennie-O lean ground turkey, Hormel Square Table entrees and the Spam family of products, according to Circana Total US MULO;13 weeks ended 7/16/2023 vs YAG.
• Hormel Black Label bacon is the fastest growing national brand in the category over the last year — with volume growth of 13% versus last year — and has gained buyers versus last year, +7%, according to Circana Scan Panel; Total US All Outlet; 52 weeks ended 7/16/2023 vs YAG.

Amplify scale in snacking and entertaining.

• Household penetration gains were seen within the snacking and entertaining portfolio, led by Hormel Gatherings party trays, Planters snack nuts and Hormel pepperoni, according to Circana Scan Panel; Total US All Outlet; 13 weeks ended 7/16/2023 vs YAG.
• Hormel pepperoni — the No. 1 selling brand of pepperoni in the U.S. — grew volume, sales and household penetration during the quarter, according to Circana Scan Panel; Total US All Outlet; 13 weeks ended 7/16/2023 vs YAG. The brand also partnered with Universal Pictures and Amblin Entertainment to celebrate the 30th anniversary of the blockbuster adventure "Jurassic Park" with the Tear Into Flavor sweepstakes.

Enhance growth of Hormel's ethnic and Food Forward portfolios.

• Hormel's Applegate products outpaced category dollar sales growth during the quarter in the breaded chicken, breakfast sausage, bacon and hot dog categories, according to Nielsen; Total US xAOC; dollar sales for 12 weeks ended 7/29/2023 vs YAG.
• The Applegate team launched Applegate Naturals frittata bites, the industry's first and only Certified Humane frozen egg bites.

Expand leadership in foodservice.

• Hormel delivered volume growth during the third quarter across their premium offerings, including bacon, pizza toppings, prepared proteins, breakfast sausage and Fontanini Italian meats and sausages, according to internal data.
• Hormel launched several new items at the School Nutrition Association's Annual National Conference, including Jennie-O branded turkey barbacoa, turkey pot roast and a turkey breakfast bar.

Aggressively develop Hormel's global presence.

• Demonstrating the value of Hormel's balanced model, foodservice sales in China increased 14% compared to last year, according to internal data, helping offset declines in the retail business in China.
• Hormel continued to support their global brands around the world through innovation, co-branding and advertising, including Skippy peanut butter ice cream in South Korea, new Calbee Spam brand flavored potato chips in Japan, and the Keep It Real TV campaign, which showcased a series of Spam brand recipes across the United Kingdom.

Continue to transform the Hormel company.

• Hormel delivered another quarter of e-commerce sales growth, led by the Planters, Jennie-O and Spam brands, according to Retailer POS aggregated online sales - total Hormel, 12 weeks ended 07/30/2023.
• Hormel was recognized as one of America's Best Companies to Work For by U.S. News & World Report, named one of America's Greatest Workplaces by Newsweek, for the first time earned a place on Fast Company's 2023 Best Workplaces for Innovators list, and was ranked No. 14 on the Selling Power's 50 Best Companies to Sell For list.
• During the quarter, Hormel announced an expansion of their free college tuition program for eligible team members in the U.S. to earn their degrees, or complete nondegree programs, for free.

Segment highlights - third quarter

Retail

• Volume up 1%.
• Net sales down 2%.
• Segment profit down 7%.

Volume growth was driven by the value-added meats, bacon, snacking and entertaining, and emerging brands verticals. In addition to a recovery across the turkey portfolio, volume and net sales grew for many items, including Hormel's Spam family of products, Hormel Gatherings party trays, Hormel pepperoni and Applegate natural and organic meats. Net sales declined due to the difficult comparison from high levels of demand for Skippy spreads last year and lower market-driven pricing on raw bacon items. Segment profit declined due to unfavorable mix and increased brand investments, partially offset by the benefit from pricing actions across the portfolio, improved bacon volumes and higher equity in earnings from MegaMex Foods.

Foodservice

• Volume up 2%.
• Net sales down 3%.
• Segment profit up 14%.

Volume for the quarter increased, driven by growth in Hormel's affiliated businesses and strong demand in many branded categories, including pizza toppings, premium bacon and breakfast sausage, and premium prepared proteins. Brands such as Cafe H, Hormel Fire Braised, Fontanini, Old Smokehouse and Hormel Bacon 1 delivered volume gains compared to the prior year. Net sales declined, primarily due to lower net pricing in certain categories, such as bacon, reflecting raw material commodity deflation. Segment profit increased due to the contribution from higher volumes and improved mix.

International

• Volume up 10%.
• Net sales down 6%.
• Segment profit down 50%.

Net sales declined as a result of lower branded export sales and lower results in China. Foodservice sales in China improved sequentially throughout the third quarter, partially offsetting the difficult net sales comparison from sales to food-security programs last year. In addition to growth from the Skippy and Planters brands, strong volume growth was driven by low-margin commodity fresh pork and turkey exports. Segment profit declined significantly due to unfavorable pork and turkey commodity markets, continued softness in China and lower branded export demand.

Selected financial details

• For the third quarter, advertising spend was $43 million, compared to $37 million last year. The company expects full-year advertising expense to increase compared to the prior year.
• The effective tax rate was 21.7%, compared to 24.5% for the previous year. The company benefited from favorable changes in certain U.S. income and deductions in the fiscal 2022 federal tax return filing. The effective tax rate for fiscal 2023 is expected to be between 21.0% and 23.0%.
• Capital expenditures were $78 million, compared to $61 million last year. The company's target for capital expenditures in fiscal 2023 is $280 million.
• Depreciation and amortization expense was $75 million, compared to $65 million last year. The full-year expense is expected to be approximately $285 million.
• As disclosed in a Form 8-K filed with the SEC on Aug. 22, 2023, the company received an unexpected, unfavorable arbitration ruling involving an isolated commercial dispute with a third party. The estimated pretax impact of $70.0 million is reflected in operating expense and accrued liabilities. The associated one-time payment is expected to be made in the fourth quarter of fiscal 2023.

Presentation

A conference call will be webcast at 8 a.m. Central Time on Aug. 31, 2023. Access is available at www.hormelfoods.com by clicking on "Investors." The call will also be available via telephone by dialing 888-259-6580 (toll-free) or 416-764-8624 (international). An audio replay is available by going to www.hormelfoods.com. The webcast replay will be available at noon Central Time, Aug. 31, 2023, and will remain on the website for one year.

Source: Hormel Foods Corp.