[Call Starts Abruptly]

Good morning. Welcome to the Hormel Foods Conference Call for the Second Quarter of Fiscal 2020. We released our results this morning before the market opened around 6:30 a.m. Eastern. If you did not receive a copy of the release, you can find it on our Web site at hormelfoods.com under the Investors section. On our call today is Jim Snee, Chairman of the Board, President, and Chief Executive Officer; and Jim Sheehan, Executive Vice President and Chief Financial Officer. Jim Snee will provide an overview of the company's response for the COVID-19 pandemic, in review of the company's current and future operating condition and commentary regarding each segment's performance for the quarter. Jim Sheehan will provide detailed financial results and commentary regarding the company's current and future financial condition. The line will be open for questions following Jim Sheehan'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. An audio replay of this call will be available beginning at 11:00 a.m. today, Central Standard Time. The dial-in number is (888) 254-3590, and the access code is 7355932. It will also be posted to our Web site 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 Pages 30 to 35 in the company's Form 10-Q for the fiscal quarter ended January 26, 2020, in addition to a supplemental risk factor related to the COVID-19 pandemic included in our Form 8-K files this morning. Those can be accessed on our Web site. 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, organic sales, adjusted pretax earnings, adjusted diluted earnings per share and operating free cash flow. Discussion on non-GAAP information is detailed in our press release located on our corporate Web site. I will now turn the call over to Jim Snee.

Thanks Nathan. Good morning everyone. First off, I want to take this opportunity to express my sincere appreciation to the essential workers showing up everyday in food manufacturing facilities across the industry. They should be recognized for the heroic and purposeful work they are doing and they have my most sincere appreciation and gratitude. I also want to acknowledge the food industry employees for showing their commitment everyday with the work they do, whether in a grocery stores, food pantries, restaurants serving patrons or takeout, delivery or curbside pick-up. And of course, a big thank you to the healthcare workers and first responders who are keeping all of us safe. Throughout this pandemic, our number one priority has been to keep our team members safe, especially those who are not in a position to work remotely. Our COVID leadership team including operations, quality control, communications, legal, R&D, and human resources have worked tirelessly to ensure we have the appropriate enhanced safety measures in place, including personal protective equipment for all plant team members, temperature and wellness screenings, frequent disinfecting of high touch areas, reconfiguration of common areas and workstations, revised shift scheduling, reducing production line speeds, new guidelines on carpooling, more extensive social distancing measures throughout each facility and wherever possible providing remote work opportunities and improved access to COVID-19 testing. I am continually amazed in our management team's ability to find innovative ways to enhance employee safety in our facilities. Throughout this crisis, we have also been transparent with our team and the public about all we are doing to put safety first. As part of our industry-leading safety measures, we have also developed an awareness campaign we call "Keep COVID Out," a program that reinforces various preventative measures at our production facilities and in the communities where we live and work. As a global branded food company, we play a critical role in providing safe, high-quality food during this unprecedented time. As we all know, it has not been business as usual over the past several weeks, and we will likely be in this new normal for some time. I'm very proud of how all our team members have stepped up and reacted to the rapidly changing dynamics in our industry. Before I get into the quarterly results, I want to take a moment to tell you a few things about our approach over the last several weeks that really stand out for me. I told our team that we were made for this and the following are examples of what really makes us the company so uncommon. As we progressed into the initial stages of the pandemic, our senior leadership team agreed that we would do everything we could to protect the jobs of our thousands of team members. Each day, I heard examples of our supply chain team going above and beyond to shift production between plants or relocate where certain jobs could be done. In many cases, these changes had never been done before. Balancing workloads across plants in a manner we did was not the most cost-effective decision, but it was the right decision. Another example of what makes this company uncommon is our commitment to making the best long-term decisions for our team members, suppliers, customers, and shareholders. Because of our stable cash flows and strong balance sheet, we will not neglect any strategic investments during this uncertain time. We have completed a comprehensive review of our capital projects, and in some cases have slightly delayed project completion because the additional capacity isn't needed right now. However, we continue to move forward with many investments that will enhance our long-term performance. One such investment is Project Orion. Our team's ability to effectively and efficiently work remotely has allowed us to keep Project Orion on track, and we have made the decision to go live on our financial system update in June. I know everyone on our finance team is committed to making the important cutover a success. We are confident we will see the benefits from our financial system go live just as we are seeing from our HR system upgrade completed in January. I also want to take a few minutes to highlight key areas that are helping us weather the storm. First, our creation of One Supply Chain supply chain three years ago has been instrumental in helping us manage this crisis from one pivot point at an executive level. The quick decisions we made early on could not have been made in the same way if we were operating four or five different supply chains. Second, the significant investments we made several years ago in our ecommerce team, infrastructure, and capabilities positioned us to quickly grow in this emerging channel. During the quarter, our tracked purchases through IRI were up over 100% and our brands are significantly outpacing category growth and capturing market share in many categories across both center store and perimeter. Finally, our decision late last year to transition the entire enterprise to one IT platform made virtual coordination much easier than it otherwise would have been. While our decision to transition right before the pandemic was serendipitous, our IT Services Group deserves a lot of credit for seamlessly transitioning thousands of team members to working remotely in less than a week. Now looking at our sales results for the quarter, the balance we have purposely built into our business is a competitive advantage that has allowed us to perform well in many different economic situations, including the current crisis. For the quarter, volume increased 4% and organic volume increase 7%. We delivered record sales for the quarter with an increase of 3%. Organic sales increased 6%, and three of our four segments delivered increases in sales. From a channel perspective, total retail sales increased 16% during the quarter. We saw multiple different waves of demand in our retail businesses as the pandemic has unfolded. In the first wave, we saw tremendous demand for nearly all of our center store brands. Our initial assessment was consumers were stocking up, but as the weeks progressed, we continue to see sustained double-digit increases. The second wave of demand took place as shelter-in-place restrictions were enacted across the country, and consumers shifted from dining and restaurants to purchasing more perishable products across the perimeter of the store. We continue to see perimeter sales increase at double-digit rates over last year. Throughout the escalation in demand, we've seen a large increase in the number of new buyers and households purchasing our branded products. What I'm particularly proud about is the number of new buyers that are making repeat purchases of our brands. This is an important leading indicator as consumers are using our products, enjoying the experience, and repurchasing our brands. I'm also encouraged by our team's ability to capture, share in channels that were open and available namely the retail channel. From a total company perspective, we significantly outperformed the category, private label, other large brands, and small brands. Our ability to capture market share is a testament to our brands and direct sales force, and also to our operations and supply chain teams’ ability to ensure our products are on the shelf. One dynamic from the pandemic that is affecting all of us is what is happening across the foodservice industry. It's heartbreaking to see distributors, restaurants, hotels, and many other foodservice venues struggle to survive. I've seen estimates of thousands of restaurants across the United States could close as a result of this crisis. Every entrepreneur behind each restaurant has a unique story of why and how they chose to open their restaurant. Many of these restauranteurs are community members trying to make their neighborhood a better place to live and work, and these closings are tragic. Our foodservice divisions have been doing their part to help the foodservice industry. Within days of the crisis, our Hormel Food Service Group offered a rebate program to help offset operators' food costs. This program was successful and exceeded our expectations. We're also working very closely with our distributor partners to support their needs and have recently received accolades for our efforts. And finally, we've talked a great deal about how our direct sales force is a distinct competitive advantage and no time is that more true than right now. Our sales team has been on the virtual frontlines, helping operators quickly adjust to take out delivery and curbside pickup with best in class guides and kits, and sometimes being the only supplier to personally check in with the restauranteur during this difficult time. Like others in the industry, we saw a sharp decline in our foodservice business starting in late March. For the quarter, our enterprise foodservice sales were down 21%. As you think about our domestic foodservice business, it is primarily sold through the Refrigerated Foods and Jennie-O Turkey Store segments. Prior to the outbreak, our foodservice business represented approximately 40% of sales in both segments and a majority of our operator customers are in key segments, such as midscale and casual dining, lodging, K-12 schools, colleges and universities and healthcare. Each foodservice segment is experiencing different dynamics during the shelter-in-place restrictions, and each will have a different recovery timeline coming out of the pandemic. Even though it is early in the third quarter, we are starting to see orders pick up across our foodservice businesses. From a financial perspective, we delivered earnings per share of $0.42; Jim Sheehan will provide more details of the moving pieces, but I do want to mention that our earnings fully reflect $0.05 per share in investment losses and increased supply chain costs related to COVID-19. The high level dynamic during the quarter was similar in each segment. Namely, demand shifts from foodservice to retail at higher operational costs. However, each segment did experience some unique circumstances, and I want to highlight those areas. Grocery products volume increase 7% and sales increased 8%. Organic volume increased 19% and organic sales increased 20%. We saw exceptional growth from nearly every brand, with some products delivering very strong double-digit growth including the SPAM family of products, SKIPPY peanut butter, and Hormel chili. Two keys to grocery product success during the quarter was the sales and marketing teams focus on limiting production to our priority, high volume items and frequent conversations with our customers regarding assortment and product availability. We know our center store brands are perfectly suited for value consumers who need affordable high quality products for their families. With millions of Americans now unemployed, or shelf stable products are as important to consumers as they've ever been. Earnings for grocery products increased 22% despite the divestiture of CytoSport for last year. Strong volumes and improved mix were the key drivers to the double-digit increase. Jennie-O Turkey Store delivered a strong quarter with volumes up 19%, sales up 12% and a segment profit of 54%. Strong retail, whole-bird and commodity sales more than offset declines in food service. The Jennie-O sales and marketing group made excellent progress regaining distribution prior to the pandemic, which puts them in a strong position to succeed. During the quarter, Jennie-O lean ground turkey sales increased by double digits. Higher sales and operational improvements across the supply chain are the key drivers to earnings growth. International volume decreased 2% and sales increased 2%. Branded exports primarily SPAM offset declines in our China food service business. Segment profits increased 62% due to higher branded export margins and increased income from affiliates. I'm pleased to report our China plants operations are now fully up and running to support our retail and food service businesses as the country continues on its path for reopening. Our food service business in China is improving off the lows we saw during the pandemic and we are seeing very strong demand for SPAM, SKIPPY and our refrigerated products at retail. The team in China is working through higher pork prices, but are taking the necessary pricing actions to offset cost increases. Refrigerated foods volume was flat and organic volume was down 1%. Sales increased 1% and organic sales declined 3%. Retail demand was led by products such as Hormel Black Label bacon, Applegate natural and organic products, Columbus grab-and-go charcuterie and Hormel pepperoni. We also finalized the acquisition of Sadler's Smokehouse during the quarter. The majority of Sandler's sales are into the food service channel. But I've been impressed by the way in which this team has quickly pivoted their production to meet the growing needs in retail. One unique trend we are seeing in the marketplace is consumers searching for products that can replace a restaurant experience. Brand like Sadler's Smokehouse and Lloyd's barbeque fit that need perfectly. In fact, our retail lines at Sadler's and Lloyd's have been operating at capacity to meet the demand for their products. Our food service business saw double-digit declines during the quarter. However, we are very confident that as the food service industry starts to open up, our product lines featuring precooked, pre-sliced and pre-marinated products will thrive as operators look to simplify preparation and reduce handling of products. Our deli business experienced customer dynamics that were a blend between retail and food service. Products like Columbus grab-and-go charcuterie performed well as consumers searched for unique and flavorful products. We can see declines in the behind the glass and prepared food businesses, as many retailers closed these areas to redeploy labor to other sections of the store. Earnings were down 17% to the lower food service sales and higher operational costs as we paused production at two plants during the quarter. Jim Sheehan will provide more details regarding input cost volatility the refrigerated foods team experienced during the quarter. As we look forward, we are withdrawing our full year sales and earnings guidance. The decision to withdraw guidance reflects uncertainty created by COVID-19 in several key areas, including consumer behavior at retail and food service, volatility and our input costs and supply chain disruptions. Our team is focused on these indicators to guide our decisions and investments in the coming weeks and months. First, we are paying close attention to consumer behavior across our entire portfolio. We are watching consumer buying patterns in the retail channel with metrics such as household penetration and repeat rates. We're also watching how consumers emerge from shelter and place restrictions across the country and reengage the food service industry. In addition to monitoring restaurant traffic, we're observing how other segments in the food service industry, such as lodging, colleges and universities, and K through 12 education reopen. We're also actively managing through the volatility we're seeing in raw material markets. As I mentioned, Jim Sheehan will provide a detailed assessment of the hog and pork industry of the recent periods of operational pause and start-up in processing facilities across the industry are creating dramatic swings in input costs. I have the highest confidence in our ability to pass along the necessary pricing, but we may experience short-term margin compression, or expansion as raw material markets adjust to the rapid changes in supply and demand. Finally, while we have implemented industry leading safety measures, we have experienced operational challenges at some of our facilities due to COVID-19. And we are strategically managing through operational disruptions on a daily basis. These operational disruptions have led to incremental supply chain costs. During the second quarter, our costs increased by approximately $20 million primarily related to team member bonuses, enhanced safety measures and lower production volumes. In the second half, we expect to incur another $60 million to $80 million of incremental costs that are temporary and these costs will be weighted to the third quarter. In closing, I want to emphasize three points. First, our company was built for this. We have the right strategy, sound business fundamentals, best in class management and the financial strength to thrive in this dynamic marketplace. Second, we will not do anything to jeopardize our strong financial position. We are well-equipped to weather this storm and will be stronger because of it. Third, we have said from the very beginning of this pandemic, that our goal was to do our best to do everything right. From people safety to supporting our partners and customers to ensuring America has food on its shelves to donating millions of dollars and millions of meals to hunger related causes. Everything we are doing is in perfect alignment with our purpose of inspired people, inspired food. At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter, provide commentary regarding key input cost markets and an update on our financial position.

Thank you, Jim. Good morning. Net sales increased 3% to $2.4 billion, a record for the second quarter. Organic sales were up 6%. Segment profit increased 5% to $310 million as double-digit growth from grocery products Jennie-O turkey store and international more than offset a decline in refrigerated foods. Pretax earnings were $286 million down 10%. Excluding the CytoSport gain last year, adjusted pretax earnings declined 5%. This decrease included significant losses on investments. The effective tax rate was 20.6% compared to 11.1% last year. Last year's rate benefited from a tax gain on the CytoSport sale. Earnings per share for the quarter was $0.42 down 19%. Adjusted earnings per share was down 9%. Selling, general and administrative expenses increased year-over-year. Lower expenses last year were due primarily to the gain from the CytoSport sale. Advertising for the quarter was $35 million flat to last year. Net unallocated expenses for the quarter increased $46 million. The increase was due primarily to $16 million related to the CytoSport pretax gain and $19 million in lower investment results from last year. Operating margins were 12.1% compared to 13.3% last year. Additional costs included the import investments in COVID-19 related employee safety measures and production professional bonuses. Both reflect our commitment to our production professionals and ensuring their safety. The company continued to generate strong and stable cash flows despite the impact of COVID-19. Cash flow from operations and free cash flow more than doubled in the quarter compared to the prior year. We recently renewed our shelf stable registration statement and are considering near-term opportunities to access the debt market, at favorable interest rates to provide ample liquidity to take advantage of strategic opportunities. The company's strong cash flow and balance sheet along with the investment grade credit rating allows us to manage risk, as well as make strategic and long-term investments to drive shareholder return even in times of uncertainty. We are confident we will remain in a strong position to fund our capital needs, including the dividend, capital expenditures and pension contributions as we grow the business. We paid our 367th consecutive quarterly dividend effective May 15 at an annual rate of $0.93 per share, and 11% increase over 2019. Capital expenditures in the quarter were $80 million compared to $48 million last year. Large projects for the remainder of the year include the Burke pizza topping plant expansion, a new dry sausage facility and Project Orion. The company's target for capital expenditures in 2020 is $340 million. We completed the purchase of Sandler's Smokehouse for $269 million during the quarter using cash on hand. Share repurchases in the quarter were $12 million representing 300,000 shares. We repurchased stock to offset dilution from stock option exercises, and based on our internal valuation. The quarter was impacted by contrasting dynamic forces. Within an 8-week period, the industry experienced the decline in food service demand, creating an oversupply of protein. This was quickly followed by plant disruptions which resulted in significant protein shortages. At the peak in early May, the industry was operating at 40% below capacity. The changing dynamics of supply and demand cost are swings in hogging commodity values, which have continued into the third quarter. To illustrate the volatility, the USDA composite cutout declined 40% from March 23 to April 9. Since April 9, prices have increased by as much as 140% to levels that's been since DEDV in 2014. Likewise, bellies have traded between $40 and $270 per hundredweight since the beginning of April. These trim traded at both 10-year lows and 10-year highs over the same period. The most recent USDA supply and demand report estimates a 1% decline in hog production for the year after estimating a 5% increase in the prior month's report. We feel the hog in commodity values in the near-term will be determined by industry processing capacity. Additional plant disruptions will depress hog values and increase commodity values. Alternatively, if the industry is capable of operating at near capacity levels, hog prices and commodity values should moderate. Worldwide demand for pork remains strong. We continue to monitor African swine fever in China, Southeastern Asia and Europe. According to the USDA exports are expected to increase greater than 10%. In the near-term, we are closely analyzing two key factors, hog processing levels and consumer confidence as restaurants reopen. We are currently using multiple predictive analytic models to monitor and forecast both factors. We are actively managing industry capacity issues by leveraging the three ways we source raw materials; internal processing, contracted sourcing and purchasing primals on the open market. The supply chain strategy is designed to mitigate volatility. The margins could expand and contract as pricing lags changes in cost. This can shift profitability between quarters. Fundamentals in the turkey industry were mixed in the second quarter, but recent data indicates improving conditions. Consistent with the pork industry in the near-term, we are focused on the ability to maintain turkey operations in the industry and at our facilities. Four placements in the last six weeks have experienced meaningful declines. This should continue to reduce cold storage levels, which had already significantly declined. We expect whole-bird pricing to remain elevated compared to last year for the remainder of the year. Turkey breast pricing was significantly lower in the second quarter, but pricing is improved in the third quarter. We successfully implemented the Oracle Human Capital Management System of Project Orion in January. As Jim Snee said our team is credited with advancing Project Orion as we work remotely with minimal project delays. We are proceeding with the finance go-live in June. Our team is already benefiting from enhanced analytics and improved demand planning. In June, we will introduce additional capacities such as robotic process automation and real-time data integration. Further implementation for the supply chain will take place later in 2020 and 2021. At this time, I'll turn the call over to the operator for the question-and-answer portion of the call.

[Operator Instructions] Our first question from Tom Palmer with JPMorgan.

You gave some helpful detail on what you're seeing in the hog and pork market. I just wanted to ask about how that translates to your results as you kick off the quarter, right? It would sound, I guess on the lean hog side prices down quite a bit, but you guys historically have not always seen your costs track as closely just given your negotiated purchases. And then, on the more input cost side, you're seeing some pretty substantial increases. So are you kind of messaging that the quarter is going to start-off a little bit slower from a profit standpoint, and then you would look to adjust pricing and kind of recapture those input costs or did I miss here?

First of all, the most important thing on pricing is going to be the ability to keep the plants running and the processing capacity and right now that seems to be happening. But there's great deal of uncertainty as to what plants are going to be had and the volume impact those interruptions will have. So that's the most important thing as you look at our quarter that can create the volatility that you've talked about. The other thing that's happening in the industry is that primals or items raw materials don't require additional processing are much more expensive than the less processed items. My example would be hams right now are running at about $35, but 72% trim today is 125. Normally, you would take those hams and you'd bone them because of that price discrepancy in the two items. And you'd bone the hams for trim, but right now it's hard to find the labor with the absenteeism that's in the plants to do that boning. So there's a quite a bit of diversity in the pricing of the primals right now. As far as hog prices today, hog prices are at about $39 says the western Corn Belt. And last quarter, our pricing for hogs were not far off of the average Western Corn Belt I think was about mid-50s 54 and 55 in that range. The only thing that was a bit above average for us were grain based contracts. And so, hog pricing for us is not out of line of what you're seeing in the Western Corn Belt. We're watching the input costs greatly and you're seeing the volatility. I mean, take a look at 72% trim. It was as low as $34 in the second quarter went as high as $145 in the second quarter. That comparison gets to $68 price today and it's at 125. You've got bellies that range from $41 at the low to 267 at the high averaged about 113. And it's dropped to $94, just the last week. So it's really hard to read the -- or estimate the primal values, raw material costs. But watch what's happening on the plant performance. Again, as I said before, if we're able to keep players both the industry and our plants running at about capacity, we think there'll be a moderation in both hog prices and overall primal values. Hope that helps.

And then just wanted to ask on the Jennie-O side, the volume growth, I think, traditionally, about three quarters of your product has been internally supplied. I'd be surprised if you were able to move slaughter volumes by as much as that segment volumes were up. So could you talk about your purchases this quarter, any changes to inventory levels, and then how you're thinking about kind of a mix versus slaughter and purchases going forward?

Yes. I mean, obviously, we're quite pleased with the quarter that JOTS had, really good work, coming off of -- coming out of our first quarter call, we talked about what they had done in distribution and really what they've continued to do, especially on lean ground turkey. They've been able to really move through some of that inventory, because we've had -- the business has been driven across the entire portfolio. So whether it was retail, whole-birds, commodities, it's been a really, really good mix of products that have put them in a great position in the quarter. In regards to some of the actual harvest volumes and some of those questions, we'll have Nathan follow-up with you on that, that level of detail, but just overall really strong demand across many areas. Good quarter for JOTS.

And we'll go to our next question from Heather Jones.

Just wondering when you talk about food service in the refrigerated foods business. I guess a two part question. Just wondering if you could give us a sense of what proportion of that is like the QSRs or pizza takeout chains versus like the hotels, institutions business? And then, the second part of the question is, we talk about you start to see this demand come back, if you could just give us some sense of the magnitude of recovery you're seeing.

Thanks Heather the question. Our food service business was off to a great start this year and in the quarter. We saw some really strong growth through mid-March. And then a sharp decline through the end of quarter, we talked about business being down 21%. And as we think about the channels where we compete, we have a very balanced food service business. And so you think about lodging, colleges, universities, K through 12, midscale casual chains, really, really nice balance. When you talk about QSR, if you're talking about traditional burger chains, probably don't have a lot of business there. But if you think about locations that still have drive thru business available to them. We have quite a bit of business in that channel, if you want to call it that. And so very balanced model across food service and as we're starting out the third quarter and we talked about, it's early, we're seeing some demand pick up. The part that is really hard to read at this point, we'll be watching closely. Is that pipeline fill or is it true consumer demand, so we're certainly not spiking the ball. We know we're going to have to watch it closely over the weeks and months ahead, but from where we sit, we feel like we're well positioned. We talk about our direct sales force that's able to pivot and get out in front of operators as their world has changed dramatically. The products that we've spent years and years creating Austin Blues, Fire Braised, Bacon 1, Cafe H, all so well positioned for this new environment. And so obviously, we got to watch what happens with capacity, patron comfort level, the speed and magnitude of rebounds. So lots of uncertainty there. But, when it's all said and done, we've got an amazing food service group that I know put us in a great position to win.

Thank you. And then, my second question is on, Jim Sheehan, you mentioned utilization of the plants, for the industry and for Hormel, if one of you could give us a sense of, with the CDC guidelines, et cetera. What do you think over the next 6 to 12 months is the feasible max utilization for these plants trying to end. And are you guys having issues with getting labor to the bone in hands or would you be able to take advantage of those cheap pan costs for your trim?

Heather, I'll go ahead and take that one. I mean, I think the thing to remember, in our facilities, we don't own any of the harvest facilities. So as you think about our processing plants, it is a different business. And so yes, we do have some lines, some areas where it is hard to socially distance. Our team has done an amazing job putting in those enhanced safety measures and really meeting or exceeding CDC and OSHA guidelines. In those plants, I mean, we've seen some lines have to slow down. But I wouldn't say that it's anything that's going to have a dramatic impact on the business long-term, that the shorter term issue is as you do have more and more positive cases and you get some absenteeism, that's the short-term issue that really is impacting the capacity in some of these plants. And so, we're in a much better place in terms of understanding how to manage through the process. All of our plants are up and running today. And really one of the keys as we've progressed through this pandemic is the fact that additional testing has really allowed us to maintain the understanding of what's happening and who's positive, who is negative, who has to sit out until can come back to work. So having more testing widely available is really been a great thing. And I think you'll continue to see that via a benefit as we'd like to maintain our operations.

We'll take our next question from Erica Eiler with Oppenheimer.

Good morning. This is actually Erica Eiler on Rupesh. Thanks for taking our questions. You talked a little bit about what you're seeing in the food service channel here so far early in Q3. Is there any color you can provide and what you're seeing within the retail channel lately?

Sure. We've continued to see very strong dynamic, strong business in the retail channel, both in the center of the store and on the perimeter of the store. We've been really pleased with what's happened in grocery products as we've been able to add households, bring new consumers into the mix. I would say early on in the crisis, there was this view that it was all just stocking up or pantry loading. But over time, we've seen the velocity, we've seen a sustained demand. So we know that there's a lot of new buyers and stronger new buyer repeat percentage. So that has held up on the retail side of the business, both center of the store and the perimeter.

Okay, great. And just given the challenges in food service, due to this unprecedented environment. Can you talk about, your ability to convert some of your food service supply into the grocery retail channel and some of the things you've been doing on this front?

Yes. Early on, I mean, we had our retail team collaborating with our food service team and where there were opportunities to repack products. We certainly took advantage of that, the governments eased some of the labeling requirements, which was a positive as we were able to move more products into the channel. But then, the demand was so great, we had a number of retailers who were less concerned about maybe the retail packaging and just wanting product available for shelf. So we started to sell food service packed items into retail channels as well. So it's really been a little bit of everything in terms of converting some food service lines into retail, moving food service product into retail, all with this idea of how are we helping retailers meeting the increased demand.

Your next question from Ken Zaslow with Bank of Montreal.

When you work from the new COVID-19 environment or the new normal however you want to put it? Well, Hormel's earnings strength is stronger or weaker or the same and what financial measures we use, think about when you emerging and how do you frame it?

It's a great question, Ken. When you say when you emerge, clearly you have to take out the next few quarters, just based on the uncertainty that we talked about and really the industry is talking about. From our perspective, we're thinking two plus years out and what we are really confident in is this balanced model that we've intentionally and purposefully built and talked about tirelessly over the last number of years. And it's so important, because it really allows us to meet the consumer wherever they choose to go. And so, in the midst of this crisis, obviously, you had food service operations shutting down so the consumer behavior was forced. But they had to choose perimeter, center of the store and we were there front and center, right? Center store perimeter, deli, ecommerce and so we feel really good about the balanced business model we've created. The other thing that we feel really good about is the way that we've been able to provide value, variety and versatility across this entire portfolio. And so again, as the consumer evolves out of this crisis where are they going to go with the number of unemployed Americans now, value is a more important certainly in the shorter term than it's ever been. And we're there. And then, if there is a consumer trend that emerges in a big way that maybe we're not competing today. This balance sheet that we talked about that Jim Sheehan referenced, I mean, it really allows us to quickly pivot and become competitive either by building or buying. And so we remain very bullish on our earnings power over the long-term as you would imagine, but I think there's some really good data and support behind why we feel so bullish. And so lots of great opportunities in the short-term, but we think we're well positioned over the long-term as well, hopefully, that's helpful Ken.

I guess what I'd say is, to what extent do you think the cost structure will increase in the permanent and if food service loses, say 2 to 500 basis points? Are you in a better position or worst position, I guess, is kind of what I'm. And you did also mention, there are -- you potentially taking on more debt for strategic opportunities? What does that mean? So again, I get the three or four part question and I'll leave it there.

Yes. No, I mean, it's a great question. But again, if food service does have a permanent decline where does that go, right? And so does it go to our grocery products organization? Is it going into more fresh meat? I mean that part is so real, really too early to tell in terms of what is the more permanent consumer behavior. We need to see that play out over time. I think what we're really trying to say is, no matter where it goes, we'll be there to be able to capitalize on it. I mean, our goal, obviously, is to maintain and return to the business that we have, because obviously we know that our food service business is very competitively managed. In terms of, what we talked about some of the short-term financial opportunities. I mean, clearly, we don't know what's going to happen as this crisis keeps dragging on. And so we just want to make sure, a) that we're well positioned not only for our existing business, but if opportunities arise to be able to quickly take advantage of it.

Good morning, Ken. Regarding the debt, we do have some debt $250 million that matures in April of next year, so it's within one year. Obviously, interest rates are very favorable right now, we think that there will be an interest in Hormel in the market. So we think that those favorable interest rates will be passed on to us, if we decide to go out there. And as Jim said, we want to be well positioned for any opportunities that exist during this time period and as we come out of this time period to pivot and take advantage of those markets that may provide opportunities either new markets or existing markets where we can expand whether by building within that structure or acquiring.

Our next question from Peter Galbo with Bank of America.

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Okay. Peter Galbo, please go ahead with your question.

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Jim, thanks again for the help just kind of in thinking about, the three different ways that your source. I guess I just want to focus in on kind of the sourcing of primals. I think a few years ago, you would given a number that it's around $700 million to $900 million annually that you kind of purchased externally, in a given basis. I just want to make sure that's still a good number and maybe forgetting about kind of the inflation and pricing you've seen for a moment. Has the ability to physically secure supply of product at least improve it all from, say kind of the end of April through the first couple of weeks in May? And I have a follow up as well.

Certainly. I think that's what you're seeing, as I said, you saw bellies at 267 during the depth of the decline in operations and now they're back at $94. And you're seeing the movement as plants come online and start to understand how to operate at this. At this level, you're seeing those prices decrease, obviously, those are market prices. Right now, we're not doing a lot of buying on the open market. The products that we're getting through our internal sources and our contracted sources are providing enough volume for us as you've seen the decline in the food service industry, the demand from the food service industry. Again, it depends on what items you're looking for as to how easy they are, a very bone and ham, you can find any place but again, that's you have to find an operation that has the ability to source if you're looking for trim. So it takes some work, but we've been doing this for a long time. We have a highly skilled staff that have long relationships and I think suppliers who appreciate operating with Hormel, so those relationships have helped us through this process. You've seen this in the beef industry where you have beef 50s that have been as high as 326. But as operations have come back online, there are 198. So it's something that you have to be skilled at, but it's something that we're able to handle.

Got it. Okay. And then, just the second question, the retail sales number that you quoted, above 16%, kind of seems to imply that maybe you under shipped consumption relative to what we saw in the scanner data. Was there any inventory drawdown on the part of the retailer or some of your distribution partners that we would have seen or is it really that we should expect to kind of see a pipeline may fail, so to speak, going in to the third quarter?

Again, it's early in the third quarter, but so far our retail business both center of the store and the perimeter is holding up and it's strong. I think from an inventories perspective, any inventory retailers have and any inventory that we add on some of the high volume items, those are pretty well cleared and you're dealing with all current production levels. Our IRI data is still really, really strong and we could share in a number of categories again both perimeter and center of the store. So really pleased about where the business is, the part that we've touched on in our comments that we're also really pleased with is our ecommerce business. We made significant investments a couple years ago. And we've seen those investments pay-off very strong growth, capturing share, not only brick and mortar but virtually. And we think we'll continue to see that as a growth engine as consumers continue to get comfortable shopping online, whether it's delivery or click and collect. So I would say retail business across the board in store ecommerce all really strong Peter.

We'll take our next question from Adam Samuelson with Goldman Sachs.

So, I guess first question, we have a clarification. The $20 million, the cost -- of switching costs incurred in the quarter, and $60 million to $80 million expected to incur, over the balance of the fiscal year, just to help us think about where those actually fell in the segment's perspective, just we can understand kind of how the comps play out next year, most of them up.

So in the second quarter, most of that cost came within JOTS and refrigerated foods. Our refrigerated foods had a little bit higher percentage and that had to do with some early interruptions and processing that we saw in a refrigerated foods and then it was followed later by some additional safety measures that we talked and to be very honest, we set a priority of employee safety and we didn't do a lot of negotiation when it came time to going out getting the protective gear or taking other actions we acted quickly. So that we could provide that assurance to our employees. As we go forward, I think that you're going to look at it as to the volume of operations and refrigerated foods and grocery products, we'll both see a portion of that expense, probably the highest footfall within refrigerated foods, then Jennie-O and then grocery products, if you think about it, roughly but it's a changing dynamic. That's what we expect right now, but with the uncertainty that's going on in any operations right now it could shift.

An add-on. I mean, just remember, the plant pauses started at the end of Q2, really, the majority that we've seen are in Q3. Jim referenced, the lower volumes, lower tonnages, don't forget that we've paid significant team member bonuses as well. So, the good news is right now all of our plants are up and running.

All that makes sense. Thank you. And then, my second question is in the grocery business where you've had this big surge in sales for legacy candy business, for peanut butter, how are you thinking about kind of how much inventory is in consumer pantries at this point and kind of anything over as you get into little parts of the year and that gets drawn down? Or do you think that the surge in retail sales is actually being consumed reasonably in real-time? That might not be I think but --?

Yes. I think I talked about a little bit earlier, the early read, probably by a lot of companies was that it was a stock up or pantry loading, but what we have seen is, again, not only the new households, but this strong repeat rates, the velocities are good. And then, even the new buyers there's a good new buyer repeat. And so, are there some brands or some categories perhaps, but I think our big brands, when you think about SKIPPY, you think about SPAM, when you think about Hormel chili, those items seem to be really clearing not only the retailer, but obviously the household as well. And so, what does that mean for later in the year? I don't know that it's as much about the brands and how much they have in the pantry as much as what happens with that consumer behavior, as food service perhaps starts to open up a little bit more, and is there a pent-up demand as consumers maybe don't want to -- don't want to be eating at home and they want to migrate to food service operations. That's the uncertainty that we're thinking about and talking about. But as far as the grocery products business and the lift in sales and the repeats, we've been really, really pleased.

We'll go to our next question from Michael Lavery with Piper Sandler.

Just starting with a follow up to Ken's question, I understand your thinking on just capital strategy and the debt. But can you give us a sense of how actively you might be pursuing things like M&A?

Yes. I mean from our activity level and how active we are. I mean, nothing has changed. I think the big change is what's happening in the marketplace is just a lot of organizations have really had to hit the pause button. So I think we continue to look at a number of different processes evaluate opportunities. But clearly the market itself is not as active as it was. So, when it's really hard to read when that will pick up. But I mean, we're continuing a very active process that we always have.

Okay. That's helpful. And just on the export outlook, can you give us a sense of what your expectations are there and with any political risks, do you think there is a pork going to China, especially if there were to be any instances of shortages here in the U.S.?

Well, the USDA is expecting exports to be greater than 10% is what their outlook is. As we've had an interruption in operations, I think it's added some concern about whether we'll be able to meet that that level or not. But I think there's still a demand for pork from the United States to be exported ops. Political activity, I guess I'll pass on.

Yes. That's really hard to tell. I mean, obviously, we've seen a lot in the technology space, but people need to eat. So that's really kind of hard. That's kind of hard to predict.

We will take our next question from Robert Moskow with Credit Suisse.

I've tried to do a better job of forecasting your grocery division and looking at our retail tracking data, you indicated sales up 48% just for that division alone. And Jim say, I know you said that retail tracking is doing really well. But is there any reason you don't want to give us exactly what the IRI data is telling you it is? It would be very helpful to us as we try to correlate your shipments to your to the retail tracking so that we don't overestimate it. Because you kind of touch around on it, but was there any reason you don't want to guess like this, the total number for that grocery division to grow, it's the easiest thing for us to forecast, may be sounds like?

Yes. I mean, Rob, I guess, we're not. We don't have anything that we don't want to tell you about any of our businesses. I mean, I guess our position is -- all of our grocery products, data, meat products, data, or retail data in general is really strong. So maybe we can help you do a better job of predicting, it might be worthwhile in your follow up call with me -- send to me, we get into a little more detail just so. So we understand, and make sure we're talking the same way. But, like I said, from a broader sense, our retail business has been really strong across the board.

Well, maybe I'll follow up this way. You said that your retail shipments are up 20%, is that consistent with your hierarchy data that 20% because our data would indicate something more than that?

We've got obviously some unmeasured channels in there. And I think again, it would be better -- probably better if you guys do a nascent kind of walkthrough, maybe channel by channel just so you get to a better number.

Okay. My follow up actually is on the Austin facility. I thought actually that your facility would get some of the excess live hogs from other facilities nearby that are closed entirely? And would actually have pretty strong support margins as a result is that just kind of making too many assumptions or it's not possible to get extra volume from other plants combined?

Well, the facility really had few interruptions during the quarter, we harvest at all of our contracted hogs. So our first obligation are to the producers that we have long-term contracts with and long-term relationships with. So, we have harvested on Saturday we take these decisions about when we operate the plants as to when it's best financially to operate the plants. There were periods of time when for instance the demand in food service was so far down and there was no reason at all that you would extend your processing capacity. So we've managed the plant at a very reasonable thoughtful way that we are not going to shortcut our long-term relationships that we have with our producers to harvest another company's hogs.

Your next question from Ben Bienvenu with Stephens, Inc.

Good morning everybody. This is actually Pooran on for Ben. Just wanted to follow M&A front. I know you guys have said your strategy kind of remain constant but on the food service and the deli front and these have clearly been strong driving growth for the company. Are you seeing any changes in valuations or greater willingness to sell in the marketplace, given the sharp drop in demand that we've seen?

Are you talking about M&A opportunities?

Correct? Yes.

I said a little while ago, I mean, I think there's almost been a pause in that activity. And so it's really hard to make a statement around valuations just because we haven't really seen the activity, the e-valuation process that we're going through, is active and consistent, but really wouldn't be in a position to make a comment on valuations as of yet.

Okay. That's fair. I just wanted to get your take on the performance in the international business, which was up quite strong. Could you just dive into that a little bit more and just help us think about that business in the next couple of quarters and maybe just the important moving pieces.

Yes. So I think as soon as we look out, I mean, we expect the demand for SPAM on a global basis to remain very strong. We also expect export demand for SKIPPY to be strong. We expect China to continue to improve, especially in the food service space. In China, the retail business really remained strong, with SPAM and SKIPPY and our refrigerated products both in store and ecommerce. So as we look forward that probably the biggest difference is that continual build of the China food service business which we expect to continue to improve as a march from their lockdown.

We'll take our next question from Ben Theurer with Barclays.

Actually wanted to follow-up a little bit on retail and what we've been talking in the past, you have more medium long term targets, new products innovation and to actually get basically a contribution from sales about 15% from innovative products. So what did you understand within the more recent dynamic within the retail channels? Could you share a little more detail on repeat rate purchases amongst like cards very well established, long lasting brands such as SPAM, SKIPPY, Hormel chili, versus than the more newer brands or the innovated ones and the innovation just to understand how the velocity and the different subcategories is running, that would be great.

Yes. Ben, I want to start with the really the first part around innovation. And what's been really impressive across our organization even though the fleet moved to working virtually, our innovation hasn't slowed down at all. Our team's done an amazing job being able to work virtually on the innovation process. In fact, I know it's a number that we usually report at the end of the year. But of course, we track it throughout the year. And we met our 15% innovation goal. And so the results that we're seeing are really, really positive and there's just lots of great innovation work being done not only in terms of the R&D process, but being able to get them out in the marketplace, having virtual products showcases virtual cuttings and innovations across the entire pipeline. So whether it's SKIPPY pepperoni, Natural Choice, happy little plants, I mean, you name it, the innovation work continues. In terms of repeat rates, again, SPAM has one of the highest new buyer repeats. And so a brand that's over 80 years old, as they said, it's probably more relevant today than it's ever been. The repeat rates for items like Herdez, Black Label Bacon, I mean, all really, really strong. So, again, kind of piggybacking on my earlier comments, just very pleased with the retail performance new buyers from new buyer repeat, in store et cetera. There's just a lot to feel really good about in there in the retail business.

Okay, perfect. And then, my follow up question. I mean, very clear on the 20 million now and the $60 million to $80 million for the remainder of the year. And you said, it's most of it is actually non-recurring, but I could imagine that part of it must be to a certain degree recurring in terms of some of the PPE and some of maybe the social distancing, I don't know you have to bear in mind. So if you could share a little bit more medium term outlook, would you think potential costs 30 could be once things are back to a more normal level, but maybe not perfectly normal?

Right. I mean, I think the things will that won't be reoccurring over the long-term, right? So we have team member bonuses that aren't built into those numbers. I mean, over the long-term, we don't expect those to be recurring. We're suffering from some lower tonnage and plants. Right now, over the long term, we expect that business -- those businesses to rebound and so we won't have that part. But we aren't going to have, PPE costs. So, whether it's mask, face shield, putting up dividers in the plants to make sure that that there's that distance, that separation. And those things are going to be there on a permanent basis. And so, where we're at right now evaluating which of those costs are temporary and which are more permanent, that will need to be passed along. And so, this is, again, our number one priority has been to keep team members safe at all costs. As Jim said, we weren't negotiating prices. We're negotiating supply. And then, the second was to keep the product on the shelf, which we've done in an amazing way. And then really our third objective as we go forward is really understand what costs are permanent, what costs are temporary? So this is all a work in process.

Jim, the one thing that I would point out is that many of these costs are industry costs, and will be every participant in the market are going to have these types of costs. The other thing is, we have to have time to build efficiency around some of these things. We've been reacting to putting the fires out, let's say, and as we have more time to look at line speed and social distancing, and the costs around those we'll be able to build efficiencies into the model. So what we're trying to do is to analyze these expenses that were just short-term expenses and to some degree to have to be absorbed, And then building a more efficient process with the way that we will have to operate in the future, and we will certainly be able to do that. But right now, we're just reacting to the changes will get better as we go through.

We'll take our last question from Jonathan Feeney with Consumer Edge Research.

I was wondering if it's possible to quantify the effective profit mix, both within grocery products and within refrigerated foods. But it strikes me, I say if it's possible, because I know what you're making on a given product is all over the place, when cups are all over the place. But if he could imagine 2019, or more normal sourcing environment, I'm trying to understand and how structurally, the products that declined compared to the products they grew in terms of the structural kind of profit you'd expect to make in a normal sourcing environment, for the purposes of just looking at where the business comes out maybe a little bit -- getting a little bit more detail on that. I think Ken Zaslow asked you a similar question about that structural profitability earlier. Thanks very much.

Jonathan, there's some things to consider. I mean, obviously, grocery products has a really nice margin structure. The growth that we saw in SPAM, drives a lot on that. The other part that makes it really difficult, as Jim talked about is this volatility that you see within the quarter. And so we're still dealing through that and to get to a normalized number is difficult. The food service piece, again, different parts of food service. We've got some, you know, higher margin, precooked, pre-sliced, pre-marinated, you'll also have elements of that are -- going to be commodity in terms of ribs that are going to barbecue businesses. So, the thing to remember is I mean, well, as Jim said, we'll be fulfill the efficiencies and processes, but we'll also make sure that pricing is adjusted over the long-term. And there's really two components to consider. And we talked about the markets. We've already taken pricing on certain products such as bacon that's moved very in a very volatile way. Some products are more CPG like and we're monitoring those markets. And then, as the conversation we just had around supply chain costs, so we have to understand what your temporary, what your permanent, which are going to have to be passed along over the long-term. So, it is a difficult question and there's a lot of moving parts. That will continue to be working on over the months ahead.

So I think one way to look at it is as we move especially around food service into a more user convenient products, that's going to add value both to Hormel and to our operators. And that clearly seems to be a shift that's going to happen in the food service industry where there'll be less desire to touch those products. And when you think about our Bacon 1 and some of the other products we offer, those have nice margins on our side, and offer the opportunity for the operator to expand their margins to so we think that's a win-win opportunity.

At this time, for any closing or additional remarks?

Well, thank you. On behalf of the team here at Hormel Foods, I want to thank you for listening in today and being patient with our technical difficulties. Now this is an uncommon company with an incredible 129-year history. We have weathered many storms during those 129 years and we will weather this storm because we were made for this. I wish all of you an enjoyable Memorial Day weekend and please stay safe and healthy.

This concludes today's call thank you for your participation. You may now disconnect.