Hormel Foods Corporation (HRL) Earnings Call Transcript

Good morning, and welcome, everyone, to the Hormel Foods conference call, where they will discuss their announced definitive agreement to acquire Brakebush Brothers, LLC. My name is Joel, and I will be your conference operator today. [Operator Instructions] I will now pass the call to Jess Blomberg, Director of Investor Relations. Jess, you may now begin your conference.

Good morning. Welcome to the Hormel Foods conference call regarding today's announcement of our agreement to acquire Brakebush Brothers, LLC. Earlier this morning, we issued a press release announcing the transaction. If you did not receive a copy of the release, you can find it on our website, hormelfoods.com, under the Investors section, along with supplemental slide materials. Joining me on today's call are Jeff Ettinger, Interim Chief Executive Officer; John Ghingo, President and Chief Executive Officer-elect; and Ash Bhumbla, Chief Financial Officer. Jeff, John and Ash will discuss the strategic rationale for the acquisition, provide an overview of the transaction and review our financial expectations. We will conclude with the Q&A portion of the call, and the line will be open for questions following the prepared remarks. Before we get started today, I'd like to reference our safe harbor statement. Some of the comments we make 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 today's press release and our SEC filings, which can be accessed on our website under the Investors section. Additionally, please note we may discuss certain non-GAAP financial measures this morning. Management believes that doing so provides investors with a better understanding of the company's underlying operating performance. Reconciliations of these measures, where applicable, can be found in the materials posted on our website. With that, I'll turn the call over to Jeff.

Thank you, Jess, and good morning, everyone. Today, we are announcing an important step in the continued evolution of Hormel Foods. We have agreed to acquire Brakebush, a leading value-added chicken company with a major presence in the foodservice industry. For more than 100 years, Brakebush has earned the trust of customers through innovation, quality and strong relationships. What attracted us to Brakebush is straightforward. First, it is a highly respected company with leading positions in value-added chicken across a variety of foodservice channels. This is a $1 billion net sales business that has delivered consistent growth over time through a diverse customer base. Second, Brakebush has a talented organization. The company's team and direct sales force have been instrumental in building and maintaining the partnerships that have supported its success. Finally, Brakebush is truly a value-added company. It is not vertically integrated. Instead, they have built deep relationships with suppliers. Brakebush brings differentiated capabilities through 5 production facilities and 2 research and development labs. Few businesses combine this level of scale, growth, operational expertise, innovation capability and customer loyalty. Beyond the strengths of the business itself, we believe there is meaningful cultural alignment between our organizations. Brakebush has been a family-owned business guided by a long-term perspective and a steadfast commitment to employees and communities. Those qualities resonate deeply at our 135-year-old company. As we look ahead, our focus is on building upon the strong foundation the Brakebush family and team have created. With that, I will now turn the call over to John to discuss the compelling opportunities for the future.

Thank you, Jeff. I am excited about the future ahead. Brakebush is exactly the type of business we have been looking to add to our portfolio. As we've discussed throughout the past year, we have taken a number of deliberate actions to sharpen our focus and direct resources toward the businesses, categories and capabilities that we believe have the greatest long-term growth potential. This acquisition is another clear example of that strategy in action. We believe the combination of Brakebush's value-added chicken portfolio and our advantaged Hormel foodservice business creates a compelling value creation opportunity for the future of our company. Protein remains one of the most attractive long-term opportunities in food, and chicken continues to grow in relevance with consumers and foodservice operators alike. Within that landscape, value-added chicken stands out as a sizable and growing category. We believe value-added chicken will benefit from favorable demand trends, menu innovation and operators' increasing need for convenient, high-quality solutions that make chicken preparation easy in the kitchen. Taken together, these dynamics create an attractive opportunity for sustained growth. Brakebush has built a leading position in this space through deep customer relationships, category expertise and a commitment to innovation. The company has earned the trust of operator partners by delivering solutions that help them run their businesses more effectively and better serve their guests. Our businesses are highly complementary. Brakebush has built an outstanding position with national and regional restaurant operators, while Hormel Foods brings broad capabilities and an expansive channel presence. Together, we believe there are opportunities to broaden customer access, accelerate innovation and bring a wider range of value-added solutions to market. While the overwhelming majority of the business today resides in the food away-from-home channels, we also see clear opportunities to expand value-added chicken within our consumer branded portfolio in the retail space. Another area of alignment is our shared commitment to staying close to customers. A towering strength of the Brakebush company is its direct sales organization and its operator-focused approach. That solutions-based philosophy closely mirrors how we have built our Hormel foodservice business over many years. Both organizations have earned the trust of operators by helping solve challenges in the kitchen, supporting menu innovation and delivering high-quality value-added protein solutions. We believe this common approach creates a compelling foundation for future growth. I'd like to take a moment to add some perspective about our overall focus as an organization. We have announced 4 portfolio-shaping actions within the last year: Justin's whole-bird turkeys, our Brazil business, and now Brakebush. We have taken deliberate actions to remove businesses from the organization that were nonstrategic and creating complexity. And now we have agreed to acquire a company that doubles down on our advantaged foodservice business, expands our presence in the on-trend value-added chicken category and has a strong track record of execution. One of the things we admire most about Brakebush is what the organization has already accomplished. They have built an outstanding company, a distinctive culture and a successful business model. While there are certain areas we will look to integrate, our priority will be to remain focused on driving performance behind both Hormel Foodservice and Brakebush. With that, Brakebush will operate as a subsidiary reporting through our Foodservice segment. When I step back and look at Hormel Foods following the completion of this transaction, I see a company that is more aligned with attractive long-term growth trends, even better positioned in foodservice and participating with more scale in one of the most compelling categories in protein. We believe those advantages will drive sustainable growth and long-term value creation, and we're optimistic about the opportunities ahead. With that, I'd like to welcome our new Chief Financial Officer, Ash Bhumbla. I'll turn the call over to him to discuss the transaction and early financial details.

Thank you, John, and good morning, everyone. I'm pleased to provide additional details on our early financial expectations for the transaction. My comments this morning will pertain only to the Brakebush acquisition. We will not be covering the fourth quarter or fiscal '27 today, rather, we'll discuss those topics on our next earnings call. With that, as we announced this morning, we have entered into a definitive agreement to acquire Brakebush for approximately $1.055 billion in cash on a cash-free, debt-free basis and subject to customary closing adjustments. We believe this transaction represents an attractive opportunity to deploy capital in support of our long-term growth strategy. As John has highlighted, this is a strategic combination of 2 highly complementary businesses. Brakebush brings proven capabilities in value-added chicken, an attractive growth profile and strong customer relationships. Hormel Foodservice brings breadth of product offering, operating expertise and a broader operator portfolio. Together, we see a compelling opportunity to accelerate profitable growth, expand margins and generate attractive long-term returns. For calendar year '26, Brakebush is expected to generate approximately $1.2 billion of net sales. Based on estimated adjusted EBITDA for the same period, the purchase price represents an approximately 10.7x multiple before synergies and an 8.9x multiple, including expected annual run rate cost synergies. We have identified approximately $20 million of annual run rate cost synergies, which we expect to realize by the end of fiscal '28. These opportunities are primarily concentrated in procurement and manufacturing productivity. We also see meaningful revenue opportunities from combining Hormel Foods customer relationships, food service reach and retail capabilities with Brakebush's value-added chicken portfolio, complementary direct selling organization and operating capabilities. These commercial opportunities would be incremental to the cost synergy target. The transaction is expected to receive asset purchase treatment for U.S. federal income tax purposes. As a result, Hormel Foods expects to receive an ongoing cash tax benefit from the step-up in the tax basis of acquired assets. We expect to finance the acquisition through a combination of cash on hand and new debt. The final instrument mix, maturity profile and cost of debt will depend on market conditions at the time of issuance. We intend to maintain our strong investment-grade credit profile and preserve appropriate liquidity and financial flexibility. At closing, we expect pro forma net debt to adjusted EBITDA to be slightly above our long-term target range of 1.5 to 2x. Supported by the cash generation of the combined company, we expect to rapidly return net leverage to our publicly stated range within fiscal '27 with the objective of progressing towards the lower end of that range thereafter. Importantly, this transaction does not change our other capital allocation priorities. We recently announced our 393rd consecutive quarterly dividend, and we remain committed to investing in the highest return growth and productivity opportunities across the business. We expect the transaction to close in the first quarter of fiscal '27, subject to regulatory approvals and customary closing conditions. When we report fourth quarter results in early December, we plan to provide fiscal '27 guidance for the combined company, including the anticipated contribution from Brakebush. At this time, we expect the acquisition to be solidly accretive to adjusted earnings per share beginning in fiscal '28 after taking into account financing and purchase price accounting. In summary, this transaction adds a profitable and growing business, strengthens our presence in value-added chicken and foodservice and creates identifiable opportunities for further growth and margin expansion. We're confident that this transaction offers attractive long-term financial returns and is consistent with our commitment to disciplined capital allocation. With that, we would be happy to open the lines for questions.

[Operator Instructions] Your next question comes from the line of Rupesh Parikh with Oppenheimer.

Also congrats on the acquisition. So to start, I would love to hear more, maybe just more about the strategic rationale of the acquisition. It seems to me at least you get the nice benefit of added diversification more the more attractive foodservice business and obviously also on the chicken category. So just overall, just more color just on the strategic rationale.

Thanks for the question, Rupesh. This is Jeff Ettinger. I mean, you hit the one-two punch. It's foodservice, where we think we already have an advantaged business, and this is a great opportunity to double down in that area and it's value-added chicken. And we've been a protein-centric company for many, many years. That's a big advantage right now. But chicken has been probably the least of the proteins for us, under 5% historically with this acquisition, it will now be closer to 13%, even with turkey and beef for our portfolios. And then just the fit between the organizations. They're a direct selling organization with a strong reputation mirrors what we have with our Hormel Foodservice group. They have very complementary operator relationships, which we have very little current overlap with. And we're looking forward to being able to understand better their expanded innovation and manufacturing capabilities. They have the 5 value-added plants and the 2 R&D centers. And then importantly, from our perspective, they don't have any harvest. That was not a part of the business we were looking to invest further in. So the value-added emphasis is important. Ultimately, we think there's a great fit between the organizations. Frankly, we're both from small Midwest towns. We're over here in Minnesota and they're in Wisconsin. A group of us will be heading over tomorrow actually to introduce ourselves more broadly to their team, and we're very excited about the transaction.

Great. And then maybe one quick follow-up question for Ash. In terms of financing acquisition, in terms of the mix of debt and cash, is that something we'll just hear more color about later next year in terms of how you guys will -- or in next year in terms of how you guys approach that?

Yes. Thanks for the question, Rupesh. We've noted that we expect to finance the acquisition through a combination of cash on hand and new debt. Our strong investment-grade credit profile does provide meaningful flexibility for us regarding the timing, maturity and structure of that financing. And so you're exactly right. I think we'll have more to say on kind of, the upcoming calls around the final financing mix and costs, which will be dependent on conditions at time of issuance. But we feel comfortable that this is the right allocation of capital for our long-term strategy and our long-term return generation.

Your next question is from Heather Jones with Heather Jones Research.

I guess I have a 2-part question. I was just wondering -- so you mentioned that you're not acquiring any slaughter facility. So wondering how you procure the raw materials? Is that on a cost-plus basis, spot basis? And then wondering -- because a lot of times, foodservice business tends to be cost pass-through. So I was just wondering if you could give us a sense of how much of this business has, like, programmatic cost pass-through mechanisms in place.

Heather, thanks for the question. So Brakebush does purchase chicken inputs. And so overall, the business is not immune to changes in chicken costs or supply availability. But the financial performance over time has been very, very consistent, and that's really because of the array of pricing mechanisms that, that business has in place. There are portions of that business that are effectively more on a long-term fixed price basis, and there are several portions that are really more in a stable margin type portfolio, whether that's cost plus or some sort of market minus. So overall, when we look at the business, it's very consistent with the value-added orientation that we see in our own core foodservice business, and we think we're in a good position to drive value there.

And then Heather, this is John. Just to add one comment to that from a commercial perspective in terms of pricing, I would say, broadly speaking, Brakebush utilizes pass-through pricing mechanisms that are similar to our Hormel Foodservice segment that we've discussed before, which helps with movements up and down in the chicken markets. The timing of those pass-through mechanisms can vary by contract, but that's the general approach.

Okay. And a follow-up is just wanted to -- I missed part of the comment on expecting accretion in fiscal '28. Is that -- did I hear you all say that's going to be adjusted for increased amortization? Or I wasn't sure if I understood that correctly.

Great question, Heather. So big picture, no. That's just an adjusted earnings basis, but not necessarily adjusted for -- specifically for amortization there. I should note, we fully expect Brakebush to contribute substantially for fiscal '27. But the first year, in particular, does reflect financing costs associated with the transaction, some of the purchase price accounting effects and limited realizations of those cost synergies. And so when we take those factors into account, we fully expect the acquisition to become solidly accretive to adjusted EPS beginning in fiscal '28.

Your next question is from Peter Galbo with Bank of America.

Ash, welcome, I guess, as hard as you tried to run away from chicken. It found you again. So there's that. Jeff, I was wondering if you could start off. This deal is, I think, consistent with the successful deals that Hormel has done in the past from a foodservice perspective. It's a little bit larger, I think, than what you would have done historically in that segment. So maybe you could just compare and contrast it against some of the more recent foodservice deals that you all have done that you were there for, at least we're privy to on Fontanini and Sadler's, and how we might think about it in that context?

Yes. Thanks for the question, Peter. It has been about 5 years since the company's last major acquisition, and we obviously take a disciplined approach to M&A. We really saw Brakebush as the right target, the right price at the right time. It does remind us of certain past acquisitions, some of the more successful ones we've had. First, I'll start with some in the Foodservice segment, as you referenced. I mean, we had Fontanini, we've had Sadler's even before that, there was Burke. So these are brand names within the foodservice world and create or had a reputation coming in that we've been able to really build on. They're not known as consumer brands, but they're important differentiated points within the business. And they each came with new capabilities and capacity and operator-first solutions. And in each case, we were very careful to be respectful of what the team had built up. In many cases, we blended our team with their team over time. So our foodservice team definitely has a history of successfully delivering on M&A acquisition. I also see some similarities with our Applegate acquisition. To me, when I think about that one 11 years ago, we kind of, look strategically at the category and said, hey, look, this organic natural antibiotic-free area is important. It's growing. It's not a fad. We really ought to be getting into that, but you then make sort of the build versus buy decision. And in that case, we thought we were the wrong brand. I mean, you look at a company like Applegate, they had over 150 relationships with farms and other suppliers key to that area. So it just was very much move the needle towards, hey, if we could find the right partner, that's the way we go and we did with Applegate, and we've done really wonderfully with that business, and we see Brakebush in the same light. In terms of size, I mean, I guess, to me, I think historically, some of our better acquisitions have been in sort of the high hundreds of millions. This one perhaps to slightly over $1 billion, but I think it's in that same network, whether it's SKIPPY or Applegate, Fontanini, et cetera. So I mean, I think we're comfortable with this level. It's big enough to move the needle, but not so big that we think it adds more risk.

Okay. Great. John, I was hoping to get a little bit more color on just the overall customer mix for Brakebush. Understanding it's 90% foodservice, but if I think about the historical Hormel foodservice model, it's super diversified. It's in a lot of channels that I guess qualifies foodservice, but we may not traditionally think of. So maybe you could just help us think about the customers that Brakebush is currently serving and whether or not that has a material change in terms of your overall foodservice portfolio going forward?

Yes. Thank you, Peter. So I would say that Brakebush has a pretty diverse and really strong balance across their current business in terms of channel and customer profile. If you're thinking about strength within national and regional accounts, think about areas like restaurants, certainly some health care. There is some retail business within Brakebush today. So very, I would say, deep strong customer relationships across a number of different areas. If you then step back and look at Hormel, we obviously have a very broad set of channels and customers across -- broadly across away from home. That includes a lot of street business or independent regional business as well as strong customer relationships in some different areas, commercial and noncommercial. And then we obviously have a very broad retail mix of customers and channels. So we see a lot of opportunity putting those pieces together in terms of the growth momentum we see for value-added chicken across away-from-home channels as well as retail channels, frankly. So we see a lot of opportunities to kind of, take advantage of the best of both in that sense. So very complementary.