Hormel Foods Corporation M&A announcement

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, Jon Ghingo, President and Chief Executive Officer elect, and Ash Bhumbla, Chief Financial Officer. Jeff, Jon, 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 five production facilities and two 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 Jon 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 four portfolio-shaping actions within the last year.

Justin's, whole-bird turkey business, our Brazil business, and now Brakebush. We have taken deliberate actions to remove businesses from the organization that were non-strategic and creating complexity. Now we have agreed to acquire a company that doubles down on our advantage 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 are optimistic about the opportunities ahead. With that, I would like to welcome our new Chief Financial Officer, Ash Bhumbla. I will turn the call over to him to discuss the transaction and early financial details.

Thank you, John, and good morning, everyone. I am 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 2027 today. Rather, we will 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 two 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 2026, 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 2028. These opportunities are primarily concentrated in procurement and manufacturing productivity. We also see meaningful revenue opportunities from combining Hormel Foods' customer relationships, Foodservice 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 1.5x-2x.

Supported by the cash generation of the combined company, we expect to rapidly return net leverage to our publicly stated range within fiscal 2027, 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 2027, subject to regulatory approvals and customary closing conditions. When we report fourth quarter results in early December, we plan to provide fiscal 2027 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 2028, 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.