Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview

The Company is a global manufacturer and marketer of branded food products. The Company's three reportable segments are described in Note L - Segment Reporting in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

The Company reported net earnings per diluted share of $0.40 for the second quarter of fiscal 2023, down 17 percent compared to last year. Significant factors impacting the quarter were:

• Net sales for the second quarter decreased, as the benefit from pricing actions to mitigate inflationary pressures was more than offset by the impact of lower volumes in each business segment and lower net pricing in certain categories, such as bacon, reflecting raw material commodity deflation. Volume and net sales declines for each segment were partially due to lower turkey availability as a result of the ongoing impacts of highly pathogenic avian influenza (HPAI) in the Company's vertically integrated turkey supply chain.

• Segment profit for the second quarter decreased 12 percent, as improved results in the Foodservice segment were more than offset by declines in the Retail and International segments.

• Earnings before income taxes for the second quarter decreased 13 percent compared to the prior year. Lower selling, general, and administrative expenses and higher equity in earnings were unable to overcome the impact of lower sales, unfavorable mix, and higher operating costs.

• Foodservice segment profit increased primarily due to improved mix across the portfolio.

• International segment profit declined significantly due to lower sales in China and significantly lower turkey export sales.

• Retail segment profit declined due to the impact of lower net sales, unfavorable mix and higher operating costs, partially offset by the benefit from pricing actions across the portfolio, higher equity in earnings from MegaMex Foods, LLC (MegaMex Foods) and improved results for the bacon business.

• Year-to-date cash flow from operations was $412 million, down 29 percent compared to the prior year.

• During the second quarter, the Company increased its common stock interest in PT Garudafood Putra Putri Jaya Tbk (Garudafood) to approximately 30%.

Consolidated Results

Volume, Net Sales, Earnings, and Diluted Earnings Per Share

			Quarter Ended																		Six Months Ended
in thousands, except per share amounts			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Volume (lbs.)			1,099,563						1,164,198						(5.6)						2,161,774						2,369,070						(8.8)
Net Sales			$	2,977,639					$	3,096,559					(3.8)						$	5,948,632					$	6,140,917					(3.1)
Earnings Before Income Taxes			278,839						321,868						(13.4)						560,041						630,772						(11.2)
Net Earnings Attributable to Hormel Foods Corporation			217,239						261,617						(17.0)						434,958						501,188						(13.2)
Diluted Earnings Per Share			0.40						0.48						(16.7)						0.79						0.91						(13.2)

Net Sales

Net sales for the second quarter decreased, as the benefit from pricing actions to mitigate inflationary pressures was more than offset by the impact of lower volumes in each business segment and lower net pricing in certain categories, such as bacon, reflecting raw material commodity deflation.

In the second quarter, retail brands and products such as Hormel**®** chili, SKIPPY**®, Hormel®** pepperoni, WHOLLY**®, Applegate®** frozen items, Hormel**®** Square Table****TM, Hormel**®** Gatherings**®, La Victoria®, Herdez®, Dinty Moore®** and Mary Kitchen**®** delivered net sales growth compared to the prior year. In the Foodservice segment, the sliced meats, pizza toppings, and premium breakfast sausage categories grew volume and net sales during the quarter compared to last year. In the International segment, overall net sales declines for the quarter were partially offset by net sales growth from the SKIPPY**®** and Planters**®** brands, in addition to strong growth in Brazil.

For the first six months of the year, the benefit from pricing actions to mitigate inflationary pressures was more than offset by the impact of lower volumes in each segment. The primary drivers of lower volume were declines in commodity pork availability as a result of the Company's new pork supply agreement and lower turkey supply from the ongoing impacts of HPAI.

Cost of Products Sold

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Cost of Products Sold			$	2,486,220					$	2,543,088					(2.2)						$	4,961,263					$	5,048,697					(1.7)

Cost of products sold for the second quarter and first six months of fiscal 2023 decreased due to lower sales. On a volume basis, cost of products sold increased 8 percent for the first six months of the year driven primarily by continued inflationary pressures stemming from, among other inputs, packaging, logistics, and labor.

Costs are expected to remain elevated due to the continued impacts of broad-based inflation and higher warehousing costs. In general, raw material input costs for protein are expected to be lower for the balance of the year compared to fiscal 2022 but to remain above historical levels. Feed costs are anticipated to remain above historical levels.

Gross Profit

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Gross Profit			$	491,419					$	553,471					(11.2)						$	987,369					$	1,092,220					(9.6)
Percentage of Net Sales			16.5		%				17.9		%										16.6		%				17.8		%

Gross profit as a percentage of net sales for the second quarter and first six months of fiscal 2023 declined, driven primarily by unfavorable mix and the persistent impact of inflationary pressures. Pricing actions helped mitigate some of the impact from inflationary pressures. Gross profit as a percentage of net sales increased for the Foodservice segment but declined for the Retail and International segments during the second quarter and first six months of the year.

Looking ahead to the third quarter of fiscal 2023, the Company expects gross profit as a percentage of net sales to decline compared to last year. The Company expects gross profit as a percentage of net sales to increase for the Foodservice segment but decline for the Retail and International segments.

Selling, General, and Administrative (SG&A)

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
SG&A			$	212,492					$	224,659					(5.4)						$	434,548					$	450,631					(3.6)
Percentage of Net Sales			7.1		%				7.3		%										7.3		%				7.3		%

For the second quarter, SG&A expenses decreased due to lower employee-related expenses and advertising investments. For the first six months of fiscal 2023, SG&A expenses as a percent of net sales were comparable to the prior year.

Advertising investments in the second quarter were $35 million, down 11 percent compared to last year. The Company expects full-year advertising expense to increase compared to the prior year.

Equity in Earnings of Affiliates

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Equity in Earnings of Affiliates			$	16,870					$	5,916					185.2						$	32,429					$	12,814					153.1

Equity in earnings of affiliates for the second quarter and first six months of fiscal 2023 increased due to significantly higher results for MegaMex Foods. MegaMex Foods results reflect a benefit from pricing actions and lower avocado input costs.

Effective Tax Rate

			Quarter Ended												Six Months Ended
			April 30, 2023						May 1, 2022						April 30, 2023						May 1, 2022
Effective Tax Rate			22.1		%				18.7		%				22.4		%				20.5		%

The higher effective tax rate in the second quarter and first six months of fiscal 2023 is primarily due to the decrease in tax benefits from stock option exercises. The effective tax rate for fiscal 2023 is expected to be between 21.0% and 23.0%. For further information, refer to Note J - Income Taxes.

Segment Results

Net sales and segment profit for each of the Company’s reportable segments are set forth below. The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the profit and other financial information shown below.

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Net Sales
Retail			$	1,916,243					$	2,000,695					(4.2)						$	3,874,040					$	3,996,591					(3.1)
Foodservice			881,441						909,872						(3.1)						1,716,191						1,764,066						(2.7)
International			179,955						185,992						(3.2)						358,400						380,260						(5.7)
Total			$	2,977,639					$	3,096,559					(3.8)						$	5,948,632					$	6,140,917					(3.1)
Segment Profit
Retail			$	153,226					$	190,186					(19.4)						$	307,903					$	359,888					(14.4)
Foodservice			145,399						135,927						7.0						281,841						270,685						4.1
International			13,595						27,130						(49.9)						33,500						54,369						(38.4)
Total Segment Profit			312,220						353,243						(11.6)						623,244						684,941						(9.0)
Net Unallocated Expense			33,356						31,436						6.1						63,111						54,370						16.1
Noncontrolling Interest			(24)						62						(138.3)						(92)						201						(146.0)
Earnings Before Income Taxes			$	278,839					$	321,868					(13.4)						$	560,041					$	630,772					(11.2)

Volume and net sales declined for each segment for the first six months of fiscal 2023 primarily due to lower fresh pork availability resulting from the Company's new pork supply agreement and lower turkey volumes due to the ongoing impacts of HPAI in the Company's vertically integrated turkey supply chain.

Retail

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Volume (lbs.)			766,330						824,539						(7.1)						1,519,217						1,693,478						(10.3)
Net Sales			$	1,916,243					$	2,000,695					(4.2)						$	3,874,040					$	3,996,591					(3.1)
Segment Profit			153,226						190,186						(19.4)						307,903						359,888						(14.4)

For the second quarter, net sales growth from the global flavors vertical was more than offset by lower net sales across the other retail verticals. Brands and products such as Hormel**®** chili, SKIPPY**®, Hormel®** pepperoni, WHOLLY**®, Applegate®** frozen items, Hormel**®** Square Table****TM, Hormel**®** Gatherings**®, La Victoria®, Herdez®, Dinty Moore®** and Mary Kitchen**®** delivered net sales growth compared to the prior year. Additionally, Planters**®** snack nuts and Hormel**®** Black Label**®** bacon grew volume during the quarter, partially overcoming the headwind from lower turkey volumes, the impact of elasticities related to pricing actions, and lower contract manufacturing volumes.

Net sales declined for the first six months of fiscal 2023 primarily due to lower fresh pork availability and lower turkey volumes.

Segment profit declined for the second quarter and first six months of the year due to the impact from lower net sales, unfavorable mix and higher operating costs, partially offset by the benefit from pricing actions across the portfolio, higher equity in earnings from MegaMex Foods, and improved results for the bacon business.

Looking to the third quarter, the Retail segment expects lower segment profit compared to last year. From a net sales perspective, the impact of pricing actions and rebounding turkey volumes are expected to more than offset lower pricing across the bacon portfolio and strong SKIPPY**®** peanut butter sales in the prior year. Declines in segment profit are expected as a result of unfavorable mix and higher operating expenses. Further risks to the outlook include higher-than-expected elasticities and lower sales volumes as a result of softer consumer demand.

Foodservice

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Volume (lbs.)			254,575						257,914						(1.3)						491,662						510,164						(3.6)
Net Sales			$	881,441					$	909,872					(3.1)						$	1,716,191					$	1,764,066					(2.7)
Segment Profit			145,399						135,927						7.0						281,841						270,685						4.1

Volume and net sales declined during the second quarter, as 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 in certain categories, such as bacon, reflecting raw material commodity deflation. Brands such as Cafe H**®, Hormel®** Bacon 1****TM, Old Smokehouse**®** and Hormel**®** Fire Braised****TM also delivered volume gains compared to the prior year.

Net sales declined for the first six months of fiscal 2023 primarily due to lower fresh pork availability, lower turkey volumes, and lower net pricing in certain categories reflecting raw material commodity deflation.

Segment profit increased during the second quarter and first six months of fiscal 2023 due to improved mix across the portfolio.

For the third quarter, the Foodservice segment expects higher segment profit compared to the prior year. The Company expects rebounding turkey volumes and improved mix to be the primary drivers of growth. Risks to the outlook include further softening of foodservice industry demand and higher-than-expected operating costs.

International

			Quarter Ended																		Six Months Ended
in thousands			April 30, 2023						May 1, 2022						% Change						April 30, 2023						May 1, 2022						% Change
Volume (lbs.)			78,659						81,745						(3.8)						150,896						165,429						(8.8)
Net Sales			$	179,955					$	185,992					(3.2)						$	358,400					$	380,260					(5.7)
Segment Profit			13,595						27,130						(49.9)						33,500						54,369						(38.4)

During the second quarter, volume and net sales growth from the SKIPPY**®** and Planters**®** brands, in addition to strong growth in Brazil, was more than offset by lower commodity turkey export sales and lower results in China. Foodservice sales in China improved sequentially throughout the second quarter, helping offset the difficult comparison to retail pantry loading and sales to food-security programs last year.

Net sales declined for the first six months of fiscal 2023 primarily due to lower turkey volumes and lower sales in China.

Segment profit for the second quarter and first six months of fiscal 2023 declined significantly due to lower sales in China and lower turkey export sales.

In the third quarter, the International segment anticipates segment profit to decline compared to last year but show sequential improvement to the second quarter. The segment expects to benefit from strong branded export margins, gradually improving conditions in China, and more normalized turkey export volumes by the end of the quarter. Further risks to the outlook include weaker-than-expected export demand, deteriorating economic conditions in China, and continued disruption impacting the Company's turkey exports.

Unallocated Income and Expenses

The Company does not allocate deferred compensation, investment income, interest expense, or interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at the corporate level. Equity in earnings of affiliates is included in Segment Profit; however, earnings attributable to the Company’s noncontrolling interests are excluded. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.

			Quarter Ended												Six Months Ended
in thousands			April 30, 2023						May 1, 2022						April 30, 2023						May 1, 2022
Net Unallocated Expense			$	33,356					$	31,436					$	63,111					$	54,370
Noncontrolling Interest			(24)						62						(92)						201

For the second quarter and first six months of fiscal 2023, net unallocated expense increased due to higher pension costs, which were partially offset by improved rabbi investment results.

Related Party Transactions

There has been no material change in the information regarding Related Party Transactions as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2022.

LIQUIDITY AND CAPITAL RESOURCES

When assessing liquidity and capital resources, the Company evaluates cash and cash equivalents, short-term and long-term investments, income from operations, and borrowing capacity.

Cash Flow Highlights

			Six Months Ended
in thousands			April 30, 2023						May 1, 2022
Cash and Cash Equivalents			$	580,496					$	861,719
Cash Provided by (Used in) Operating Activities			411,754						577,111
Cash Provided by (Used in) Investing Activities			(511,068)						(125,811)
Cash Provided by (Used in) Financing Activities			(306,739)						(204,001)

Cash and cash equivalents decreased $402 million for the six months ended April 30, 2023 primarily due to the purchase of a minority interest in Garudafood for $426 million. Additional details related to significant drivers of cash flows are provided below.

Cash Provided by (Used in) Operating Activities

• Cash flows from operating activities were largely impacted by changes in operating assets and liabilities.

–Accounts receivable decreased $106 million during the six months ended April 30, 2023 primarily due to lower sales and decreased $109 million during the six months ended May 1, 2022 as a result of the timing of sales and collections.

–Accounts payable and accrued expenses decreased $205 million and $46 million in the six months ended April 30, 2023, and May 1, 2022, respectively, due to the general timing of invoice payments and annual incentive payments.

–Inventory increased $27 million for the first half of 2023 compared to $226 million in the prior year. The increase in inventory during fiscal 2023 was due to production outpacing sales and the higher inventory value in fiscal 2022 was primarily driven by increased raw material costs.

Cash Provided by (Used in) Investing Activities

• During the six months ended April 30, 2023, the Company purchased a minority interest in Garudafood for $426 million.

• Capital expenditures were $91 million and $128 million in the six months ended April 30, 2023, and May 1, 2022, respectively. The largest spend in both years was related to capacity expansion for pepperoni and the SPAM*®* family of products.

Cash Provided by (Used in) Financing Activities

• Cash dividends paid to the Company’s shareholders continue to be an ongoing financing activity for the Company with payments totaling $293 million during the six months ended April 30, 2023 compared to $274 million in the comparable period of fiscal 2022.

• Share repurchases were $12 million during the six months ended April 30, 2023 compared with no share repurchases during fiscal 2022.

• Proceeds from exercise of stock options was $3 million in the six months ended April 30, 2023 compared to $75 million in the comparable period of fiscal 2022. The decrease in proceeds was due to fewer options exercised during fiscal 2023 compared to fiscal 2022.

Sources and Uses of Cash

The Company's balanced business model, with diversification across raw material inputs, channels, and categories, provides stability in ever changing economic environments. The Company maintains a disciplined capital allocation strategy by applying a waterfall approach, which focuses first on required uses of cash such as capital expenditures to maintain facilities, dividend returns to investors, mandatory debt repayments, and pension obligations. Next, the Company looks to strategic items in support of growth initiatives such as capital projects, acquisitions, additional dividend increases, and working capital investments. Finally, the Company evaluates opportunistic uses including incremental debt repayment and share repurchases.

The Company believes its anticipated income from operations, cash on hand, borrowing capacity under the current credit facility, and access to capital markets will be adequate to meet all short-term and long-term commitments. The Company continues to look for opportunities to make investments and acquisitions that align with its strategic priorities. The Company's ability to leverage its balance sheet through the issuance of debt provides the flexibility to pursue strategic opportunities which may require additional funding.

Dividend Payments

The Company remains committed to providing returns to investors through cash dividends. The Company has paid 379 consecutive quarterly dividends since becoming a public company in 1928. The annual dividend rate for fiscal 2023 increased to $1.10 per share, representing the 57th consecutive annual dividend increase.

Capital Expenditures

Capital expenditures are first allocated to required maintenance and then growth opportunities based on the needs of the business. Capital expenditures supporting growth opportunities in fiscal 2023 will focus on projects for capacity, innovation, automation, and new technology. Capital expenditures for fiscal 2023 are estimated to be $280 million.

Debt

As of April 30, 2023, the Company’s outstanding debt included $3.3 billion of fixed rate unsecured senior notes due in fiscal 2024, 2028, 2030, and 2051 with interest payable semi-annually. During the first six months of fiscal 2023, the Company made $28 million of interest payments and expects to make an additional $28 million of interest payments during fiscal 2023 on these notes. See Note I - Long-Term Debt and Other Borrowing Arrangements for additional information.

Borrowing Capacity

As a source of short-term financing, the Company maintains a $750 million unsecured revolving credit facility. The maximum commitment under this credit facility may be further increased by $375 million, generally by mutual agreement of the lenders and the Company, subject to certain customary conditions. Funds drawn from this facility may be used by the Company to refinance existing debt, for working capital or other general corporate purposes, and for funding acquisitions. The lending commitments under the facility are scheduled to expire on May 6, 2026, at which time the Company will be required to pay in full all obligations then outstanding. As of April 30, 2023, the Company had no outstanding draws from this facility.

Debt Covenants

The Company’s debt and credit agreements contain customary terms and conditions including representations, warranties, and covenants. These debt covenants limit the ability of the Company to, among other things, incur debt for borrowed money secured by certain liens and engage in certain sale and leaseback transactions, and require maintenance of certain consolidated leverage ratios. As of April 30, 2023, the Company was in compliance with all covenants and expects to maintain compliance in the future.

Cash Held by International Subsidiaries

As of April 30, 2023, the Company had $205 million of cash and cash equivalents held by international subsidiaries. The Company maintains all undistributed earnings as permanently reinvested. The Company evaluates the balance and uses of cash held internationally based on the needs of the business.

Share Repurchases

The Company is authorized to repurchase 3,677,494 shares of common stock as part of an existing plan approved by the Company’s Board of Directors. During the second quarter of fiscal 2023, the Company repurchased 310,000 shares for $12 million.

Commitments

There have been no material changes to the information regarding the Company’s future contractual financial obligations previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2022.

TRADEMARKS

References to the Company’s brands or products in italics within this report represent valuable trademarks owned or licensed by Hormel Foods, LLC or other subsidiaries of Hormel Foods Corporation.

CRITICAL ACCOUNTING ESTIMATES

This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. The significant accounting policies used in preparing these Consolidated Financial Statements are consistent with those described in Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Form 10-K.

Critical accounting estimates are defined as those reflective of significant judgments, estimates, and uncertainties, which may result in materially different results under different assumptions and conditions. There have been no material changes in the Company’s Critical Accounting Estimates as disclosed in its Annual Report on Form 10-K for the fiscal year ended October 30, 2022.

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking” information within the meaning of the federal securities laws. The “forward-looking” information may include statements concerning the Company’s outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.

The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in this Quarterly Report on Form 10-Q, the Company’s Annual Report to Stockholders, other filings by the Company with the Securities and Exchange Commission, the Company’s press releases, and oral statements made by the Company’s representatives, the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.

In connection with the “safe harbor” provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company’s actual results to differ materially from opinions or statements expressed with respect to future periods. The discussions of risk factors in the Company's most recent Annual Report on Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q contain certain cautionary statements regarding the Company’s business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.

In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company’s business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company’s business or results of operations.

The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to changes in the national and worldwide economic environment, which could include, among other things, risks related to the deterioration of economic conditions; the COVID-19 pandemic; risks associated with acquisitions and divestitures; potential disruption of operations including at co-manufacturers, suppliers, logistics providers, customers, or other third-party service providers; risk of loss of a material contract; the Company’s inability to protect information technology systems against, or effectively respond to, cyber attacks or security breaches; deterioration of labor relations, labor availability or increases to labor costs; general risks of the food industry, including food contamination; outbreaks of disease among livestock and poultry flocks; fluctuations in commodity prices and availability of raw materials and other inputs; fluctuations in market demand for the Company’s products; damage to the Company's reputation or brand image; climate change, or legal, regulatory, or market measures to address climate change; risks of litigation; potential sanctions and compliance costs arising from government regulation; compliance with stringent environmental regulations and potential environmental litigation; and risks arising from the Company’s foreign operations.