Jim Snee
Chairman of the Board, President & Chief Executive Officer at Hormel Foods
Thank you, David. Good morning, everyone. We delivered a strong first half of the year with consecutive quarters of better-than-expected earnings, a significant improvement in operating cash flows, food service strength, recovery in our international business and stable volumes across our business. Importantly, we made further progress on our strategic initiatives, and we remain on track to deliver on our commitments to drive long-term shareholder returns and growth. We entered the year with a realistic and achievable path to improve our business over the next three years, and our first half performance demonstrates meaningful progress. We are driving savings, minimizing complexity and reducing costs. As a result of this work, we delivered meaningful gross profit improvement in both the second quarter and the first half of the year.
We are also capturing incremental value from our investments. The best example of this is the momentum our team has generated for the Planters snack nuts business, which is responding positively to our brand building and innovation efforts. Taken together, we are pleased to report first half adjusted diluted net earnings per share in line with last year. This represents improvement compared to our expectations heading into the year given the uncertain consumer environment and significant headwinds in our Turkey business.
Core to our success so far this year is strong execution against our six strategic priorities, which include driving growth for each of our business segments, executing our enterprise, entertaining and snacking vision and continuing to transform and modernize our company.
We delivered an excellent first half within foodservice, growing volume, net sales and segment profit mid-single digits respectively. The second quarter represented the fourth consecutive quarter, our team achieved volume and segment profit growth, and the food service team has now delivered year-over-year segment profit growth for nine out of the last 10 quarters.
We continue to leverage our highly differentiated business model to provide innovative solutions to solve operator challenges. In the second quarter, we once again saw strong contributions from Bacon 1, our premium prepared proteins, pepperoni and Jennie-O Turkey. With the help of our culinary collective and direct sales force, we continue to introduce innovative new offerings that are positioned to disrupt large food service categories.
Two of our newest items, Hormel Flash 180 sous vide chicken and Hormel ribbon pepperoni, have already exceeded our fiscal 2024 sales projections, and our new Cafe H Pork Al Pastor product also has been well received in the marketplace. We recently featured these products at the National Restaurant Association show where the response from customers was overwhelmingly positive. We believe our food service business is exceptionally well positioned to drive category growth, brand value and operator engagement well into the future.
Transitioning to our international segment, our performance has been very encouraging given the challenging conditions the team faced last year. From a profitability standpoint, International had a strong first half of the year with segment profit up almost 30%. Our team drove growth in many areas including our partnerships in Indonesia and the Philippines, our refrigerated export business and in-country operations in China and Brazil. Notably in China, our food service business is performing relatively well, and our retail business continues to recover. We expect our retail business in China to improve in the back half of the year, led by distribution gains of spam singles, the launch of new Skippy spreads and innovation in our shelf stable meat snacking portfolio. Overall, we remain confident that we have the right strategy and structure in place to drive growth in our international business and develop our global presence over the long term.
In our retail segment, we continue to navigate an environment characterized by an uncertain consumer backdrop and pressure from whole bird turkey dynamics. That said, there are many proof points showing that our focus on winning with consumers, winning with customers and driving profitable growth is delivering positive returns. According to Circana [Phonetic], we gained share across several of our flagship brands during the second quarter, including Planters, Black Label, Spam and Jennie-O.
Additionally, we increased total points of distribution by 6% for our flagship brands and 4% for our rising brands, which includes brands such as Applegate, Herdez, Corn Nuts and Hormel's square table.
From a vertical perspective, we delivered strong results both in terms of shipments and consumer takeaway with Bacon. Black Label Raw and convenient bacon products are resonating with consumers, and we expect this trend to continue in the back half of the year, supported by further advertising and innovation. Emerging brands, which contains our Applegate and Justin's brands, also delivered a strong quarter with mid-single digit volume and net sales growth compared to last year. Similarly, within snacking and entertaining, we delivered net sales growth for Planters snack nuts. I'll provide more detail on our successes within this important category later in my remarks.
Within convenient meals and proteins, we are experiencing mixed results. Our spam family of products and square table entrees portfolios both delivered a strong first half even in response to pricing actions, but we did experience softer demand for other Center Store canned and convenient items. We are also seeing similar softness across the global flavors vertical and within the Mexican categories in which we compete. These trends are not entirely new, and our teams are actively working to address this in the back half of the year.
Lastly, our value-added meats vertical continues to be negatively impacted by turkey dynamics. While we did drive growth during the first half across the Jennie-O value added retail portfolio, these gains were more than offset by weaker whole turkey markets. We expect this business to remain challenged for the rest of the fiscal year.
Our objective in retail is to balance volume and net sales gains to drive consistent, profitable growth. We are managing through challenges such as Turkey pricing and pockets of softer consumer demand. Longer term, the team remains focused on winning with our consumers and our customers, better allocating our resources and improving the margin structure of the business.
Now, moving on to our enterprise wide entertaining and snacking strategy, where we continue to win by unlocking the value of our brands across the channels where we compete. Within retail, we saw some of the most positive end-market data for the Planters and Corn Nuts brands since our acquisition of the business, including volume, sales and share gains during the quarter for mixed nuts, cashews and Corn Nuts. This momentum is a direct result of expanded distribution and our investments in innovation, higher ROI advertising and brand building. Additionally, we released several new entertaining and snacking items including Planters Salt and Vinegar Cashews, Planters nut duos, loaded taco flavored Corn Nuts, and a summer themed hard salami and pepperoni tray under the Hormel Gatherings brand, and we are supporting Hormel pepperoni, America's number one pepperoni brand.
Our new national advertising campaign, Boldly Irresistible, highlights the versatility and craveability of this popular snack, and is expected to help drive growth in the back half of the year.
In foodservice, our team delivered excellent growth during the quarter in the convenience channel led by Planters flavored cashews and Corn Nuts innovation. And internationally, we recently announced that the Skippy brand is returning to the Canadian market in the form of five all new peanut butter inspired snack products. This complements the work the team is doing to drive entertaining and snacking growth globally.
Turning now to our last two strategic priorities -- future fitting our One Supply Chain and advancing our transform & modernize initiative. In the second quarter, our supply chain efforts once again resulted in lower overall logistics expenses, lower distressed sales and higher investment income from responsible capital management. We also made further progress on our transform & modernize initiative in the areas of supply chain efficiency, portfolio optimization and data and analytics. Now, within our plan work stream, we continued the implementation of a new end-to-end planning process and are integrating new planning technology.
In the Buy work stream, we are realizing the benefits from our new procurement and productivity programs. For the balance of the year, we are broadening our efforts outside the supply chain to all procurement areas. Within Make, we completed a major improvement project to expand the capacity for our retail can portfolio, allowing us to limit external production. Additionally, we launched a project to increase capacity for Bacon 1. Both projects use existing assets and infrastructure, and are expected to generate strong returns.
In the Move workstream, we implemented analytics across our refrigerated network to further enhance our service levels. We are also exploring an expansion of our refrigerated network to drive added benefits, and we continue to advance our total company portfolio optimization effort. Leveraging our analytics tools and capabilities, we are finding opportunities to enhance and support margin profile improvements. We are eliminating lower margin SKUs, allowing us to maximize production time for more profitable items.
Also, this quarter, we celebrated the opening of our new $5 million childcare center in Austin, Minnesota. Not only does this new facility assist the company's recruiting efforts in today's tight labor market, but more importantly, the center provides a needed service for our team members and our community. This transformational work is a key driver of our growth over the next several years, and is essential for building significant and scalable capabilities for our future.
Now, shifting to our updated 2024 outlook. We are reaffirming our full year top line outlook and updating our earnings outlook. We continue to expect mixed sales growth of 1% to 3%, assuming volume growth in key categories, a benefit from higher brand support and innovation, and our current assumptions for raw material input costs.
In foodservice, we expect continued volume growth led by bacon, turkey, pizza toppings and our line of premium prepared proteins. We expect net sales increases in our international business, driven by branded exports and further recovery in China. In retail, we expect higher net sales for our bacon and emerging brands verticals. We have assumed net sales will be negatively impacted by volume and pricing headwinds in whole bird turkeys and higher elasticities in our center store business as previously discussed.
From a bottom line perspective, we have increased the lower end of our diluted net earnings per share and adjusted diluted net earnings per share ranges to reflect our solid first half performance and our expectations for growth from our foodservice and international segments, ongoing improvements across our supply chain and benefits from our transform & modernize initiative. Consistent with our prior guidance, our full-year outlook assumes higher salaries, normalized employee related expenses and costs associated with planned investments in the business, including higher advertising investments.
An additional factor expected to impact both our net sales and earnings guidance ranges is an unplanned production interruption at our Planters facility in Suffolk, Virginia. We discovered a food safety issue in April which has since been resolved. Jacinth will provide more detail regarding the financial impact in her comments. Taking all these factors into account for the full year, we expect net sales growth of 1% to 3%. Diluted net earnings per share of $1.45 to $1.55 and adjusted diluted net earnings per share of $1.55 to $1.65, and benefits to net earnings from our transform & modernize initiative, which is expected to deliver its strongest level of savings in our fourth quarter.
In closing, our first half performance demonstrates our team's ability to execute our clear and achievable plan. We have line of sight to a strong second half of the year, as we make further progress on the initiative we laid out last fall. Our team remains focused on growing operating income, driving savings through our transform & modernize initiative, and capturing incremental value from our investments.
At this time, I will turn the call over to Jacinth Smiley to discuss detailed financial information related to the second quarter and first half and additional color on our outlook.
