Good morning, and welcome to the Hormel Foods Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead.

Good morning. Welcome to the Hormel Foods conference call for the fourth 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 website at hormelfoods.com under the Investors section. On our call today is, Jim Snee, Chairman of the Board, President, and Chief Executive Officer; and Jim Sheehan, Executive Vice President and Chief Financial Officer. Jim Snee will provide a review of the company's current and future operating conditions, commentary regarding each segment's performance for the quarter, an update on the impact of the COVID-19 pandemic and a perspective on fiscal 2021. Jim Sheehan will provide detailed financial results and commentary regarding the company's current and future financial conditions. The line will be opened 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 noon today, Central Standard Time. The dial-in number is 888-317-6003, and the access code is 5831860. It will also be posted on our website and archived for one year. Before we get started, I need to reference the Safe Harbor statement. Some of the comments made today will be forward-looking and actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to Pages 34 through 41 in the company's Form 10-Q for the fiscal quarter ended July 26, 2020. It can be accessed on our website. 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 diluted earnings per share and operating free cash flow. Discussion on non-GAAP information is detailed on our press release located on our corporate website. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. Before we get into the business results of the fourth quarter, I want to say thank you to all of our supply chain and plant professionals. They continue to show up every day and their dedication is remarkable. They are the heroes in our company during this pandemic. We remain focused on keeping all our employees safe, supporting our communities through these difficult times and meeting the needs of our consumers, customers and operators with safe, high-quality food. With a dramatic increase of COVID-19 cases upon us, we are doubling down on our awareness campaign called KEEP COVID OUT! These various preventative measures are focused on stopping the spread of the virus in the communities where we live and work and keeping the virus out of our production facilities. In addition to our virus mitigation efforts and safety initiatives, in August, we announced a milestone effort in our commitment to education. Our new program called, Inspired Pathways, will provide for every graduating senior who is the child of one of our employees, the opportunity to attend community college on us. This program is one of a kind and truly uncommon. Our team is making excellent progress on the program and we are excited for the first class to begin in the fall of 2021. We know the application process is a major roadblock to college admission. For this reason, we are building out a network of mentors in our company to assist employees and their children through the college application process. Hormel Foods is a change maker and we are excited for the impact this program will have for our families and our future Hormel Foods families for generations to come. Fiscal 2020 was, by all measures, challenging. This year certainly tested our balanced business model. Coming into this year, we were confident we could deliver record sales, but never could we have imagined how it unfolded. All four operating segments contribute to the record as each grew sales for the full-year. This is even more impressive when you consider all four segments have sales into the foodservice channel, which showed sharp declines due to the pandemic. An important component to our growth this year was innovation. I am pleased to say our team achieved our goal of having 15% of our sales coming from new products created in the last five years. Even in the midst of the pandemic, our team developed, launched and grew new product sales. Key items contributing to this accomplishment are SKIPPY peanut butter squeeze packs, Hormel Cup N' Crisp pepperoni, Herdez Salsa Cremosas, Happy Little Plants, Plant-Based Pepperoni and Foodservice, and many other innovative items. Earnings per share for the full-year were $1.66, compared to $1.80 last year. This includes over $80 million in incremental supply chain costs, representing almost $0.12 per share. This is in addition to a $0.10 headwind from the divestiture of CytoSport in 2019. As you think back on 2020, our experienced team managed through a lot of rapid and unpredictable changes. We’ve been through a lot in the last nine months and we have gained an understanding on how to appropriately operate in this environment while never sacrificing employee safety. In March and April, we all witnessed the foodservice industry collapse. On-premise dining was shutdown completely and most establishments were not prepared or structured to handle a large influx of pickup and delivery orders. Simultaneously, grocery store shelves were emptied due to incredible consumer demand. We saw raw material markets decline precipitously as demand dropped, only to see markets spike as some harvest facilities temporarily paused operations. We also put multiple production facilities on a voluntary pause to protect the health and well-being of our team members, while also dealing with our suppliers pausing their production. It seem like each week since the pandemic started, we had a different raw material ingredient or packaging component shortage to manage through. As we sit here today, we believe there is more stability across the industry because of the learnings from the last nine months, even as COVID-19 cases surge across the country. In the foodservice industry, even though on-premise dining is being restricted again in many states, operators are better prepared to effectively manage pickup and delivery. Our supplier community is also more experienced and had to handle manufacturing facilities and limited labor situations. There are countless other examples of improved stability across the food supply chain, but the bottom line is we do not expect there to be the same level of chaos as there was nine months ago. Looking at the fourth quarter, volume decreased 2% and organic volume decreased 3%. Sales decreased 3% and organic sales decreased 4%. Earnings per share was $0.43, down from $0.47 last year, only reflecting $0.03 per share in increased supply chain costs related to COVID-19. Turning to our segments. Grocery Products volume increased 1% and sales declined 1%. Low inventory levels and production limitations in certain categories such as can meat and chili, limited our ability to meet the unprecedented customer demand. In categories, such as nut butters, where we had adequate capacity and labor, sales grew double digits. Earnings for Grocery Products increased 1% as improved results in categories such as nut butters and microwave meals offset increased freight expense and lower earnings from our MegaMex foodservice business. International volume decreased 1%. Sales increased 8% and segment profit increased 55%. The strong sales and earnings performance was led by our retail and foodservice business in China. Products like SPAM and SKIPPY have shown exceptional growth, but we’ve also seen growth from innovative new items such as our Hormel Beef Turkey. This product was launched in e-commerce channel and is the most successful new product launch in Hormel China’s history. We remain very positive about the long-term prospects of our China business. International demand for SKIPPY peanut butter and SPAM luncheon meat was very robust. Both our U.S. export business and our affiliated businesses in the Philippines, South Korea and Europe benefited from this consumer demand. Jennie-O Turkey Store volume declined 2% and sales declined 6%. Growth in Jennie-O lean ground turkey and whole birds was exceptionally strong. We did experience declines in foodservice, which was disproportionately impacted by lower sales to K-12schools. Segment profit decreased 21%. Lower foodservice sales and increased supply chain expenses associated with COVID-19 were key drivers to the profit decline. The plant pauses in the second quarter continued to impact performance within our vertically integrated supply chain. Refrigerated foods volume decreased 4% and organic volume decreased 5%. Sales decreased 5% and organic sales decreased 7%. Brands such as Applegate, Hormel Black Label, Hormel Fully Cooked Entrees and Hormel Always Tender generated exceptional growth this quarter. Lower levels of inventory and production limitations on certain categories such as dry sausage and sliced meats limited our ability to meet the unprecedented customer demand. Our foodservice business, which has historically represented approximately 40% of refrigerated food sales saw double-digit declines during the quarter. Earnings declined 17% due to lower foodservice sales and incremental supply chain costs related to COVID-19. Looking forward, our solid performance this year amidst the uncertainty posed by the pandemic, along with our balanced business model gives us confidence we can perform well in many different economic scenarios. To give you a sense for how we are thinking about the future, I’d like to walk through three important drivers to our near-term and long-term performance; retail dynamics for our brands, our leadership position in the foodservice industry, and our supply chain performance. In the retail channel, like most food companies, we have seen dramatic increases and measures such as sales, household penetration, buy rates and repeat rate for our retail products as consumers ate more meals at home. Instead of reviewing all the metrics, I want to provide some inside into the underlying consumer dynamics we believe are important to understanding how Hormel Foods is positioned to outperform as the pandemic subsides. Long before the pandemic started, we were witnessing a shift away from the traditional sit-down family dinner. Anyone who was kids has experienced this. Many activities, not enough time and dinner was whatever could be eaten between activities. The pandemic brought the sit-down family dinner back. Meals previously eaten on the go have become family activities and early on were viewed as enjoyable and highly anticipated within the home. Through our research, we recognize that consumers are enjoying the new ritual of eating at home, but when products that are convenient, versatile, and flavorful. We have a portfolio of brands that meet these consumer needs. These brands were growing before the pandemic and we believe they will have staying power as the pandemic subsides because they are uniquely positioned to meet the evolving needs of consumers. Another important trend in retail is ecommerce. We continue to drive market share gains in our biggest and most important categories as consumers quickly gain acceptance of ordering food online. We continue to shift our investments towards this channel and are excited by the growth we see. Turning to the foodservice channel, we are committed to the future of foodservice. We are confident consumers will want the choice to purchase food prepared away from the home. As a leader in the foodservice industry, we are adjusting and investing in our capabilities. We are shifting resources to faster-growing channels, investing in our direct sales force talent and continuing to support the foodservice distributor and operator community as they battle through this difficult time period. We cannot overstate the importance of relationships in this industry and the long-term competitive advantage our direct sales force provides. When the foodservice industry returns to growth, we understand operators will be looking for products to simplify their operations, save time and minimize labor, all while preserving the flexibility to add their own unique touch to a menu item. Products like Hormel Bacon 1, Hormel Fire Braised Meats, Sadler's Authentic Smoke Barbeque and Café H globally inspired proteins are well-positioned to thrive in this market. Finally, I want to address our supply chain. In many categories, we have purchased at very high levels relative to our historical performance. We have been able to steadily improve our throughput as we learn how to operate in a COVID-19 environment or supplement our internal production with trusted co-manufacturing partners. On our first quarter call, we talked about short-term supply chain risks including lower inventory levels, limited labor availability, and production inefficiencies that could impact our ability to meet the unprecedented demand. This played out in certain categories in the fourth quarter. Production in categories like can meats, pepperoni and Chili was constrained due to labor shortages, but also because of COVID-related changes in our production lines. Our supply chain team has done an excellent job solving for each individual issue and our production capacity is structurally higher as we move into 2021. We continue to focus on the health and safety of our employees which impacts our ability to adequately staff our facilities. Our COVID-19 leadership team including operations, quality control, communications, R&D and human resources are working tirelessly to keep our team informed on COVID-19 preventative measures. We are much better at adjusting through rapid changes in staffing than we were when the pandemic started and we’ll continue to keep the health and safety of our employees as the top priority. A benefit we have this coming year is additional capacity from the investments we’ve made before the pandemic started. Our work expansion in Nevada, Iowa will open in our first quarter and will give us additional capacity for pizza toppings. Throughout the pandemic, we have seen sustained demand as pizza continues to be a favorite amongst consumers and patrons. This new capacity will help us meet that demand. We will also be opening our new dry sausage production facility in Omaha, Nebraska during the first half of the year. This facility will produce Columbus Charcuterie products, which is an important milestone in the trajectory of this leading deli brand. We also announced an additional investment for pepperoni capacity. This will give us the runway to continue growing our retail and foodservice business. As you consider the various factors influencing our business, and our favorable balance across the retail, foodservice, deli and international channels, we are optimistic about our ability to grow sales and earnings in fiscal 2021. While uncertainty exists, we do want to give you some basic insight into how we see the year playing out. For our retail business, it will be hard to replicate 2020 from a sales, demand perspective. However, we do expect continued growth albeit at a slower rate. For foodservice, we expect a modest recovery in the industry, but likely not fast to 2019 levels. Today, foodservice operators are better equipped to drive growth even with fewer patrons physically in their restaurants or venues. We expect modest growth in our deli business as retailers are more experienced in operating their deli business in a COVID environment. As a reminder, our deli business exhibits characteristics of both retail and food service. Finally, our international business is poised to continue growing and barring any unforeseen geopolitical issues is expecting a strong performance next year. Hormel Foods has the right strategy. Our business fundamentals are solid and we are on sound financial footing. I continue to be incredibly optimistic about our long-term performance, even as we navigate all the uncertainty COVID has brought. As a global branded food company, our balanced and diversified business model positions us to win across all of our key channels. At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter, give an update on our financial position, and provide commentary regarding key input cost markets.

Thank you, Jim. Good morning. Net sales for the fourth quarter were $2.4 billion, a decrease of 3%. For 2020, the company generated record sales of $9.6 billion, a 1% increase. Our balanced model proved successful as all four segments grew sales for the year. Fourth quarter and full year segment profit declined 9% and 4% respectively. The business absorbed approximately $81 billion in incremental COVID-related expenses during the year with $20 million impacting the fourth quarter. Earnings per share for the fourth quarter was $0.43 compared to $0.47 last year. Our fourth quarter results reflect approximately $0.03 an incremental COVID-related expenses and $0.01 in losses on strategic cost positions. Full year earnings per share decreased 8% to $1.66. On an adjusted basis earnings per share declined 2%. CytoSport contributed $0.10 earnings per share in 2019, including the gain on sales. SG&A, excluding advertising any expense reductions from the sale of CytoSport 2019 was 6.6% of sales compared to 6.5% last year. Advertising investments for the year were $124 million, compared to $131 million last year. Planned to increase advertising in 2021 to support many of our leading brands. Jennie-O will be the first turkey company to have a float in the 94 year of history of the Macy’s Thanksgiving Day Parade. Unallocated expenses returned to more normal levels in the year, compared to the prior year, which included the favorable impact of the sale of CytoSport and a legal settlement. Full year operating margins were 11.5%, compared to 12.6% last year. Decline was driven by the COVID-19-related expenses and the impact from lower foodservice rates. The effect of tax rate was 18.5% compared to 19.1% last year. We again executed our disciplined financial strategy despite disruption caused by the pandemic. 2020 through operating cash flow, paid record dividends, invested in capital to grow our value-added businesses and acquired Sadler’s. We also secured $1 billion of debt to provide liquidity at a wealth of business to take advantage of strategic opportunities. The company remains in a position of strength heading into 2021. For the year, the business generated cash from operations of $1.1 billion, an increase of 22%. Cash flow benefited from lower working capital. Finished goods inventory began the third quarter and at seasonably low levels. Strong demand for our retail items continued into the fourth quarter. Retail business and grocery products and refrigerated foods were most negatively impacted by this dynamic during the course. We are seeing a gradual improvement in inventory levels. Presence in operations, labor availability, internal capital expansions, and increased use of strategic manufacturing partners give us confidence in the ability to expand supply in 2021. Paid our 369th consecutive quarterly dividend effective November 16 and announced a 5% increase for 2021, marking the 55th consecutive year we have increased the dividend. The new annual rate for 2021 will be $0.98 per share. During 2020, the company repurchased 300,000 shares for $12 million. Capital expenditures in 2020 were $368 million, compared to $294 million last year. Recently completed an expansion at the first pizza toppings plant and nearing the completion of the new dry sausage facility in Nebraska. 2021, we will continue to prioritize investments to support the growth of the value-added businesses including a new expansion for pepperoni. The company’s target for capital expenditures in 2021 is $350 million. The hard market that has recovered from 20-year lows due to strong domestic and export demand. Less DA composite cut out showed similar strengths throughout the fourth quarter before moderating more recently. USDA is projecting domestic production of ports to increase 1% in 2021. We expect hog prices to rebound significantly in 2021, continue to have ample access to hog’s important raw materials through our balanced mix of hog and pork supply contracts. USDA composite cut out is expected to be modestly higher in 2021. Although the outlook remains uncertain given the surge of cases happening now, it is our expectation that over the full year industry operating efficiencies and production levels will increase in 2021. Labor availability will continue to be a significant factor in the industry’s ability to operate efficiently. We expect much lower levels of commodity volatility compared to last year as supply stabilizes and demand exhibits less dramatic changes within the year. Strength of our brands and balanced approach to procurement will be key in managing through this volatility. Pork trim markets are expected to decline in 2021, but the value is highly dependent on the pork industry’s operating level. We anticipate that deli prices will increase from the current levels. This is based on moderate foodservice growth. Fundamentals in the turkey industry remain mostly unchanged. The benefit of favorable whole-bird prices, lower pork placements, and reduced cold storage levels are being offset by lower breast and thigh meat markets due to lower demand. We anticipate lower commodity prices of turkey in 2021 as sustained recovery in the foodservice industry would likely fed up the turkey markets. Meat cost is expected to be higher. Managed feed cost through a combination of spot buy, derivatives, and adjusting feed formulas. We expect the COVID-19-related higher cost structure to continue through the first half. We expect the majority of the COVID cost to subside as the pandemic comes under control. Although 2020 was a challenging year, it is important to revisit the accomplishments related to long-term growth and stability. We maintain one of the strongest balance sheets across the Fortune-500 companies, grew operating cash flow in excess of 20% and issued bonds that were well received by the debt investors. We use this capital to gain market share in ecommerce and retail, support our leading brands through advertising and marketing, achieved our 15% innovation goal, invest in value-added capacity, expand our authentic foodservice portfolio with the Sadler’s acquisition, and transform and modernize our company through Project Orion and One Supply Chain initiatives. All of these actions will help us attain long-term growth goals while continuing our outstanding track record of returning cash to shareholders. In one of the most difficult years in our 130-year history, we have shown our continued commitment to our employees, our communities, and our shareholders. At this time, I will turn the call over to the operator for the question and answer portion of the call.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes. Thanks. Good morning, everyone.

Hey, Adam. Good morning.

Good morning. So, I guess, Jim, I’m trying to just wrap my head around kind of how the different moving pieces in the outlook and there is a lot of detail that you just gave on the cost side. But at a high level, there is an expectation of sales growth. On the cost side, raw material-wise, teams kind balance of puts and takes, a reduction in COVID-related expenses, potentially a step up in advertising and then just help on tax rate and just help me think about the other moving pieces as we’re trying to think both bridge from sales to earnings per share, knowing you are not giving explicit guidance?

Thanks, Adam. I’ll go ahead and start and I’ll let Jim finish up some of the markets. But you are right, there obviously are a lot of moving pieces as we are thinking about 2021 just like they were in 2020. It does start with the demand side of the business. I think if you go back to our channel guidance around retail showing growth, albeit at a slower rate, foodservice having some modest recovery, deli business showing some growth and international maintaining its strength, I mean, that’s the important first piece of the puzzle. The second piece of the puzzle for us is the structurally higher capacity. And so, as we have tried to be very upfront about is, we didn’t meet the demands of the business in the fourth quarter, but there is a lot of work happening behind the scenes. A lot of it was already planned. Some of it came to beat during the pandemic. But it’s work and execution that the team has been accomplishing over that time, that’s why we feel good about where we are going to be from a capacity perspective heading into 2021 to meet the demands of the business. From a COVID cost perspective, Jim talked about having the same cost structure in the first-half for the business. We need to all understand when does the vaccine come into play. When is it distributed? When can we see broad distribution. But I think the timing that we’ve been hearing and have recently heard, is that first-half, second-half window seems to make sense. So, the demand side and the supply side for us, we feel really good about as we head into 2021. Jim, I’ll let you maybe talk about some of the markets or any other financial information.

Sure. Good morning, Adam. Your comment about markets being mixed, I think, is a fair assessment of how we see 2020 – 2021, excuse me. The main issue here is that you won’t see the volatility that you saw, especially in the second and third quarter of 2020. Those periods we had a drastic decline in the foodservice demand and then you have plant shutdowns and it just created almost a violent level of volatility that we believe will be much more stable environment in 2021. Part of the change in the input cost, for instance, bellies will be dependent on how quickly the foodservice business regain strength. Bellies track that foodservice demand very closely. So, overall, it is a bit of a mix. We see our hog costs somewhat similar to what they were in 2020, maybe slightly lower. We will see what that happens, understanding that hog costs or the Western Corn Belt is forecasted to be much higher, but that’s not really the basis of what we purchase hogs. And the other issue, you asked about was tax rate. We don’t see any significant change in the tax rate in 2021. We believe the tax rate will be between 20% and 21.5% let’s use that as the range as to where we expect to end up.

Okay. That’s super helpful. And then, if I could just squeeze a question on Jennie-O, the business has had some challenges in recent years and kind of ex-COVID, I think, there was a thought that we might be turning the corner there. But now maybe a non-Thanksgiving or a different Thanksgiving maybe impacting inventories on the whole-bird side. Just help us think about the trajectory for the Jennie-O business specifically?

Sure, Adam. If you go back to Q4 of last year, we really had started to turn the corner in terms of our strategy that we were building out in regaining the lost distribution, especially for our lean ground business and we had a solid Q4, solid Q1, and quite frankly, Q2 was pretty good as well. I mean, as COVID came into play and dramatically impacted the supply side of the business for that product, also impacting just the supply chain, right, vertically integrated supply chain that had plant pauses, severe disruption, increased costs. Now, as we made our way through that, we are still seeing impact in the supply chain. Anytime you back that supply chain up, you are going to have impacts for a while. The part that we remain optimistic about is the strategy of building out distribution, we still had success with lean ground turkey. The dramatic impact beyond supply chain has been Jennie-O foodservice business, like in the Hormel Foodservice business significant declines, they are just probably a little greater. It’s driven - they’ve got a bigger presence in K-12 business, but just been dramatically impacted this year. So, I mean, you are right, it’s been a mixed bag for Jennie-O over the last several years. But we feel good about where we were headed pre-COVID. We’ve done all the right things during the COVID environment and feel like as we emerge from this pandemic, the fundamentals of the business, especially on the retail side are strong and then we are going to need to see the recovery on the foodservice side.

Okay. That’s all really helpful color. I’ll pass it on. Thank you.

Thank you.

The next question is from Peter Galbo with Bank of America. Please go ahead.

Hey, guys, good morning. Thank you for taking the question. I guess, just the first question, on the retail sales guide of still expecting growth despite at a slower rate. I guess, we are having a harder time understanding again in the first quarter where the comps have kind of continued to accelerate. But as you just start getting to some of these tougher comps in the second quarter and back half of the year, understanding the capacity coming online, just help us understand your thinking around organically from a demand perspective, why that should continue to kind of grow in the second quarter and back half of the year?

Right. So, I mean, you hit on it on the first-half of the year. I think the second part of your commentary that there is a unknown of – even though we will have a vaccine in place, but how quickly are you going to see that recovery in foodservice and how quickly are consumers going to move back to historic behaviors. I think it’s too early to tell. I mean, we do see a modest recovery in foodservice. But I don’t think retail is just going to hit that cliff. I think the other part for us in the back half of the year is the fact that we did have some of these supply disruptions and we did meet all the demands of the business. So, from a comp perspective, we think there is going to be opportunities for us as well in the back half. So, that’s what’s really driving our outlook for the retail business, the continued comps in really the first part of the year and then as we are going to be comping against some unmet demand in the back half of the year.

Okay. Thank you. And then, Jim, maybe just on Jennie-O, your comments maybe in the cost section of your prepared remarks with higher grain and lower commodity prices and maybe if you could also comment on freight. Just how should we think about the margin trajectory in 2021, maybe not from an absolute level, but just versus historical, can we get back to 2019 type levels on the margin side? Just help me understand that? Thanks very much guys.

Sure, Peter. We obviously expect to continue to have some COVID cost in 2021, especially in the first half that will be a headwind to Jennie-O, excuse me, but one of the things that we can’t understate is the impact to Jennie-O in their live production operation by the interruptions in production that they saw in 2021. How that backed up the birds, you are feeding birds longer. You are processing birds at a heavier weight that underperform and I think that’s a big benefit as we keep the operations running at a more consistent level when don’t have these plant interruptions. That’s going to be a significant benefit to their cost structure. So, yes, there will be headwinds with COVID costs. Grain cost could be higher, but we manage that grain cost through our hedges that we have. We do support buying on grain. And we also could adjust the feed formula so that we are mixing the feed a little bit better to improve our feed cost. So, there is a lot of levers there that we can attain. In 2019, we had about a 9% margin on this business. We think that we can go back and achieve that level in 2021.

The next question is from Ben Bienvenu with Stephens, Inc. Please go ahead.

Hi. Thanks. Good morning, everybody.

Good morning, Ben.

Good morning, Ben.

I want to ask, first just a clarifier on the commentary in the press release that you are optimistic about revenue and earnings growth in FY 2021. I assume that’s true even on a 52-week basis. And then I want to tack on to that, you highlighted and it’s – it’s been a really unusual challenging two years from an external standpoint. A number of elements that have caused volatility headwinds and inefficiencies, but you’ve also been undergoing some significant supply chain adjustments over the last two years in Fremont in particular. I am curious we haven’t seen earnings grow in a few years and I am wondering what kind of external environment do you think we need for the earnings growth potential of the business to shine through. And then, at what point do we start to see kind of steady state around the supply chain cost side of things as it relates to the adjustments that you’ve made internally?

Yes. So, Ben, we certainly would agree it’s been unusual and challenging. The work that our supply chain team has done has been absolutely phenomenal, not just with the Fremont transition, in the midst of this pandemic and making sure that we’ve got one message consistently across the organization. The guidance or the comments that we’ve made about sales growth does play out in a 52-week year. Obviously, we’ve got a 53-week year next year. But for us, the business we expect moderate growth in our retail business. So, if you go back to the grocery products business, I mean, we were showing steady growth in grocery products. Our foodservice business has been a shining star in our organization and continues – had been outperforming the industry significantly. The investments that we’ve made around our business out was deli and then, of course, our international business. But, for us, there is some returns. So just at that level of normalcy where we can see our retail businesses return to historical growth. Our foodservice business, the foodservice industry gets back to some level of normalcy. We’ve got the right investments. We’ve got the right structure. We’ve got the right businesses to take advantage of those market conditions. And so, it is obviously unusual and challenging. But we remain very, very confident in the way that we’ve built the balance across the organization. We have improved sales capabilities on the ecommerce side. We’ve made investments in consumer insights and analytics. So, we’ve done all the right things to support the growth of this business over the long-term.

Okay, great. Thank you for that. And then, the international business has had nice results in the midst of this challenging year. And this has exhibited nice growth over the last several years. I am curious, how big do you think that business can get? And when you think about opportunities as it relates to that business, you alluded to some of that in your opening comments, but I’d be curious if you could elaborate a bit more on that segment?

Yes. I mean, we think there is continued opportunities in China and then we’ve really seen that team has strived. We’ve built our new facility there in Jiaxing several years ago to support the expected growth and they’ve delivered both on a retail and foodservice basis. They’ve also, as we described had some great innovation from an M&A perspective. I talked about my desire to really add on to that great platform that we’ve built both retail, foodservice and then even in retail ambience and refrigerated frozen. So, it’s got a lot of the great attributes that our domestic business has and we see opportunities for it to continue to grow organically and be supportive to M&A – from an M&A perspective. Our export business this year demonstrated the power of brands on a global basis with SPAM and SKIPPY showing great growth and we expect that to continue to grow. So, again, just really optimistic on where the business is today, but then also the opportunities that exists organically and from an M&A perspective.

Okay, Jim. Thank you and have a happy Thanksgiving.

Yes. You too, Ben.

The next question is from Robert Moskow with Credit Suisse. Please go ahead.

Hi. Couple questions. You mentioned new capacity that’s coming online, some new plants, have you secured labor for that new capacity? I know, you had some labor issues, but I am not quite sure in which facilities or which regions it’s happening. And then just a clarification, you said that you are expecting sales growth across all of your sales and profit growth, that’s excluding the 53rd week, correct?

So, I’ll start with the second one, Rob. Yes, we expect to be able to grow the business on a 52-week basis sales – sales and earnings, and then, of course, next year we do have our 53rd week as well. From a labor perspective, the two big labor needs are the plant in Omaha, Nebraska, the expansion of our dry sausage, our charcuterie line of products for Columbus. And, yes, we’ve had a lot of success securing labor for that facility, a bigger metropolitan area. And so, labor has not been an issue. The other big investment that we described with our Burke expansion in Nevada, Iowa and there again, we had a great labor force and we’ve been able to secure additional labor in that facility as well. In some of the other areas where we are expanding capacity with an additional line, we are confident we will be able to do that as we navigate through the COVID environment. But they are historically really strong labor markets for us. Our SPAM for example, we are expanding capacity here in Austin, Minnesota and Dubuque, Iowa, very strong labor markets for us. As we’ve said, some of the more growth markets that can be a challenge for us of where we are currently expanding capacity we are actually in a good position.

Okay. Good. And then, so I am going to give you some more questions here. In the back half of the year, I think you expect easier comparisons, because you’ll have sufficient capacity in Chili and your other canned goods, I can’t remember the other one. But I would imagine demand on those canned goods is going to be down a lot in the back half just because we’ll have a vaccine and consumers will gain, so, have you factored that into your expectations for easy comps, but you might have the capacity, but you are going to have the same demand.

Yes. No, I think that’s a great point, Robert. And we have – and so, what we are trying to say is, it’s not going to be pound for pound in terms of the opportunity. But we do still expect there to be growth and the other part too considers the fact that, I mean, if this is we are talking about, we are largely growing before the pandemic. So, I mean, yes, we will have capacity. We understand and we said that we do expect continued growth at a slower rate. But we also know that we would face the current demands of the business. And so, when you factor those three things together, that’s why we expect it to have a strong back half of the year.

Okay. Lastly, on peanut butter, did you take a price increase this year? Your competitor was talking about the price increase that they took in their strong performance. Have you taken pricing and also are you satisfied with your share performance in peanut butter?

Yes. Thanks, Rob. We’ve been really pleased with the performance of SKIPPY, even before the pandemic, the trends were really positive. We’ve continued to perform well during the pandemic. We’ve done a nice job gaining share. We are also taking pricing on peanut butter and, again, feel really good about where the business is trending. We’ve had – we haven’t had any capacity constraints. The plant has been running well and then, we’ve done a great job supporting this business through innovation. I talked about in my prepared remarks about how the team has done a great job in the midst of everything going on to continue innovation with SKIPPY Squeeze, SKIPPY High Protein, SKIPPY No Sugar, just lots of great work supporting that iconic brand.

Okay. Great. Have a good holiday. Thank you.

Thank you too, Rob.

The next question is from Michael Lavery with Piper Sandler. Please go ahead.

Thank you. Good morning.

Good morning, Michael.

Can you just come back to the supply chain a little bit, and elaborate a little bit on the status or trending of savings from the One Supply Chain and I guess, the question is, it feels a little bit like the curveballs you had this year would make it a little bit like changing a tire while you are driving. But it still sounds like you are expecting that the savings to be coming through and not to progress. And so, is it just maybe that you’ve settled back into sort of a new normal group? How should we just think about the trajectory of how all that plays out?

Thanks, Michael. We are leading the supply chain savings that we laid out before the organization. In fact, we think some of those savings will be accelerated. Those savings have paid dividends in a very difficult operating environment this year and allowed us to do things that we wouldn’t have been able to do in the past and other things that we did much more efficiently. So we are very pleased with the progress we are making on One Supply Chain. It is a hard year to measure, because there are a lot of moving parts, but we believe that we’ve met every expectation that we set originally on this and we think it’s going to accelerate as we go through and continue to expand the efficiency of these operations.

Yes. And Mike, so, I mean, clearly, we’ve had pretty significant cost increases. You think about PPE, team member bonuses, plant disruption cost, lower overhead recovery, and so, you are trying to measure it in a year where you’ve got so many different pieces and your analogy of changing tire while driving is one that I haven’t heard, but certainly it’s very, very appropriate for the environment that we’ve been in this year.

Okay. Thanks. That’s great color. And then, just a follow-up on the retail side of the business and your expectations there. For the three quarters where you’ve given the channel splits this past year, it was up 16%, 19% and now 7%. And so, again, even if 1Q was around flat, that’s like a ten pace on a year. Just to hold that sales level absolutely flat would seem quite impressive and so to grow over and above it, I know we’ve touched on this already, but can you just maybe quantify some of what the capacity impact is? Or just how you are confident that that’s a growth driver over and above the very high levels that you set for fiscal 2020?

Yes. So, I think from a capacity perspective, I talked a little bit earlier about SPAM. And we were constrained on our SPAM business, but are in a really good position because of expanded capacity. Our Chili, our Stew, our Hash business have had success, but it took sometime securing co-manufacturing. But we’ve also internally been able to get to some extended runs. Our complete business in terms of adding shifts to that business. So, from a capacity perspective, we feel really good about where we are heading into 2021. We obviously still understand everything that’s happening in the world around us with these increased COVID cases and we are experiencing that first hand. I guess, from our perspective, we are – we believe the retail number is very realistic as we think about the full year, and then for us, really the key is to be able to meet the needs of the business. And so, as we head into 2021, capacity is at the top of our priority list.

Okay. Thanks. That’s great color. Thank you.

The next question is from Rupesh Parikh with Oppenheimer. Please go ahead.

Good morning. Thanks for taking my questions. So, just going back, I guess, to foodservice, so if you look longer term, do you see any impediments in getting back to your prior foodservice levels just given some of the – it seems like obviously larger restaurants, - permanent restaurant closures out there?

Yes. I mean, we don’t, Rupesh. I mean, we know the way that we’ve attached the business structurally with the direct selling organization the way we’ve innovated in the space, the relationships that we have with operators, clearly, the timing is uncertain. But I think over time, we do expect our foodservice business to continue to be a growth vehicle for our organization.

Okay. Great. And I know there has been a number of questions just around cost on this call. Outside to the COVID costs, are you going to kind of expect to continue at least for the first half of next year? Anything you can share just in terms of other puts and takes in terms of cost, whether wages, freight, advertising, anything else we should be thinking about for the upcoming fiscal year?

I think, one of the things that we have had a challenge and that was in freight cost and that was because of some capacity constraints for us. That increase in freight cost had to do with that loading full trucks and sending trucks out of less than optimal levels. So, as capacity goes up and production improves, we think that freight cost even though there is pressure on freight, but sending out trucks that aren’t full is an expensive process. We think there is going to be improvements on that side of it. Again, with COVID cost, every day we learn a little bit more about how to operate more efficiently. So, we continue to have a headwind on COVID cost that our operations become more efficient from probably a less direct cost standpoint. So, efficiencies in the plant to speed that you can run those types of things, but obviously for us, regarding COVID that’s employee safety and that will be the highest priority. We will continue to invest what we need to invest in those cost to keep our employees safe.

And Rupesh, I would say, we are obviously making necessary investments in advertising back to supply chain. We’ve talked a while ago about the new distribution center to support our grocery products business that continues to do really well even with the low balancing having to do. And our teams are working on another distribution center to support the refrigerated foods business. So we continue to see opportunities to get better in that area.

The other area, Rupesh, that I’d point out is that we’ve made significant investments in Project Orion in 2020. We haven’t called it out. We haven’t separated it what the expenses as you might expect have been material. You can see some of that in our unallocated expenses this year where we’ve closed down our HR benefits and finance portions of a project and there have been some expenses that impacted us in the fourth quarter too.

Okay. Great. Thank you for all the color.

The next question is from Tom Palmer with J.P. Morgan. Please go ahead.

Good morning, and thanks for the question. I wanted to ask on the inventory side. I mean, I can see on the balance sheet that inventory is up pretty substantially versus where it was a quarter ago. And you’ve talked about actions you’ve taken to kind of resolve that. So, I guess, I really was looking to understand on next earnings call, are we going to see some lingering effects of this inventory constraint having weighed on first quarter, especially as we see kind of a resurgence of COVID cases and potentially pantry stocking again. Or is quite the opposite and you have the potential to get a catch-up where inventories were drawn down a quarter ago by your customers and now can you can backfill into it? Thanks.

Good morning, Thomas. It’s much like 2020. It’s a mix of both. Our finished goods inventory is down. So there is some constraints that we’ll have in Q1. Now Q1 is more of a quarter at which you sell more close to what you produce. It’s not a quarter that you build inventory but it’s also a quarter that normally you don’t draw down a lot of inventory. So it’s going to have a less of an impact in Q1 than perhaps it did in Q4, which is a period – a quarter in which you draw inventory down. You can’t produce of a product during the quarter. The other factor is, it’s an increase in raw material or raw materials in inventory and that primarily comes back from products that are generally sold through the foodservice industry. In some instances, that means that we won’t have to go out and buy products. When you buy products on the open market, obviously you have fluctuations in those costs as product is put away and as foodservice returns to strength, we would be able to draw down that inventory and perhaps manage our cost a bit better in the foodservice areas.

Okay. Thanks for that color. And then, just wanted to ask on pricing assumptions as we look towards the coming year. There were several segments or a couple segments where pricing rolled over sequentially. I assume that was mainly mix, but then when you are looking at positive growth in the coming year, how much of the burden is volume-driven and then how much is pricing?

Yes, Thomas, the big driver right now for pricing is, we talked about SKIPPY and then we are expecting an uptick in volume. We’ve got opportunities to drive volume this year. But we – I mean, we do also have pricing power and we think about products that are tied more to underlying commodities on the retail side. So, you think about bacon, which is a big driver. Obviously, we’ll be watching that closely. Jim talked about the belly market earlier. But I mean, it’s volume-driven, but we know that we also have pricing power as well and we do have our SKIPPY pricing in place.

Thanks.

The next question is from Ken Zaslow with Bank of Montreal. Please go ahead.

Hey, good morning, everyone.

Hi, Ken.

There has been a lot of discussion obviously about your ability to the inventory levels, as well as your supply chain. Can you talk about how much demand did you leave on the table in 2020 that you’ll get back in terms of in 2021 because of your capacity constraints? Can you put some sort of quantification to what actually was the impact in 2020? And what will be the benefit in 2021, as you gain your capacity? I know there is a lot of quality, I just don’t understand how to actually model it.

Yes. That’s a tough number to get at, Ken, I mean, I think, clearly, as we’ve talked about the end of Q3 and given the warning signals into Q4, we had missed demand opportunities in SPAM, in some of our pepperoni business, sliced meats as we’ve described and it is hard to quantify and we do think we’ll be able to capture some of that back in 2021. And then, it is, as I said, the supply chain, the structurally higher capacity is going to be a very key component for us in delivering the sales and earnings growth. But in terms of actually quantifying that number, that’s a difficult number to get at. But we know the opportunity is there.

Let me just ask one more way of asking, maybe this is an easier way. How much more capacity will you have in 2021 than in 2020?

Well, that's going to depend on the product lines, but on the key areas, we think that there will be some significant expansion in capacity. We've talked about some of the plants that we've expanded on. So, as far as a dollar amount or a percentage, that's difficult. Obviously, we continue to operate with the uncertainty of COVID, that how much impact is it going to have on our plants, which plants is it going to impact. Those are all the difficult – those are all the uncertainties that we're living with and we wish we knew exactly how hard we could run the plants and for how long, but that's a bit of a struggle with what we are looking at in 2021 to identify it down to a number.

Okay. And then just the final question is, did you say that grocery profit will match sales? Or did I mishear that? I just didn't hear that.

I don't think we said that Ken.

Okay. Do you want to say something about that? How's that?

I mean, our bigger conversation rather than getting into the segments is, we think the channel discussion is really how to think about the business as we head into 2021. And, obviously, we've given some - we hope additional and good color around retail, foodservice, deli and international.

Great. Thank you. Be well, and have a happy Thanksgiving, guys.

Yes. You too, Ken.

The next question is from Eric Larson with Seaport Global Securities. Please go ahead.

Yes. Thanks, guys. I know we are running low on time and happy holidays to you here as well. Hope you have a good turkey day. The question and Jim alluded – Jim Sheehan alluded to it a little bit earlier and I had this question in mind. But I think you're now, I think, two years or so into your ERP update conversion, will fiscal 2021 require the same amount of capital? I can't tell by your CapEx numbers, are kind of about where they were a year ago, maybe a little bit lower. But will that start being a net positive to your corporate expense line in 2021 or should we be thinking that the real benefits of reduced ERP expenditures come in F 2022?

There will be a reduction as you – as we go into 2021. As you think about this, we had three major paths to attain with Project Orion. First was HR and benefits. Second was to update the entire finance function, and third was supply chain. HR and benefits is completed. Finance is totally completed. For example, all of the staffing that had been assigned to Project Orion and the finance group have been pulled back to their old jobs, so those two are gone. Obviously, supply chain is a big task. But as you look at the accomplishments, two out of three have now been completed as we go into 2021 and you will see significant benefits from what we've attained through Project Orion and efficiencies in the operations. And insight into the business, the amount of analytics that we are getting and the scope of information that we now have to operate the business has expanded drastically even in the last quarter.

Okay. Yes. Thanks, Jim. And so, my final question, I know this is a very 30,000-foot level question, but I think, Mr. Snee, you alluded to it a little bit in your prepared comments, but you said the consumers are enjoying being at home and cooking and that a lot of that will continue going forward. And I am sure you're talking to your customers. I mean, the debate here is customers – a lot of consumers say I am sick of cooking at home. I can't wait until we can go back to the restaurants. So, it's kind of a pull and tug argument. So, what are your consumers telling you when you talk to them about what their behavior changes might be?

Yes. I think you hit it right on the head, Eric, is that, especially early on, they enjoyed the time together. But there has been a bit of fatigue. But I don't know if that's going to entirely go away where a lot of consumers are missing the option of being able to get out into their favorite dining establishments. And I do think they've been able to take some advantage of that as foodservice operators have gotten better at on-the-go and or grab-and-go and delivery. But I do think we are going to see that shift away from dining at home, back into the foodservice channel, the key is at what rate. And so, that's why we're saying we expect a moderation of retail and we do expect an expansion of foodservice. The unknown is what is the right rate or the right number in 2021. But there is certainly fatigue, I think it’s the right word to use. And we also know that over the long-term, consumers are going to maintain their need for convenience and versatility, which so much of our product portfolio, whether in retail or foodservice really hits hold.

Got it. Okay. Thank you and happy and safe holidays to all.

Thanks Eric. You too.

The next question is from Ben Theurer with Barclays. Please go ahead.

Thanks. Good morning, Jim and Jim. Thanks for squeezing me in. Actually, first quick question for Jim Sheehan, could you clarify on the hog cost commentary? You said something like prices would be up, but then cost will be down, just to get this right from your commentary you had?

Sure, Ben. I'll try to clarify my comments. You are seeing forecast that the Western Corn Belt is going to be higher in 2021 than it was in 2020. So, for instance, in the fourth quarter, Western Corn Belt ran, let's say, mid-50s, probably 54 would be a good number, it's about 58 today. We think it's going to go up. But with the method in which we purchased hogs, that is one component and actually it's one of the smaller components in which we price the hogs that we buy. The more common method that we use or the higher percentage of hogs that are purchased are purchased on what's called the composite value. The composite value today is $78. And we see that as the basic range that it will be in for 2021. And that's actually down from where it was in the fourth quarter of 2020, I think it was at $83 on average in the fourth quarter. So, we often warn people that you'll hear comments about the Western Corn Belt prices, but it's not the primary method in which we buy hogs. That's why we see some fluctuation in the cost of hogs as we go into the year, but not at the rate that you are hearing from those that are quoting that the Western Corn Belt. We do have hedges in place and those hedges are slightly below the future markets. Now, we've had some negative impact in 2020 from our positions that we've put on to protect us from ASF, those are rolling off and have been replaced.

Okay. Perfect. And then, Jim Snee, just coming back to one of the prepared remarks commentary within the retail portion and the balance versus foodservice on those growth rates. So, one of the particular things I wanted to focus on is, the MegaMex JV, which you've actually highlighted to have seen some of the negative performance impacting on grocery because of the foodservice piece about it. Could you elaborate a little bit on how that has performed on the retail side? And how that maybe have balanced versus foodservice? And what you're expecting on the demand side over the -- for that particular segment?

Yes. Great question, Ben. Our MegaMex business, especially on the retail side has performed really well. Again, even heading into or before the pandemic, that business was really strong for us. And not only just on an organic basis, but the work that our team has done from an innovation perspective. We talked about Herdez, guacamole, salsa. This year, we've talked about some additional innovation that the team has been able to put in place. And so, the retail business was strong - continued very strong and we expect it to maintain the strength going forward. As you mentioned, the foodservice business, like our other foodservice businesses, were soft and – but we do expect over time to see those businesses recover as well. But we could not be more positive or optimistic about the future growth of our MegaMex retail business. We think it's really, really well positioned and it's on strategy for us as we think about our desire to grow our ethnic portfolio.

Okay. So, net-net, it was still up, correct?

Yes. Yes.

Okay. Perfect. Thank you very much.

Great. Thanks, Ben.

This concludes our question and answer session. I would like to turn the conference back over to Jim Snee for any closing remarks.

Yes. Thank you. On behalf of the team here at Hormel Foods, I want to thank all of you for joining us today. As I said earlier, I continue to be incredibly optimistic about our long-term performance. And we have done a great job navigating all the uncertainty COVID has brought. But I know that this Company has the right strategy, the right business fundamentals and we are on sound financial footing. I want to wish all of you a happy Thanksgiving, and please stay safe and healthy during the holiday season.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.