Hormel Foods Corp (HRL) — Q2 2022 Earnings Call Transcript

Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2022. We released our results this morning before the market opened, around 6:00 a.m. Eastern. 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 Jacinth Smiley, Executive Vice President and Chief Financial Officer. Jim will provide a review of the company's second quarter results, an update on business initiatives and a perspective on the remainder of fiscal 2022. Jacinth will provide detailed financial results and further commentary on the second quarter and our outlook. 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. An audio replay of this call will be available beginning at noon today, Central Time. The dial-in number is (877) 344-7529 and access code is 8061295. It will also be posted to our website and archived for one year. Before we get started, 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. These non-GAAP measures include organic volume and organic net sales. Discussion on non-GAAP information is detailed in our press release and located on our corporate website. We have also posted supplemental information on the second quarter and our outlook. This can be found on our investor website, investor.hormelfoods.com. I will now turn the call over to Jim Snee.

Thank you, David. Good morning, everyone. Our team continues to successfully navigate some of the most difficult operating conditions in the company's 130-year history as we again delivered strong top and bottom line growth this quarter. I want to express my gratitude to the entire team for their commitment and ability to drive results. There are many examples across our company of our results matter focus. And I would like to specifically acknowledge two teams who showed incredible dedication and determination during the last quarter. First, I want to recognize our Jennie-O Turkey Store team. In March, highly pathogenic avian influenza, or HPAI, was confirmed in our supply chain. And our team quickly and effectively mobilized into crisis mode. This involved working long hours over the course of many weeks to protect the safety of the turkey flocks, provide transparent communication to customers and operators, and plan for future business interruptions, all while operating the day-to-day business. This was compounded by severe weather in early May, which also impacted several facilities within the supply chain. Our Jennie-O team went through a lot this quarter, showing unwavering commitment and resolve in the face of some exceedingly demanding situations. I thank them for the work they've accomplished and for the work yet to come. Second, I would like to applaud our team in China for their incredible execution during truly unprecedented times. Strict lockdowns forced the partial closure of two of our manufacturing facilities. Some of our team members volunteered to sleep and live inside the facilities for 10 days to ensure the plants remained operational until normal production could resume. Simultaneously, our sales and marketing teams drove outstanding retail sales gains in anticipation of widespread lockdowns. The ingenuity, resourcefulness, and grit displayed by our entire team in China was truly commendable and another example of what makes our company uncommon. In the second quarter, our team delivered its sixth consecutive quarter of record sales and third consecutive quarter of earnings growth. Operating margin also improved compared to the first quarter, an indication that our balanced business model is working. Cluster and operator demand for our leading brands remained robust as we continue to realize the benefits of investments in our direct sales force, diversified product portfolios, increased advertising, brand building, and innovation. Across all channels, our brands have responded well to managing pricing and promotional levers to ensure the long-term health of our brands and the categories in which they compete. We also made meaningful progress across our supply chain during the quarter, where our investments in capacity and recovery in staffing levels contributed to improved fill rates, inventories, and production volumes. One of our most important strategies has been to create a balanced, flexible, and diversified business model, able to withstand market volatility and business fluctuations and other unforeseen events. As our second quarter and first half results clearly demonstrate, our strategy to bring balance into our business continues to differentiate Hormel Foods from others in the industry. One of the ways we do this is through our channel diversification. In the initial stages of the pandemic, we leaned heavily on our retail businesses, both domestically and internationally, to drive growth. In the current environment, we are growing with the foodservice industry through its recovery and continuing to meet elevated demand at retail. From a top-line perspective, we drove 15% growth from our retail businesses in the second quarter and continued to see elevated demand for our leading brands, including WHOLLY, SKIPPY, Hormel, Square Table refrigerated entrees, SPAM, Hormel Gatherings, Jennie-O, Columbus, and Applegate. We are also seeing our investments in the e-commerce channel pay dividends, with solid above-category sales growth and share gains. As measured by IRI, sales increased 5% for the quarter, ending with a strong April. E-commerce constitutes around 12% of our tracked retail sales and is an important part of our future growth. We demonstrated our leadership position in the foodservice channel again during the second quarter, driving sales growth of 32% compared to last year. Growth was extremely balanced, with strength in both Refrigerated Foods and Jennie-O Turkey Store. We have made substantial gains in the fast-growing convenience store channel, in large part due to the scale the Planters brand brings to our company. Growth from the Planters and core nuts businesses in this channel is enabling expanded placements of other products. Recent wins in the retail and snacking space include SPAM, Chili, SKIPPY peanut butter, Compleats, Black Label bacon and egg bites, Columbus snack trays, Justin's items, and Hormel Gatherings party trays. Additionally, we've placed premium foodservice items such as AUSTIN BLUES barbecue, FIRE BRAISED Meats, and Bacon 1 pre-cooked bacon to be used in prepared items in this channel. Like e-commerce and the retail channel, convenience stores provide an important part of our future growth in foodservice. Internationally, we are continuing to make progress to bring even more balance to the company. Our business in China is a great example of this. This quarter, we again experienced demand softness in foodservice due to the country's COVID-related restrictions. Our team quickly pivoted its resources from foodservice to the retail channel. Sales of SPAM and SKIPPY surged. And our team was also able to effectively redirect foodservice items to food security programs to help supply those experiencing lockdowns. Mainstream to premium, both domestically and internationally is a strategy that has served us well and will continue to serve us well into the future. From an earnings perspective, our Jennie-O Turkey Store segment had an outstanding quarter, as its ability to adjust to current market conditions and meet strong results. Likewise, our foodservice businesses in Refrigerated Foods were able to price for inflation and deliver excellent volume growth. These businesses more than offset higher freight expenses for all segments and the earnings decline in grocery products, which absorbed significantly higher costs for certain inputs, such as avocados, protein, and packaging. We have announced another round of pricing actions across our grocery portfolio to help mitigate these inflationary pressures, but will, in the meantime, lean into our balanced model as we did this past quarter. The balanced business model has been a key driver behind our recent success and our long-term growth. We remain confident in our ability to withstand volatile economic conditions and market cycles through our continued focus on balance. We successfully completed the integration of all aspects of the Planters snack nuts business during the second quarter, and the business continues to perform at the high end of our expectations. During the cutover period in February, we experienced lower fill rates as we fully transitioned inventory into our logistics network and assumed control of the entire supply chain. While this did have a short-term impact on sales and consumption, we have seen improvements in customer service levels and expect consumption data to show continued improvement in the coming months. As we celebrate one year of owning the Planters business, I am proud of the excellent progress we have made on our commitments from last June. We have invested heavily behind the Planters and core nuts brands. We are on track to capture the synergies identified during diligence. And we have leveraged this business to amplify our scale in snacking and entertaining. After an excellent first quarter and significant profit growth in the second quarter, our Jennie-O Turkey Store team is facing an uncertain period ahead due to the impacts and risks to its supply chain from HPAI. Similar to what we experienced in 2015, HPAI is expected to have a meaningful impact on industry poultry supplies over the coming months, including large supply gaps in the Jennie-O Turkey Store vertically integrated supply chain beginning in the third quarter. On a positive note, it appears that the biosecurity measures the company has implemented since 2015 have provided additional protection against the virus, as the number of company-managed turkeys impacted to date is 25% lower than during the last outbreak. Breast meat prices have already risen to levels higher than any point in 2015, currently trading above $6 compared to the previous all-time high of $5.85. We have seen increases in other turkey markets as well. From a cost perspective, feed prices are significantly higher, with corn and soybean meal up more than 125% and 40%, respectively, as of early May. Additionally, there is further upside risk to feed prices with later plantings due to cold and wet weather across the Midwest this spring. The cost of production labor at company manufacturing facilities has also increased more than 50% on average compared to 2015. Our team is taking the appropriate actions to protect the health of the turkeys across our supply chain, managing through operational challenges caused by the outbreaks and adapting to changing business conditions while simultaneously managing through the impacts of HPAI. Our team made progress on the Jennie-O Turkey Store business transformation. During the second quarter, we closed the Benson Avenue facility and successfully transferred approximately 200 employees to the newer and larger manufacturing facility in Willmar. We remain on track to integrate business functions, consolidate the Jennie-O Turkey Store supply chain into the broader Hormel Foods One supply chain, and drive SG&A cost synergies of approximately $20 million to $30 million annually by fiscal 2023. Above all, the team is focused on creating a business model that is better aligned to the changing needs of our customers, consumers, and operators to drive long-term sustainable growth. I also want to provide an update on the great work our team is doing to fulfill our ESG commitments and achieve our 20 by '30 goals. During the second quarter, we announced we are on track to match 100% of domestic energy use with renewable sourcing by the end of 2022. We announced that our Justin's brand is transitioning to jars that use 30% less plastic. We were ranked #57 on the U.S. Environmental Protection Agency's Fortune 500 list of the largest green power users. We were named One of America's Most Trustworthy Companies by Newsweek. And in May, for the 13th time, we were named one of the 100 Best Corporate Citizens by 3BL Media. This ranking recognizes outstanding environmental, social, and governance transparency and performance. We are proud and honored to continue to be named a top corporate citizen. Lastly, I want to share a recent success story from our Inspired Pathways Free Community College Program. This week, we hired the first individuals from the program to participate in paid summer internships. This marks yet another example of why we believe this program can be generational for our employees, their dependents, and for the future of the company. We are reaffirming our sales guidance range of net sales between $11.7 billion and $12.5 billion and narrowing the earnings range of $1.87 to $1.97 per share. We are confident in our ability to deliver our sales guidance given robust demand for our brands across the retail, foodservice, and international channels, improvements in our supply chain, investments in capacity, and from strategic pricing actions. From an earnings perspective, we expect a strong finish to the year from our Refrigerated Foods business. We anticipate a fourth quarter improvement from pricing actions taken across our Grocery Products portfolio. We are navigating the impact of HPAI on the Jennie-O Turkey Store supply chain and external factors affecting the International and Other segment, including current export logistics challenges and COVID-related lockdowns in China. Our teams have actions in place to manage through these challenges and drive results for the company. At this time, I will turn the call over to Jacinth Smiley to discuss financial information relating to the quarter and provide more color on key drivers to our outlook.

Thank you, Jim. Good morning, everyone. We delivered another quarter of record sales of $3.1 billion, a 19% increase compared to last year. Organic sales increased 10%. Gross profit increased $77 million compared to last year, a 16% increase. This improvement was driven by strength in Jennie-O Turkey Store, growth from Refrigerated Foods, the addition of the Planters snack nuts business, and strategic pricing actions to offset inflationary pressures. Gross profit margin was 17.9% compared to 18.3% last year and 17.7% in the first quarter. SG&A expenses increased 12% compared to last year due to the addition of the Planters snack nuts business and higher advertising investments in our brand. SG&A as a percent of sales decreased to 7.3% from 7.7% last year. This speaks to our continued strong sales growth and disciplined cost management. We increased advertising investments in the second quarter to support the Planters, Columbus, and SPAM brands. For the quarter, advertising expense increased by 27% or approximately $0.01 per share. Operating income increased 16% to $335 million. Operating margins were 10.8% compared to 11.1% last year. Operating margin increased sequentially from 10.5% in the first quarter. As anticipated, we delivered quarter-over-quarter improvement in operating margin and made continued progress in mitigating the significant inflation we experienced. Interest and investment income declined $9 million primarily due to lower results from our rabbi trust, which generally tracks with the equity market. Interest expense increased $7 million compared to last year. Our effective tax rate was 18.7% for the quarter, down from 22.1% for the same period last year. The lower rate this quarter was primarily due to tax benefits from increased stock option exercises. Our effective tax range guidance of 20.5% to 22.5% is unchanged from the prior outlook. The net result of all these factors was diluted earnings per share of $0.48, a 14% increase over $0.42 last year. Turning to cash flows. Operating cash flow for the second quarter increased 24% to $193 million. Operating cash flow for the first half of 2022 increased 60% to $577 million. Strong earnings growth has been a key catalyst to these increases. Capital expenditures in the second quarter were $78 million compared to $45 million last year. During the quarter, we benefited from new capacity, including our pepperoni expansion at Papillion Foods plant in Nebraska and raw bacon investment in our plant in Austin. Our fiscal 2022 target for capital expenditures is unchanged at $310 million. We paid our 375th consecutive quarterly dividend effective May 15 at an annual rate of $1.04 per share. We did not repurchase any shares during the first half. We will repurchase shares opportunistically based on our internal valuation. We expect to make our first payment and begin our deleveraging related to Planters acquisition in the back half of the year. We remain committed to maintaining an investment-grade rating and deleveraging to 1.5x to 2x EBITDA by 2023. Turning to our segment results. Segment profit increased by 15% as growth in Jennie-O Turkey Store and Refrigerated Foods more than offset declines in Grocery Products and International and Other. The company benefited from Planters sales of $239 million in the quarter and the related profit contribution. Refrigerated Foods volume declined 13%, and organic volume decreased 14%. The decline in volume was primarily due to our strategic decision to restructure a pork supply agreement, reducing our exposure to low-margin commodity pork business and better aligning resources to value-added growth. Sales increased 13%, and organic sales increased 11%. Refrigerated Foods segment profit increased 3%. Refrigerated Foods saw meaningful improvement in many areas across the supply chain due to improved labor availability and additional production capacity, helping to offset production constraints. Grocery Products volume increased with the Planters business. Organic volume increased 2%. Segment profit declined 9% as organic sales growth and the addition of the Planters snack nuts business was unable to offset considerable inflationary pressures and lower results from MegaMex. Jennie-O Turkey Store had another excellent quarter, with sales up 16% and segment profit up nearly 400%. Higher commodity prices and improved foodservice sales drove the substantial improvement in segment profit. HPAI had an immaterial impact on the segment's results for the second quarter. For the International and Other segment, volume was down 14% and organic volume declined 15%, due in large part to lower commodity sales associated with the company's new pork supply agreement. Segment profit declined 3% as profit growth in China did not overcome lower results from the export business. We continue to battle extreme input cost volatility and inflation. We have seen increases across all our inputs, including raw materials, packaging and supplies, freight and logistics, and labor. We expect stabilization as demand and supply come more into balance and anticipate certain costs, such as labor, to be more structural in nature. Protein markets have generally remained elevated and above year-ago and historical levels. For context, pork prices as measured by the USDA composite cutout, were 6% higher in the second quarter compared to last year and more than 30% higher than the 5-year average. We have seen similar dynamics across beef and chicken markets and witnessed an acceleration in the turkey market during the quarter due to the emergence of HPAI. Feed also continues to be highly inflationary. Our hedging program at Jennie-O Turkey Store has effectively helped us manage risk near term. Looking to the back half of the year, we expect protein and feed costs to remain volatile and elevated compared to historical levels. Costs for packaging and supplies are up double-digits on average over last year and accelerated during the most recent quarter. Trucking freight is also up significantly on both an absolute and per volume basis. This is being driven by volatility in the spot market and soaring diesel fuel prices. While we're noticing some relief in spot markets in the third quarter, increased fuel surcharges are partially offsetting this benefit. Ocean freight rates and export logistics continue to challenge our international team. Labor shortages have been underpinning the inflation we have seen across many of our inputs and in our own facilities. We continue to see positive trends in staffing levels, which has allowed us to increase production in important product lines, such as SPAM, raw bacon, and pizza toppings. Inefficiencies related to new team members and turnover continued to impact operation, but we expect improvement in the back half of the year. As labor recovers across the industry-wide supply chain, we expect fewer upstream and downstream challenges. Our experienced management team has done an excellent job managing profitability in the face of these challenges through strategic shifts in product mix, disciplined management of SG&A, and driving efficiencies through our one supply chain. As Jim mentioned, we are reaffirming our full year fiscal 2022 sales guidance and narrowing our earnings guidance range. For Refrigerated Foods, we expect a strong finish to the year, led by continued strength in the foodservice businesses and strong demand for retail products. Our Grocery Products business will continue to be challenged by inflationary pressures until the recently announced pricing actions for this segment become effective in the fourth quarter. Given the uncertainty regarding HPAI and based on our current expectations, Jennie-O Turkey Store sales volumes are expected to decline approximately 30% in the back half of the year due to supply gaps in its vertically integrated supply chain. With the third quarter representing the seasonal earnings low for this business, we expect third quarter earnings to be in line with last year. The International and Other segment continues to see strong demand, both in its export business and in China. However, due to the impact of two partial plant shutdowns in China as a result of COVID-related restrictions and persistent export logistic challenges, there remains a risk to earnings growth in the back half of the year. Across our retail businesses, we expect continued strong demand and anticipate improvements in fill rates, assortment, and its strategic promotional activity to mitigate potential downside of elasticities. We continue to see strong momentum in the foodservice channel, with demand for many items outpacing our ability to supply. This strong demand, coupled with supply chain improvement, gives us confidence in our ability to deliver sales and earnings growth in the second half of the year. At this time, I'll turn the call over to the operator for the question-and-answer portion of the call.

Yes. This is Jack Hardin, filling in for Ben Bienvenu. You mentioned the volume impact, but regarding HPAI, will you experience margin benefits from HPAI next year similar to what we observed in 2015?

Yes. Jack, thanks for the question. We've spent a lot of time over the last several years working on our jobs business. We know we've got a fantastic brand. We've been doing a lot of work to continue to build a stronger business model that leverages our entire enterprise. And we had a strong finish to 2021, a great first half. We've got uncertainty in the back half of 2022. And we are going to begin to repopulate those farms. And we're going to return the supply in a very safe and timely manner. And so we know that the demand is there for the product. And as supply comes back in line, we expect strong demand across retail and foodservice. What we've tried to highlight were a couple of the differences in terms of what's changed since 2015 when we think about feed costs and when we think about labor costs. But I think the most important thing for us is that as we get supply ramped back up, we know that the demand is going to be there, both in the retail channel and the foodservice channel, because of the work that we've done. And as markets stay strong and if markets are better, that opportunity certainly exists.

Congrats on the results. The question is regarding mostly the situation in China. Has it started to recover, if it’s slowly opening, and if it’s still too early to tell?

Thank you for the question, Antonio. The efforts we've made to grow our business in China have proven to be very successful, establishing a robust and well-balanced business model across both retail and foodservice sectors. Reflecting on 2020, during the initial phase of the pandemic when China took decisive steps to shut down, we saw patterns similar to those we are currently experiencing. There was a decline in foodservice accompanied by an increase in retail. However, as conditions began to stabilize, our foodservice sector bounced back. Given this past experience, we anticipate our business will return to a strong growth path. While the ongoing partial shutdowns are expected to affect our Q3 results, our long-term outlook remains unchanged, and we are confident in the strength of the demand across all areas of our business.

So on the price, the inflation on Grocery, can you talk about if you're taking the pricing that you're taking? Does that cover all your expenses and your inflation? And have you seen any pushback from any of your retailers? And then lastly on this is, what is your demand elasticity across your portfolio? And which products have the least and which ones have the most?

Yes, Ken. This round of pricing for Grocery Products will cover our costs and expenses. We are very thoughtful about managing our pricing and promotions to ensure the long-term health of our business. We always take a long-term view because we know we have a responsibility to our customers, consumers, and categories. Regarding any pushback, the pricing dynamics haven't changed. We have always had a strong justification for price increases. What has changed is that retailers and manufacturers are all experiencing the same broad-based inflation. Even so, that doesn’t make conversations easier as we all aim to protect the equity of the brand and the business. In terms of pricing impact, SPAM has been most affected due to protein inputs and packaging costs, and WHOLLY Guacamole has been impacted by avocado prices, while SKIPPY has been the least affected. Both SPAM and WHOLLY have performed incredibly well despite significant pricing actions. I hope this provides some clarity.

I wanted to emphasize Jim's comment. This portfolio performs exceptionally well during downturns. We are actively investing in advertising for key brands like SPAM and Planters, and we expect to maintain strong growth despite inflation affecting our profits. There remains significant top-line growth in consumption, and the data shows continued positive trends with double-digit growth in many of our important categories.

Just want to follow up on that train of thought a little bit with consumer trading. Maybe not elasticity exactly. But just curious what you've seen historically with down trading. Just since I think you just mentioned you see some benefit. But how do you balance or what tends to be the net result of maybe down trading to some products from, say, beef to perhaps pork or SPAM or something like that versus some of the color we heard from Walmart the other day, where they were calling out down trading to private label in some categories like bacon and deli and lunch meat that are, of course, very big ones for you? Is it typically a net positive even with all those moving parts? Can you just maybe call out what some of the biggest moving pieces are there?

Yes, it's a great question. I know discussions will continue as we face these economic challenges. The key takeaway is the balance we've built across our entire business. Our portfolio offers a wide range of products for value consumers, which Jacinth highlighted with our Grocery Products portfolio that has historically performed well during downturns. This quarter, we showed strong top line growth and volume growth. We just need to address some of the inflationary factors. Considering the balance across consumer types, channels, products, and brands, we can navigate these environments effectively. While we focus on value consumers, we also have premium consumers and offerings that are performing exceptionally well. Our Columbus business, especially in entertaining and snacking, remains strong, along with our Applegate brand, which has a more food-forward approach. Ultimately, the balance across our portfolio positions us well for a variety of economic conditions.

That's really helpful. Can I follow up on your guidance? Jim, you mentioned the responsibility to protect the equity of your brands at the beginning of that statement, and I haven't seen that phrasing before. I'm curious if there's a specific significance to that that we should understand. It appears that advertising spending in the quarter increased, possibly boosted by Planters. Is that a significant factor in your outlook? What importance does that statement carry?

There isn't a significant change; it's more about emphasizing our approach. We have consistently highlighted the strength and the investments we make in our brands annually, which is part of our responsibilities. We believe this is a key differentiator in our brand stewardship. Additionally, we recognize our obligation to our brands as well as to others in the channel, ensuring we cater to our customers and consumers properly. In our foodservice business, it's crucial to support our operators by meeting their needs and delivering great value. Ultimately, our long-term perspective drives us to manage the business effectively today while ensuring we maintain healthy businesses and categories for the future.

I'll just add that it's important to maintain a long-term perspective while ensuring the loyalty of our ultimate consumers and avoiding any actions that could undermine the brand equity we've built over time with our customer base.

This is Bryan, considering for the honeymooning Pete Galbo. And hopefully, I don't screw this up. I think he may be listening. So a couple of questions. First, just you mentioned a little bit in terms of the earnings phase in. Can we just get a little bit more color? I think typically, the margins in the third quarter are lower sequentially than the second quarter. So is that still kind of the pacing? Would we have that normal sort of seasonality in margins as we move through the back half of the year? And I guess, as we're thinking about earnings effectively being flat year-over-year, how much of that is seasonality? How much of that is, I guess, the mismatch or beginning to match up your pricing versus covering your inflation? So just trying to understand some of the moving parts in terms of the phasing as we look through the third quarter and fourth quarter.

Yes. It's a great question. Bryan, you didn't mess that up. Nice job. So for us, as we've talked about this year at the first quarter, we were expecting some sequential margin improvement throughout the year. So the impact this year is really what's going to happen with Jennie-O in the third quarter. So that is a big factor. The other thing is our mix, right? Our mix does change in our third quarter. And then like I said, the jobs impact will be a significant impact. And then as we get into the fourth quarter, we'll continue to have strong business in Refrigerated Foods. We've got still some uncertainty in jobs, but we expect that to perform better. And then the big driver is the Grocery Products pricing that we talked about, which will take hold in the fourth quarter.

Okay. So sequentially, margins will be down 3Q to 2Q, like they normally would be, and then there's these other pressures. And then we would see it sort of begin to catch up more in the fourth quarter. That's roughly the way to think about it, both at the gross and I guess, EBITDA margin line?

Yes.

That's correct.

Okay. A follow-up question: we've discussed elasticity and trade dynamics on this call. Can you provide insights into how you're considering potential cross elasticity between channels? With the current level of inflation, we are noticing consumer shifts in their spending habits, particularly between discretionary and nondiscretionary items. For instance, consumers are spending on food but not purchasing discretionary products like general merchandise at Walmart. As you plan for the future in an expected inflationary environment, do you anticipate a shift away from foodservice towards grocery, or perhaps changes within foodservice channels? How are you approaching this context of continued inflation and the necessity for consumers to make discretionary choices?

Yes, Bryan, we pay close attention to this. We often discuss the strength and expertise of our foodservice business and the robust portfolio we've developed over the years. We are confident in our ability to meet the needs of the foodservice industry. Labor is a significant concern, but regarding your question, you might expect that rising inflation and gas prices would lead to a shift. However, based on what we're observing with flight and lodging bookings, as well as restaurant reservations, it appears that in both the short term and possibly longer, we will continue to see...

Yes. So Bryan, I believe I got cut off in the middle of my response to your second question.

I promised, Pete, I wouldn't screw this up, and I apparently broke the line, so.

Well, that's what we discussed privately, but we weren't going to disclose that publicly. However, I think the main point is that we are well positioned as the foodservice business may move between different segments within the channel. On a broader scale, we don’t anticipate any short-term slowdown in the foodservice industry. We still believe there is significant pent-up demand that we can capitalize on. I mentioned that as people may alter their travel habits—if they start driving instead of flying due to airline prices, despite higher fuel costs—the convenience store channel has seen remarkable growth in a short time. The acquisition of Planters has significantly benefited us in both retail and the foodservice or takeaway aspect of the convenience store sector. That sums up my longer answer.

Maybe just to start off, if I could clarify the comment about third quarter earnings being in line with last year. There was the unusual cost. So you had kind of two earnings numbers a year ago, the $0.32 and the $0.39. When you're talking about in line with last year, to which last year are you referring?

Last, we're referring to the GAAP numbers, which is $0.39, which is the adjusted number.

Okay. To follow up on Ken's question regarding the Grocery Products segment and pricing, could you clarify if you were able to fully offset the current inflation with that pricing? You mentioned that the impact of pricing would be visible in the fourth quarter. Should we expect the pricing effects to be fully reflected in the fourth quarter, possibly leading to additional impacts in the first quarter of fiscal '23? Or will the effects be spread across the third and fourth quarters, with the fourth quarter showing the complete benefits?

No. We would expect that the effect or benefit will have an impact. It will occur at the end of the third quarter and the beginning of the fourth quarter. Naturally, this will continue into the first quarter of 2023. However, the full fourth quarter will be positively impacted.

Okay. And that is you were able to secure pricing that essentially addresses the inflation that you were seeing at the time of those negotiations?

That's correct.

Jim, I’m interested in going back to 2015, the last AI breakout. You mentioned that your bird impact was 25% less than your net impact that year. One of the issues in 2015 was that you had to buy additional supply to meet demand, and the high spot prices significantly affected your financials. It also took a considerable amount of time to restock the grow houses, as those birds take longer to mature. I might be missing something, but it seems like that might not be as significant an issue this time around. When can we expect to see the volumes start to recover as you restock the grow houses?

Yes. So Eric, thanks for the question. And the comparisons to 2015 are never perfect. So when we say we're down 25%, right, we are talking about our company-owned facilities. Your other question about us buying meat, and that we are not currently buying meat this year. And then again, let's just think about the timing, which is usually 26 weeks. And so we've started some repopulation when you think about when the event started. So the volume will get better in Q4, but still down compared to normal. And then assuming that we don't have any more outbreaks from this event or that we don't see a reoccurrence in the fall, we would expect again to have more traditional volumes available in Q1.

I apologize for joining the call a bit late, so I may have missed some information. Could you clarify the timing of the grocery price increases? You mentioned they are starting in July. Were those negotiated a few months ago or very recently? How long does it generally take for such negotiations to be implemented in the market? Also, considering what we've heard from Walmart, do you anticipate any resistance to future price increases in the processed meats category since they specifically mentioned it?

Yes, we have discussed this before, but I'm happy to elaborate. The pricing we are referring to has been recently negotiated. Our Grocery Products portfolio typically experiences a 60- to 90-day lag before pricing takes effect. We are currently in that timeframe, which is why we're mentioning the end of July or the end of Q3. As we previously discussed, the pricing dynamics and the justification we need to provide remain unchanged. However, we all acknowledge that there is a widespread issue with inflation that everyone is experiencing, making these conversations more challenging. We've had many of the same discussions, but now everyone is aware of the same data. Additionally, I want to highlight that we have always approached our pricing and promotions carefully. In this inflationary environment, it is crucial for us to maintain the long-term health of our brands. This is how we are navigating the current pricing situation for Grocery Products.

And I just want to clarify my answer to Tom. Our adjusted GAAP EPS number in Q3 of last year was $0.39 less due to a one-time event with Planters. That is what we're comparing to, and we expect to be in line with or better than that in Q3.

This is Arthur filling in for Adam this morning. I was just wondering if you could help us think about how you're thinking about maintaining branded retail placements throughout this, let's call it, a difficult period. And if you could just help us, how has demand elasticity evolved from the time we last spoke?

Yes. Sure. So Arthur, I mean, the placement of our products remains very, very strong and continues to get better as our supply chain improves. We're able to improve the assortment of our products, the mix. And as our supply chain and our capacity continues to get better, we are able to engage in select promotional activity as well. So from a distribution perspective, it continues to be strong and getting better as our supply chain continues to recover. As we think about elasticity, there is still a lot of noise in terms of fill rates, assortment, promo, really getting some of the second and third tier items back on the shelf from the impact of the pandemic. And so, I mean, we're watching that very closely. But we still see lots of noise in the system for the balance of the year. Our brands have responded well to that pricing. So we're going to continue to support them with advertising and promotion. And we've got any potential impact factored into the guidance that we've provided for the back half of the year.

Can you touch on the labor issues a bit and discuss what you're doing to mitigate those impacts from a product mix perspective? And then how are you thinking about correcting those issues longer term?

Yes. Carson, thank you. I mean as we go back several years and the work that we've done to create our one supply chain and really leverage the strength of the enterprise is one of the key factors that's allowed us to navigate this incredibly difficult operating environment. Since we last talked, we have seen meaningful improvement in our supply chain since the end of January. And those improving labor trends have really helped in terms of our improved production, the building of some inventory, improvement of fill rates. And that has had a very positive impact on our business. So that being said, while we're continuing to get better with labor within our own facilities, we continue to see upstream and downstream challenges. And those challenges are significant on a weekly basis, whether it could be a packaging or ingredient headwind or when it comes to freight, ability to get product into and out of ports, that impacts our international business, that is still a very real constraint for us that hasn't cleared yet. So we feel good about the work that we've done to improve our supply chain. There's still some upstream and downstream things that need to clear. But as that labor gets better, we expect that to mitigate over time.

So first of all, you had said that demand has remained strong in the face of inflation. But volumes were quite a bit weaker than we expected. Could you maybe help quantify what the impact was from the labor constraints?

Yes, Rebecca, the main issue regarding total volume was the decrease in pork supply due to our renegotiation of the pork supply agreement at the end of last year. Labor played a role, but it wasn't a major factor. The impact from labor was significantly less than that of pork on overall volume.

Okay. Could I be supple just to ask you to quantify the impact of the pork?

Yes. That is something that we've broken out before. And actually, what I probably would do is just so we get you the exact information is we'll have David follow up with you so you've got the exact number of pounds that we've talked about in the past.

Okay. Sounds good. And secondly, is it fair to assume that HPAI could maybe delay some of the plant cost savings in jobs?

No. The work that we've done on the transformation of the business has not slowed down.

Yes. And if anything, Rebecca, we would say it has actually accelerated some of the work that was already underway to be able to reposition the business and reposition the plant the way we were planning to restructure this business to continue to be very consumer focused and really leaning towards and embracing the trends that we're seeing in the consumer space. And so if anything, it really has been a positive. And we continue to be on track to realize the timeline and the savings that we have communicated externally.

Well, thank you, and thank you all for joining us today. I'm incredibly proud of the results our team delivered in the face of an incredibly difficult operating environment. We've spent a lot of time and effort over the years developing a strategic and balanced portfolio for times just like these. And it's our people, our brands, and our culture that gives me confidence in our ability to continue to deliver results. Thanks again, and have a great day.