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