Nathan Annis
Vice President, Corporate Development at Hormel Foods
Thank you, Jacinth. It has been a couple of years since 2021 when I was last in Investor Relations. And it's exciting to be back giving you an update on our Transform and Modernize initiative and to review some case studies that highlight our progress and the value we're creating. Our Transform and Modernize initiative is reshaping how we operate across the company in four key ways. First, our processes have historically been built on deep institutional knowledge and were quite manual. As our company has grown, these processes became more complex and highly customized. We have started transforming these processes into streamlined enterprise-wide ways of working that leverage intelligent automation and digitization. I cannot overstate how critical this changes to all the work we are doing in our initiatives.
Next, our key capabilities like business planning and execution used to be siloed and underleveraged. Over the recent years and quarters, we've moved to centralize these functions to capitalize on our scale while also strategically investing in areas where we are differentiated in the marketplace. Historically, our business was overly complex, bogged down by a lengthy list of vendors and SKUs. Looking ahead, we are simplifying our operations in a smart, data-driven way. We are also strategically segmenting our business to optimize our investments.
Last, where we once had a variety of methods for identifying and realizing value and savings, we now use a standardized, more disciplined approach. This new process ensures we are capturing value consistently with clear accountability tied to key metrics. These four strategic changes are integral to the work we are doing, and our team is setting a new standard for excellence in these areas.
Now let's explore some specific examples of how these changes are making a difference in the five pillars, beginning with buy. This pillar represents a comprehensive enterprise effort to develop a new framework and tools for procuring goods and services across the entire organization. Our prior efforts of creating one supply chain and restructuring our segments through go forward are paying dividends as we scope opportunities. Viewing procurement through an enterprise-wide lens allows us to significantly transform how we operate.
For instance, we're establishing a new operating model that includes a modern structure, standardized training and updated policies and governance. Additionally, we're adopting new procurement systems such as advanced sourcing tools, should cost modeling capabilities and enhanced data visibility and analytics. In 2024, we began implementing the buy pillar by focusing on categories and cost of goods sold and indirect spend. For 2025, our goal is to target the remaining categories across our P&L.
By 2026, we expect this new approach will be fully embedded in our culture. And we anticipate benefiting from consistent year-over-year productivity growth. A great example of our efforts with the buy pillar is a recent sourcing event focused on routine supplies and parts for our manufacturing facilities. In the past, these items were procured through a fragmented process with hundreds of vendors and inconsistent purchasing methods.
By streamlining our sourcing strategy and using enterprise-wide agreements, we've significantly reduced complexity and our number of vendors while targeting improvements in our inventory levels. This project is just one of many that we are implementing to drive value. By incorporating these new tools and methodologies into our operations, we are developing a procurement function that delivers substantial financial savings, boosts cash flow and sets the foundation for sustainable benefits well into the future.
In the make pillar, we are transforming the way we manage our manufacturing network to boost efficiency increase capacity and reduce costs through the implementation of our proprietary Hormel Production System or HPS. The essence of HPS lies in standardizing the ways of working across all our manufacturing facilities. By introducing consistent management processes backed by a maturity model that ensures accountability, we're embedding the right practices at every level of our organization. Initially, we've concentrated these efforts on facilities facing capacity limitations. HPS is not only enhancing production yields and improving capacity but also boosting team member engagement while reducing downtime, working capital and overall cost.
A standout success story from the Hormel Production System comes from our efforts to address production bottlenecks for Hormel Bacon 1, fully cooked bacon, at our Wichita, Kansas facility. Our Foodservice team has consistently driven growth for this differentiated and highly profitable brand, but our capacity limitations were hindering our ability to fully meet demand. A possible solution was to add new production lines, which would have been expensive and require significant lead time to implement.
By deploying HPS at Wichita, we increased capacity by approximately 18%. This increase not only allows us to meet future demand, but also brings lasting improvements in productivity, cost efficiency and team morale. By extending these best practices to other facilities facing similar challenges, we are enhancing the agility and responsiveness of our manufacturing network. This shift not only helps us keep pace with current demand but also lays the groundwork for sustained long-term growth.
Our move pillar is all about enhancing our logistics network and boosting distribution capacity. A significant achievement in this pillar has been the renegotiation of enterprise-wide freight rates. With a detailed freight RFP process supported by our procurement team, we have secured immediate cost reductions. Additionally, we have optimized the flow of finished goods through our network, effectively lowering landed cost. Looking forward, a key milestone for the move pillar will be the opening of a new distribution center in the Memphis metropolitan area. Scheduled to become operational in the second half of 2025, we expect this facility will greatly improve our inventory management and expand our distribution capability. Reiterating what Jacinth shared, our investments go beyond just cutting cost, they're crucial for creating a more robust and scalable logistics network.
The plan pillar is perhaps the most extensive and complex of our five pillars. And we believe our work here will revolutionize our approach to end-to-end planning across the company. Historically, our planning processes have been overly manual, dependent on spreadsheets, legacy technology and numerous different processes. Our efforts are fundamentally transforming our planning function by centralizing these activities, adopting integrated business planning across all business units and embedding more data analytics and AI to guide our decisions. We believe this comprehensive, integrated and scalable approach will enhance service levels, reduce cost, decrease working capital and improve engagement for hundreds of team members across various functions. This all sets the stage for a more efficient and responsive organization.
Portfolio optimization is a critical element of this initiative and is designed to reshape our product portfolio to improve margins and drive top-line growth. This strategic focus touches all pillars and ultimately enables us to streamline operations and concentrate on the most profitable and growth-oriented categories. Historically, we have had a long tail of unprofitable or low volume items, and we have managed these inconsistently across the enterprise.
The restructuring of our company through go-forward has allowed us to take a more enterprise approach. And during 2024, our efforts have centered on creating a rigorous process to consistently assess and manage every item in our portfolio. As a result of these strategic evaluations, we've taken decisive steps, including divesting a nonstrategic business, Hormel Health Labs. Additionally, we've taken action on a large number of low volume or unprofitable SKUs and we will continue to rightsize our portfolio.
Portfolio optimization is also about strategically reinvesting in innovation. And we are tailoring our portfolio to resonate with current consumer and operator trends to fuel sustainable growth. This ongoing process ensures that each product in our portfolio is capable of making a significant contribution to our revenues and margins, ensuring Hormel Foods remains the leader in the marketplace. We made excellent progress in 2024, and we are excited to continue our work and drive accelerated value in 2025 and 2026.
Through continued investments in data people, process and technology, we are unlocking the potential of our people across the enterprise and positively impacting all aspects of our financials. We're incredibly excited by how these five pillars have become increasingly interconnected and how the work has converged with other enterprise objectives, the merging of these activities means that they are rapidly becoming ingrained in our culture and helping to transform Hormel Foods into a more efficient, responsive and competitive company.
And with that, I'll hand it back over to Jim.
