Hormel Foods Corp (HRL) — Q2 2023 Earnings Call Transcript

Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2023. We released our 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 at 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 second quarter results and give a perspective on our outlook for the balance of fiscal 2023. Jacinth will provide detailed financial results and further commentary on our outlook and 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 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 archived for 1 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. I will now turn the call over to Jim Snee.

Thank you, David. Good morning, everyone. We had clear priorities heading into the second quarter, and our results demonstrate our team's ability to execute on those commitments, deliver results in line with our expectations for the quarter, and most importantly, keep us on track to drive growth in the back half of the year. Before I dive deeper into our quarterly results and reaffirmed outlook for the year, I want to start this morning by providing an update on the progress we have made addressing inventory levels, improving our margin structure, stabilizing the Planters business and continuing the implementation of our Go Forward operating model. First, I'd like to discuss the progress we made rectifying the inefficiencies caused by elevated inventory levels. This was a top priority in the company during the second quarter, and we took immediate actions to sell excess nonproductive inventories to slow manufacturing in areas where supply was exceeding demand to bring back outside production into our facilities, allowing us to better utilize new and available internal capacity, and we implemented several changes to our demand and supply planning processes. As anticipated, these actions had a margin impact during the quarter, but were necessary to bring inventory levels into greater balance. For the back half of the year, we have further plans in place to responsibly manage and lower inventory levels, and all costs associated with these actions are accounted for in the outlook. As a result, we expect to begin fiscal 2024 with benefits from better process control, lower freight and warehousing expenses, lower distressed sales, and higher investment income resulting from an improvement in our cash cycle. Second, we continue to make progress improving our margin structure as evidenced by a sequential increase in operating margins during the quarter, even with our actions to reduce elevated inventory levels. In addition to managing costs and driving supply chain savings through continuous improvement programs, our inflation-justified pricing actions are leading to gradual margin improvement. We have announced targeted pricing actions effective at the end of the third quarter on additional retail items and are evaluating further pricing actions accordingly. Another way we are actively improving our margin structure is by optimizing promotional and advertising spend. We demonstrated that discipline this quarter by responsibly shifting some advertising spend to promotions, working with our retail partners to drive the best returns for our leading brands and growing the categories in which they compete. We are still expecting a year-over-year increase in advertising spend to support our leading brands. Specific to the second half of the year, our teams are focused on several projects aimed at reducing cost and complexity to further improve our margin structure, and we expect to see a return from some of these projects by the fourth quarter. Third, we took action to improve the Planters business. During the second quarter, we regained significant distribution and placements for the Planters brand, which started shipping at the end of the second quarter. We introduced much-needed innovation to the category with flavored cashews and new corn nuts varieties. And we shifted promotional resources to drive consumption for the Planters brand. The brand saw shipments increase 8% for the quarter, aided in part by the strong promotional execution. While early, data for the latest 13-week period on a volume basis indicates that the Planters brand is outpacing the packaged nuts and seeds category and is showing positive takeaway growth for peanuts and cashews. This summer, we are also running a national campaign for our new flavored cashews to maintain momentum for this business. Our progress during the second quarter represents a positive proof point in the turnaround for Planters. Planters remains at the center of our snacking and entertaining strategy and we are fully committed to the Planters brand, Corn Nuts brand, and the Snack Nuts category. We know what we need to do to change the trajectory of the business and our teams are focused on accelerating the pace of change. Finally, we made further progress implementing the Go Forward operating model and standing up our brand fuel center of excellence. With the structure now mostly in place, we can better resource other long-term projects including advancing the supply chain work stream of Project Orion. We temporarily scaled back some work streams as we prioritize the integration of the Planter Snack Nuts business, our transformational actions at Jennie-O Turkey Store and the implementation of Go Forward. The supply chain work stream represents some of the most important and highest-return deliverables on the entire Project Orion roadmap. We have also kicked off a series of multiyear projects such as a modernization of our order-to-cash system, improvements to the end-to-end planning processes and a pilot project to implement new ways of working across the manufacturing network. We plan to provide more detail on these large-scale and strategic projects as well as our continued evolution as a global branded food company at our Investor Day in October. Results for the second quarter were in line with our expectations. From a topline perspective, sales declined 4% on a volume reduction of 6%. Volume declines were largely attributed to impacts across the turkey supply chain due to highly pathogenic avian influenza or HPAI in our supply chain last fall. In addition to the large headwind from turkey, net sales were negatively affected by significant pork deflation during the quarter. This had the most profound effect on the retail bacon and foodservice value-added portfolios. Diluted net earnings per share for the quarter was $0.40. Earnings headwinds were understood heading into the quarter and included strategic investments to stabilize the Planters business, margin impact related to our actions to address inventory levels, challenging operating conditions in China, lower turkey sales, higher feed and pension costs, and a higher tax rate. Turning to the segments. Strong bottom-line growth from the foodservice segment during the quarter and the benefit from cost relief in certain areas was offset by lower results from the Retail and International segments. Again, this quarter, we leveraged our long-standing relationships, differentiated product portfolio and direct sales team to drive growth for our foodservice business. Volume and net sales growth in the sliced meats, pizza toppings, and premium breakfast sausage categories were more than offset by the impact of lower turkey volumes and lower net pricing, reflecting raw material commodity deflation. Our foodservice business remains extremely well positioned. We have available capacity to regain business lost over the last 3 years due to constrained supply, especially in key categories such as bacon and pizza toppings. We will also continue to lean into our world-class culinary team, innovative items and Food Forward mentality, all which further differentiate our business from the competition. At retail, we benefited from pricing actions and the strength of our leading brands, helping to partially offset the impact of unfavorable mix and higher operating costs. During the quarter, net sales growth from the global flavors vertical was more than offset by lower net sales across the other retail verticals. Like the foodservice segment, the impact of lower turkey volumes and lower bacon pricing were the primary drivers of lower topline results as elasticities played out better than expected in most categories. The MegaMex business housed in our global flavors vertical had another strong quarter. Net sales growth was led by the Wholly, La Victoria, and Herdez brands. The pricing actions we have taken across this business to combat inflationary pressures, coupled with commodity relief on avocado inputs, are leading to significant year-over-year gains in equity and earnings. Elasticities on this portfolio remain favorable and we expect to benefit from continued distribution gains from our innovation pipeline, including Herdez brand and Guacamole and refrigerated sauces. The bacon vertical also delivered another quarter of outstanding results due to strong demand for Black Label items and lower belly prices. Black Label raw bacon takeaway for the quarter exceeded 20% in volume sales. We are executing extremely well in the bacon category and anticipate continued growth in market share and household penetration while benefiting from cost favorability. The convenient meals and protein verticals saw sales growth from many of its branded products, including chili, SKIPPY Peanut Butter, Square Table, refrigerated entrees, Dinty Moore Stew, and Mary Kitchen hash. Overall net sales for the vertical declined due to lower contract manufacturing results as we prioritize higher-margin branded businesses. The convenient meals and proteins business has secured additional customer distribution for the back half of the year. Our categories, brands, and household penetration growth trends remain favorable. Net sales declined for the snacking and entertaining vertical, primarily due to strong promotional activity for the Columbus brand last year. Planters branded volume increased 8% for the quarter while the Hormel pepperoni and Hormel Gatherings brands grew net sales double digits compared to the previous year. As noted earlier, we expect to continue to benefit from favorable customer resets for the Planters business and from distribution gains on our pepperoni items in the back half of the year. In the emerging brands vertical, Applegate drove growth for its frozen breaded chicken and breakfast sausage items. The Applegate business continued to diversify its channel exposure, which is key to its long-term growth. Distribution gains in the mass channel and the strength of its e-commerce business are helping offset some weaknesses in the natural and organic channel. The final vertical, value-added meats, was most heavily affected by lower turkey availability, leading to volume and net sales declines. We expect a strong finish to the year from this vertical due to higher Jennie-O Turkey volumes and positive trends in the deli. The retail environment remains extremely competitive, and the benefits we've seen from Go Forward to better focus and resource our teams position us well to deliver our plans in the second half of the year. While the International segment remained challenged, the team drove excellent growth for the SKIPPY and Planters brands as well as another quarter of growth from the team in Brazil. Segment profit declined significantly due to lower sales in China and lower turkey export sales. In China, foodservice sales improved sequentially throughout the quarter, helping offset the difficult comparison to retail pantry loading and sales to food security programs last year. Though we have seen an acceleration in our foodservice business, a recovery in our retail business following the COVID-related policy changes earlier in the year has been slower than anticipated. The team in China has aggressive plans in place to drive improved results in the back half of the year. Limited commodity turkey supplies and restrictions on turkey exports continued to affect results as export turkey volumes declined 50% compared to last year. With the rebound in turkey supplies, we expect this headwind to lessen in magnitude in the back half of the year. The second quarter also marked the first full quarter of minority ownership in Garudafood, one of the largest food and beverage companies in Indonesia. Garudafood delivered returns in line with expectations during the quarter, and we look forward to further leveraging the strengths and capabilities of both companies to expand the business in Indonesia and Southeast Asia. Our international business is structurally sound and increasingly balanced. We are confident that the near-term dynamics will gradually abate, allowing our teams to resume delivering accelerated growth. We expect sequential improvement in the back half of the year on contributions from our branded exports, multinational businesses and partnerships around the world. Finally, it's important to note that we are experiencing a direct benefit from our multi-year efforts to align resources to value-added platforms and reduce exposure to commodity businesses. Since 2017, we have made many decisions to align our pork supply chain to the long-term trends of the industry, guarantee supply for our value-added businesses and reduce the earnings volatility from commodity exposure. In this difficult commodity environment, we have benefited as a net buyer of trim and bellies. So we have absorbed significant losses on our harvest operations, like others in the industry. We will continue to monitor long-term industry trends and where necessary, make adjustments that are supportive of our value-added growth strategies and our long-standing partnerships throughout the supply chain. Shifting to our outlook. We expect sales and earnings growth in the back half of the year. Growth from the foodservice segment and an inflection in the International segment are expected to be the primary drivers of year-over-year gains. All the businesses are expected to benefit from a rebound in turkey volumes and improved fill rates in key categories such as bacon, pepperoni, snack nuts, and for our SPAM family of products. Coupled with the progress we have made on Go Forward, including standing up brand fuel, restructuring our sales teams and resourcing the marketing teams to better support our leading brands, we remain confident in our growth outlook as we continue to meet the needs of our customers, consumers and operators. On a related front, we have made significant commitments and investments to ready the business to serve our customers in California. As of January 2022, we have been Prop 12 compliant on a portion of our pork supply, absorbing the cost of compliance in our operations since that time. As we begin serving the important California market under new regulations later this month, we expect to begin recovering the cost from these investments. Considering these factors, we are reaffirming our full year net sales and diluted net earnings per share guidance ranges. We expect net sales growth of 1% to 3% and diluted net earnings per share of $1.70 to $1.82. We are encouraged by the progress we have made and our team's sense of urgency to address the near-term challenges impacting the business.

Thank you, Jim. Good morning, everyone. Net sales for the second quarter were $3 billion. In the second half, the negative topline headwinds from our new pork supply agreement and the beginning of HPAI last year will have fully annualized. We expect a strong volume rebound in our turkey business in the back half of the year. Second quarter gross profit was $491 million. The benefit from pricing actions was more than offset by unfavorable mix and higher expenses. For the second quarter, SG&A expenses as a percentage of net sales decreased to 7.1% from 7.3%. Through the first half of the year, SG&A as a percentage of net sales is in line with last year, demonstrating our disciplined cost management. Advertising investments were $35 million during the quarter as we continued to support our leading brands in the marketplace. We expect full year advertising expenses to increase compared to the prior year. Equity and earnings of affiliates from the second quarter increased significantly compared to last year due to improved results from MegaMex. Operating income for the second quarter was $296 million. Operating margins of 9.9% improved from 9.7% in the first quarter. Net unallocated expenses in the second quarter increased 6% due to higher pension costs, which were partially offset by improved rabbi trust investment results. The effective tax rate for the quarter moved higher to 22.1% compared to 18.7% last year. As anticipated, we did not repeat last year's favorable rate, which reflected higher stock option exercises. The effective tax rate for fiscal 2023 is still expected to be 21% to 23%. The net result of all these factors was diluted net earnings per share of $0.40. Turning to cash flows and capital allocation. Our financial position remains an area of strength, allowing us to satisfy our required strategic and opportunistic uses of cash. Operating cash flow was $208 million for the second quarter compared to $193 million last year, an 8% increase. We paid our 379th consecutive quarterly dividend effective May 15 at an annual rate of $1.10 per share, a 6% increase over last year. We also announced our August dividend payment earlier last week, which will represent 95 years of uninterrupted dividend payments to our shareholders. We are now targeting $280 million in capital projects, which is in line with our historical investment in CapEx. We continue to prioritize investments in capacity for growth, innovation, cost savings, automation and maintenance. Our current net leverage ratio remains within our stated goal of 1.5 to 2x. As a reminder, our next debt payment is due June of 2024. In April, we made an additional $15 million investment in Garudafood, bringing our minority ownership from approximately 29% to 30%. As noted last quarter, we do not expect the investment in Garudafood to have a material financial impact on fiscal 2023 results. Finished products inventory increased 1% compared to the first quarter as our actions to mitigate the impacts from higher inventory levels were offset by inventory build for SPAM promotions later this summer and as we restore SKIPPY inventories to healthy levels. As we responsibly work through higher inventory levels over the balance of the year, we expect a reduction in nonproductive inventory levels for days sales, and inventory to return to a normalized range below 60 days. Lastly, we repurchased 310,000 shares for $12 million during the quarter. We will continue to repurchase shares opportunistically based on our internal valuation with authorization to purchase roughly 3.7 million additional shares. As Jim detailed, we are reaffirming our net sales and diluted net earnings per share outlook for the year. In addition to successful execution against our plans for the Planter Snack Nut business, and the recovery in China, growth for the balance of the year is dependent on continued improvement across the supply chain, including delivering on our internal cost reduction goals, year-over-year favorability in commodity and freight markets, and a strong recovery in turkey volumes.

You have been quite clear about the challenges in the second quarter, and the focus seems to be shifting to the second half of the year. You have reaffirmed your outlook for that period. Can you provide insight on the factors driving sales and earnings growth, particularly highlighting foodservice as a significant contributor? While foodservice earnings increased in the second quarter, turkey and bacon pricing impacted the top line. Is the improvement in turkey availability the main factor that will drive change? If so, how confident are you in your visibility regarding that improvement as we approach the second half, and what level of risk do you see?

Yes, Michael, thanks for the question. I mean, there's a combination of things as we think about the back half of the year. Foodservice will continue to be a driver in our business as it has been this year and previous years. But as we think about the availability of turkey, when we think about some of the capacity that we now have with projects that have come online, our most recent SPAM line or expansion of pepperoni, the continued growth and performance of the Planters business, and then the other variable to consider is as we think about the back half of the year. Although they're not there today, we've built in some higher markets for the back half of the year. So especially for those items where the pricing is more pass-through, you're going to have a topline impact but then all those other things contribute to both top line and bottom line. So those are the things that we really can control and that's what we're focused on as we head into the back half of the year.

Okay, that's great information. To follow up on your comment about pricing in the third quarter, it seems like pricing has reached its peak in most areas, and there are fewer announcements regarding increases. Have you faced much resistance? How widespread are the price increases? Can you provide more details on how we should approach this?

Thank you for the question, Michael. This is Deanna. Regarding retail, we implemented pricing changes in Q2 for several categories and are examining a few more as we enter Q3. We are carefully considering how to maintain our margins while also supporting our relationship with both customers and consumers. When we present retailers with solid information backing our price increases, we have successfully reached agreements to move forward. It is essential for retailers to protect their own margins and the interests of consumers, and we are familiar with these discussions when it comes to pricing. Ultimately, it’s about having all the relevant data and facts to justify our actions and decisions.

And just as a reminder, Michael, our foodservice business tends to be closer to the market with pricing than retail.

Just following along these lines, and I wanted to understand a little bit if you could elaborate what you're seeing more recently and what your expectations are as it relates to volume. I mean, with the pricing actions being taken, how do you feel about the volume reaction into the back half? And how much of that maybe volume recovery is then ultimately going to help you to drive some of the profit recovery you're looking for? That would be my first question.

The turkey volume is returning, and the impact of HPAI this spring has been minimal. We are now producing a full range of items. Our sales teams are focused and actively selling turkey again. It takes time to rebuild after not having turkey for a year, but they are committed. This new volume reflects that recovery in the turkey segment. We had been limited in capacity for some categories, but with those constraints lifted, the sales team can sell more effectively. The excellent work done by our team on Planters has the potential to enhance both our revenue and profits in the latter half of the year. Perhaps Deanna can provide more details about some of the categories.

Sure. As we think about volume in the back half, we're really encouraged to have turkey back with the ability to promote. So we're out actively setting up promotions for the back half of the year with our retailers. Bacon continued to enjoy growth in the first half, and we don't see anything stopping that in the back half. The brand performed really well in regards to gaining new households as well as gaining growth in the marketplace. We'll continue to support those brands with both promotions, with advertising as well as innovation, which was planned as we added capital in the areas of bacon, pepperoni, and as we think about Columbus and Planters, you'll see really advertising, promotion, and media across all of those as well as innovation. So we feel good about the volume through, again, turkey, bacon, pepperoni, Columbus, Applegate, and Planters as we saw some improvement in Planters most recently at the end of the quarter and have plans as we head into the back half.

Okay. And then just one quick housekeeping as it relates to CapEx and the reduction here in the new target. Can you explain the reason why you're lowering the CapEx? Is it the delay? Is it not execution? Is it just being more cautious on capital allocation in general? Just a few comments around that would be appreciated.

Thanks for your question, Ben. So just to start off, we are in a very strong financial position and continue to be. As we look at the spend, the spend is absolutely in line with our historical levels. And quite frankly, I mean we've gone into the year with an expanded CapEx spend, and this is just a natural fallout that happened as you go to execute for different reasons; there is slippage that actually happens when we try to execute so many projects during the year. That being said, we're in a great position in terms of what we've invested in our capacity for the business and also what we need to do from a maintenance perspective.

I wanted to ask about mix across each of the segments. It was a factor that unfavorably influenced the retail business, favorably influenced the foodservice business. I'm curious to understand the factors influencing mix, how much of them were externally driven? And what are the things that you all can do from an initiative or internal perspective that either amplifies the benefits that you're getting in foodservice or combats the challenges you're facing in retail?

Sure. Thanks, Ben. On the retail side, when we think about the mix, again, it's always a mixed bag. We've had our bacon business, which has had a positive impact. Planters has had a dilutive effect on mix. When we think about what's happened in China, and so there's a lot of moving parts across the entire portfolio even when we think about the commodity side of the business and what's happened. But I think the retail team is focused on the right opportunities to drive and improve mix. And when we think about the sales and volume opportunities in the back half of the year, a lot of those are improved mixed items. The foodservice team does a great job historically of really laddering up and increasing the value-added proposition of their portfolio. And so we expect that to continue. And then in the International business, just as China moderates and we see that inflection point and improvement as markets open up for them to be able to move more product. We see that mix improving as well.

On the international side, you mentioned that the availability of turkey is improving, and the high pathogenic avian influenza situation seems to be largely resolved, although we are still monitoring it. What kind of improvement are you anticipating in that sector, particularly regarding exports?

Ben, I think probably the most important piece here is when we think back to the back half of last year and where our volume was down of 30%. That was very, very significant. And so as we're looking at the back half of this year, we do expect Q3 to be relatively flat, maybe a slight increase. And then in Q4, would expect an increase. Specifically on the International business, there are some nuances with the Jennie-O Turkey business as we've restructured the business and moved into our Go Forward model. A lot of that responsibility was in Jennie-O this year. It's in the International business, and they've been negatively impacted by market closures tied to AI. We've already started to see some markets reopen, which will allow them to move additional volume and then also, obviously, additional margin with that.

I wanted to maybe just touch on the expected cadence of earnings in the second half of the year. If we go back many years, your third quarter earnings have typically been the lowest quarter of the year. I know the first couple of quarters of this year had some unusual headwinds, but it does sound like pricing actions, some operational improvements, and some of the volume recovery, right, is a bit more weighted to the fourth quarter. It also sounded like maybe there's a bit more work to do on working down inventory in the third quarter. So I guess with respect to that third quarter, should we expect 3Q to follow this historical cadence, meaning something below the $0.40 in the past 2 quarters? Or just given some of the improvements, is more of a rebound expected this year?

Yes. Thanks for the question, Tom. I think there's a couple of things to consider. And historically, I get the point of reference, but I would say this is a fundamentally different business that we're operating today. And so as we think of Q3 in terms of cadence, we do expect to be marginally higher than last year. To your point about the work that remains, as we said on our first quarter call, we had very clear priorities and our team did a great job executing against them, but the work is not done. And so we do expect to see some of those benefits in Q3, additional benefits in Q4. So the work is not done; the team is doing a great job, but the priorities remain the same for us.

Okay. Thanks for the detail. And then maybe just on the pricing side, you mentioned it's inflation-justified pricing. Maybe just some color on what commodities are the general focus for this pricing? And is this related to inflation that's cropped up in recent months? Or is this more catch-up for something that happened in past quarters?

Thanks for the question. It's really a couple of different things. Some of it will be catch up, not necessarily based on markets, but it will be a collection of the input costs going into our items. We also have to factor in we've invested into capacity, and obviously, depreciation comes at us as a result of that. So we're always thinking about where we need to grow, and obviously, growth has to be paid for. The other piece would be looking forward in regards to some of our markets that are a bit more annualized as we start looking into next year and where we're expecting some input increases and positioning ourselves for that to maintain our margins as well as to be able to ensure we can invest in our brands through trade and advertising.

Jim, I know we've discussed this topic extensively. Regarding the sales and revenue trends for the year, I want to clarify the guidance. To reach the low end of the range, it suggests a shift from a decline of about 3% in the first half to an acceleration of sales to over 5% in the second half. I understand there are additional factors at play, such as the impact of Jennie-O and the WholeStone contract from last year. Can you explain what is included in your volume assumptions by segment, or at least at a total level? Additionally, how much of this depends on a resurgence of demand versus factors like pipeline fill and shelf resets that would help achieve those volume targets? An in-depth explanation would be very beneficial.

That's a lot to unpack, Peter. I'll do my best here. I think, again, starting at the end, demand is always important. But this idea that we need some unbelievable demand acceleration, that's not necessary for us to be able to deliver growth in the back half of the year. And I know it's going to sound repetitive, but a big part of this is getting turkey back, getting that full assortment back, being able to now sell in some categories that were capacity-constrained, stabilizing and growing that Planters business. I mean those are all the things, in addition to the other parts of the business that are growing already. And as we think about the segments that you asked about, Retail has got a lot of dynamics and a lot of puts and takes. So even if we said retail volume will be relatively flat, we do expect volume growth in foodservice and International. When we roll all of that up, your number or your estimate is appropriate, and we've got the ability to get there with all the dynamics I mentioned.

Okay, that's very helpful, and I appreciate it. Then for Deanna, I know we've discussed pricing a lot, but your largest customer has indicated that they need food companies to lower prices. With the recent incremental pricing actions, which are justified by inflation, how do you address those comments?

As we consider the latter part of the year, it's important to note that last year we did not implement trade promotions. Therefore, much of our efforts with retailers involve discussing category growth alongside consumer behavior, focusing on strategies that take advantage of trade. We've reallocated some funds from lower-impact efforts to higher-impact promotions, which include various in-store activations and advertising. While we might initially present a price request, we view price as just one component of the conversation. Our goal is to collaborate with retailers on category growth and to reinforce the value our brands provide to consumers, emphasizing that price alone isn't sufficient. We'll engage in discussions that include pricing promotions and in-store displays, and that will be our approach for the second half of the year.

So I just want to get your thoughts on a consumer backdrop. I know there's snap reduction in the market that could be impacting retail. So curious just what you guys are seeing in retail. And then just in foodservice, I think late last year, you guys may have seen a slowdown, but just curious what you're just seeing right now on the demand side in foodservice.

Yes, Rupesh. When we consider the overall consumer dynamics, I'll let Deanna provide more insights on the retail sector. However, it's important to highlight that we've purposefully established a balanced business model. In this extremely dynamic environment, which is likely an understatement, we truly benefit from that model, whether it pertains to the premium tier, value tier, or alternative channels and protein inputs. Our diverse approach across all areas is an advantage for us in this situation. In terms of foodservice, the volume and business remain robust. At the recent National Restaurant Show, there was a sense of cautious optimism, but optimism nonetheless. With people still traveling and the various segments we serve, the balance we've created in our foodservice business also proves beneficial. This is why we remain optimistic about the foodservice sector. We believe there is sufficient demand, and our emphasis on different segments positions us to take advantage of opportunities as the business shifts from one segment to another.

Rupesh, what I want to add regarding the retail aspect is that consumers are being very deliberate about their spending, including where and how they shop, as well as the types of products they choose. Consequently, we are still observing a strong interest in our premium offerings. For instance, items like party trays or Columbus circuitry boards are providing value to consumers' lives and are part of their family pride. While some areas of our portfolio may experience short-term challenges, many of our brands remain very significant. This is why we continue to focus on advertising, promotions, and store activations, as I recognize the importance of our brands.

I guess my first question is on turkey. And Jim, you clarified kind of that volumes kind of normalizing without HPAI, I mean there was an allusion to commodity turkey pricing, which has fallen pretty meaningfully kind of since the start of the year. How do we think about the profit kind of contribution of turkey at this point? I think kind of coming into the year, kind of its own business. I think the framing have been that that was going to be roughly flat with volume growth and offsetting or volume normalization in the back half offsetting kind of feed costs, but kind of the commodity turkey environment has kind of come in pretty meaningfully since where you guys were in November and December. I'm just trying to think about how that would impact the profitability of your total turkey business, which is obviously now standing between two different businesses.

Got it. Thanks for the question, Adam. I do think it's the offset in terms of the return of the volumes and that tonnage increase in the back half. And you're right, we've seen markets come down, but there is that corresponding offset because we just haven't had that volume to sell. Our ability to be able to now have the value-added products on a regular basis, whether it's the lean ground turkey and retail or having a full product offering on the foodservice side of the business, that's really a differentiator. The bottom line to all of this is that it is great to have turkey back. Fundamentally, in our portfolio, turkey is a very, very important part of what we want to get done. We're glad to have this volume back. The ability to regain focus on the value-added portion of the business is what our team is focused on right now. Like I said, you don't just flip a switch when you haven't had something that's held for a year, but the teams, retail, foodservice are very aligned and focused on moving turkey again in the back half of the year.

The other piece I'll also add there, Adam, is that the team has done a really, really good job from a supply chain standpoint. As you think about the profitability, the yields have been really good and have improved the bird performance. That will definitely help us as you think about margins.

Okay. And then I had a follow-up on cash flow. And just I think there was another question about the CapEx reduction. But in some discussion also about kind of inventory dollars improving over the balance of the year. Has the cash flow kind of performance through the quarter and year-to-date actually hit your own expectations? And can you dimensionalize kind of by the end of the year, kind of what the anticipated release of working capital dollars should be?

Yes. So I'll start off by saying, I mean, we continue to generate really strong cash flow, and we expect that to continue and improve through the rest of the year. That continues to give us that healthy balance sheet I talk about and just being able to flex as needed from a cash utilization standpoint for the business. So we're not feeling any different about our cash flow and our availability and ability to generate cash.

Okay. Did the cash flow performance during the period meet your expectations? How much is the anticipated working capital release as we look ahead for the remainder of the year?

Yes. So definitely met expectations for the quarter, and the detail around your second piece of the question, Adam, you can definitely follow up with David on that piece.

Well, thank you. While very dynamic, the second quarter demonstrates our team's ability to do what we say we're going to do with the appropriate sense of urgency. I'm very proud of the work the team did this quarter to set us up to deliver sales and earnings growth in the back half of the year. We are still focused on the same priorities and remain confident in our team's ability to deliver the results that we expect. Thanks to all of you for joining us this morning.