荷美爾 (HRL) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Hormel Foods second quarter earnings conference call.

At this time, all participants are in a listen or only mode, following today's presentation instructions will be given for the question-and-answer session.

If anyone needs assistance at any time during the conference, please press star followed by the zero.

As a reminder, this conference is being recorded today, Thursday, May 22, 2003.

I would now like to turn the conference over to Mr. Fred Halvin, Director of Investor Relations.

Please go ahead, sir.

Good morning everyone, I would like to welcome you to the Hormel Foods conference call for the second quarter of fiscal 2003.

We released the results before the market opened around 7:30 a.m.

Central Time.

If you did not receive a copy of the release you can find it on our website at www.hormel.com.

On our call today, is Joel Johnson Chairman of the Board, President and Chief Executive Officer and Mike McCoy, Executive Vice President and Chief Financial Officer.

Joel and Mike will provide an overview of the company's second quarter performance as well as detailed financial results.

They will then provide the outlook for the third quarter and give you an opportunity to ask questions.

We intend this call for the communication with our analysts and shareholders.

The media should refrain from asking questions at this time.

First, the Safe Harbor statement.

Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.

Actual results may differ, the factors that may cause this are identified on page 26 of the company's annual report to the shareholders for the year-ended October 26, 2002.

Now, I'll turn the call over to Joel.

Thank you, Fred and good morning everyone.

It's my pleasure to be part of this morning's conference call.

As we noted in the earnings release, earnings per share for the second quarter were 24 cents versus 23 cents last year and within our 22 to 28 cent guidance range.

Included in this year's quarter, the quarterly earnings was a two-cent charge for Fleming's bad debt write-off.

Earnings per share for the first six months of fiscal 2003 totaled 58 cents, compared to 59 cents last year.

The 58 cents also includes the Fleming two-cent write-off.

Dollar sales for the second quarter were $1 billion even, up 5% from $955 million a year ago.

Excluding the Diamond Crystal brands acquisition, dollar sales were up 1%.

For the first half, dollar sales totaled $2 billion, up from 1.9 billion or 4% a year ago.

Excluding the Diamond Crystal Brand acquisition, dollar sales were up 1%.

We continue to face a difficult but improving environment in the protein markets.

Despite this tough environment, we managed to deliver respectable results.

Our diversified portfolio of branded products provided stability and opportunity.

As a matter of fact, the May 12 issue of "Fortune Magazine" included an article about Hormel foods and our ability to deliver solid financial results, even in a difficult environment. "Fortune" pointed to our success in adding value products as the core margin building strategy at Hormel Foods Corporation.

The grocery product segment delivered another quarter of exceptional performance with operating profit up 43%.

These results reflected strong demand for our products and favorable raw material costs.

Dollar sales were up 8%.

A few of the standout product lines included the Spam family of products, Dinty Moore Canned Stews and Hormel Chili.

All reported double-digit volume growth.

Even though the fridge rated food segment continued to deal with the protein glut, second quarter operating profit improved 22% compared to last year.

Better margins from our value-added branded product and the reduction of unprofitable commodity sales were the drivers behind this improvement.

We experienced lower than expected hog markets in the quarter which caused us to pay more for our contract hogs compared to the open market.

We are seeing improved live hog markets.

In fact, the current market price is above our contract floor.

This benefits us going forward as we resume paying less than the market rate for hogs under contract.

The impact of branded products within the refrigerated foods segment continues to grow.

For example, sales of Hormel fully cooked entrees were up 22% in the second quarter while case earning sales increased 18% and sales of the Always Tender flavor pork products were up 4%.

It is obviously too early to assess the long-term impact of the Canadian mad cow disease reported two days ago.

But we do not currently believe that it should have a negative impact on our business.

Beef is not a major component of our business.

It's possible this could even help our fresh meat business if people begin to substitute other proteins like pork and turkey for beef.

The food service business was even with a year ago for the quarter.

We continue to see improved product mix that delivered better margins.

A few of the value-added categories that saw double-digit growth included Bread-Ready meats, Austin Blues BBQ products and premium bacon items.

Our food service business continues to grow twice as fast as the industry.

[Technomics, an independent research firm published the 2002 nominal growth rate of the food service industry at 2.4%.

For the same period of time, our food service business grew 7%.

The Jennie-O Turkey Store segment was clearly under the most pressure in the second quarter.

Overall, sales were up 1% with branded sales increasing 8% on the quarter.

Operating profit, though, was down 60% compared to last year.

We continue to have success in growing our value-added business with products like Jennie-O Turkey Store Marinated Tenders and Jennie-O's "So Easy" entrees.

However, the profitability of this business continues to be hurt by the oversupply of turkey meat.

The timing of the correction to this oversupply is unclear at this time.

We anticipate a difficult environment in this segment in the third quarter but continue to believe that the long-term prospects for the business remain very good.

In both turkey and pork, we continue to develop and support our value-added product initiatives, even during difficult market times.

As we have seen in pork, we are confident today's investment will generate the desired results over the long term.

The specialty products segment operating profit improved 113%, driven primarily by the Diamond Crystal Brands acquisition.

Excluding Diamond Crystal Brands, operating profit was still up 39% because of record results in Hormel health labs.

The integration of Diamond Crystal Brands is on track and it's a nice addition to our portfolio of products.

Operating profit for the all other segments was down 11% in the second quarter, primarily due to soft international business.

We continue to make progress in China and, in fact, our Beijing operations reported its first profitable quarter.

The out break of SARS has had a mixed impact to our Chinese business.

It's caused a dramatic slowdown in our food service business, but we have seen improvement in our retail business because more people are eating at home.

At this time, I'd like to turn the call over to Mike McCoy to discuss our financial information.

Thank you, Joel.

And good morning everyone.

Earnings for the fiscal 2003 second quarter totaled $33.8 million versus $32.7 million a year ago, an increase of 3.4%.

Earnings for the first six months totaled $80.7 million versus $83.1 million a year ago.

Volume for the second quarter was 826 million pounds, up 1% from fiscal 2002.

This included 34 million pounds from the Diamond Crystal acquisition.

Volume for the first half was 1.7 billion pounds, up 3% from 2002.

Diamond Crystal has added 46 million pounds year to date.

Now, I'll turn to the P&L and balance sheet comparisons for the second quarter.

Selling and delivery expenses for the quarter were 12% this year, and 12% last year.

For the first half, the comparisons were 11.9% this year, and 11.6% in fiscal 2002.

Marketing investments in the first quarter equaled $27.7 million or 2.8% of sales compared with $31.4 million or 3.3% of sales last year.

Year to date marketing expenses totaled $55.7 million compared to $58.9 million last year.

We constantly evaluate our marketing programs to ensure spending efficiency.

We concentrate the majority of our advertising on our key brands that deliver a high return back to the company.

Administrative and general expense was 3.3% of sales for the second quarter, compared with 2.4% last year.

This increase is primarily due to the $4.2 million Fleming bad-debt write-off and higher pension medical costs of $3.2 million.

Interest expense for the second quarter was $8.1 million, which compared favorably with 8.1 last year.

As we mentioned in our previous conference calls, we have not benefited from the lower interest rates because most of our debt is at a fixed rate.

Depreciation and amortization for the quarter amounted to $22.3 million, versus $20.6 million a year earlier.

This increase came primarily from the Diamond Crystal Brands acquisition.

Our effective tax rate in the second quarter was 35.4%, versus 36.5% in fiscal 2002.

We anticipate that the effective rate for the remainder of the year will be approximately 35.5%.

Capital expenditures for the quarter totaled $16.8 million versus $13.7 million last year.

We estimate that our capital expenditures will total approximately $80 million in fiscal 2003.

Basic weighted average shares outstanding for the second quarter was 138.4 million shares.

The diluted weighted average number of shares outstanding for the quarter was 139.5 million.

We repurchased 106,000 shares of common stock during the second quarter, at a total cost of $2.2 million.

We have 9.8 million shares remaining to be purchased under the 10 million shares that were authorized in the fourth quarter last year.

We processed 1.7 million hogs in the second quarter, compared to 1.9 million last year, an 11% decrease due to the discontinuing hog processing at the Rochelle Illinois plant.

Our refrigerated foods and Jennie-O Turkey Stores continue to be affected by oversupply and low prices within the protein markets.

At the first quarter conference call we projected live hog prices would average $38 per hundred weight for the second quarter.

We actually saw an average base price of $35.50 for live hundred weight which was below our contract price.

This compares with an average live base price of $37.25 in the same period last year.

During the second quarter, hog contract losses amounted to $23 million versus a loss of $15 million last year.

This year's higher grain prices contributed to the additional loss.

Corn averaged $2.30 per bushel this year, compared to $1.86 per bushel last year.

Our third quarter plans anticipate an average life hundred weight market for hogs of $46, we anticipate $44 in the fourth quarter, $38 in the first quarter of 2004, and $40 in the second quarter of 2004.

We believe grain prices will be steady for the rest of the year.

Now for a quick recap.

Our reduced slaughter levels have lowered our exposure to commodity markets.

We have reduced many of our unprofitable commodity sales by closing the Rochelle, Illinois slaughter plant and converting it into value added processing space.

Margin contributions from value added products help to offset negative impacts on performance from several market forces.

Operating profit was up 43% in our grocery products segment with sales dollars up 8% from the fiscal 2002 second quarter.

Core brands like Spam, Dinty Moore and Hormel Chile performed very well.

Refrigerated foods continued to battle protein over supply issue but branded product growth within the meat product and food service businesses helped moderate the impact.

The food service business was about even with last year in terms of sales, but delivered better profits as the product mix continued to shift to premium value-added categories.

Jennie-O Turkey Store continues to struggle with the oversupply of turkey meat.

However, our value-added initiatives continue to make progress with products like marinated tenders and fully cooked entrees.

I will now turn it back to Joel for our thoughts on the future.

Thanks, Mike.

We're starting to see the supply of hogs tighten which will help in the clean up of the pork protein glut.

We expect improving market conditions between now and the end of the year, however, we're still cautious on the outlook for turkey.

The April U.S.D.A. cold storage report released a couple days ago supports our thoughts that conditions are improving.

Pork inventories were down 8% compared to last year, and beef was down 4%.

Our strategy remains sure and steady.

Aggressive development of value-added consumer and food service products will drive our growth as the economy strengthens.

Although we are experiencing higher expenses, pension and medical benefits, Hormel Foods enjoys sound financial strength and considerable flexibility to support the business and enhance shareholder value through share repurchases as appropriate.

Taking into account the plans each of our business units has in place, we're issuing earnings guidance of 27 to 33 cents for the third quarter.

We remain focused on the following strategies to increase shareholder value in fiscal 2003 and beyond: First, continue increasing our presence in the fast-growing ethnic foods, food service, case-ready and deli businesses.

Second, innovate with on-trend, value-added products.

Third, support our brands robustly.

Fourth, extend our product -- pork proficiencies to other proteins.

Next, build scale in global markets.

Next, provide outstanding customer service and finally, continue to lead in food safety.

Now, I'll open the call to questions.

Operator?

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

If you have a question, please press star followed by the 1 on your push button phone.

If you would like to decline from the polling process, please press star followed by the 2.

You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received.

If you are using speaker equipment, you will need to lift the hand set before pressing the numbers.

One moment, please, for our first question.

Our first question comes from John Feeney.

Please state your company name followed by your question.

Good morning, can you hear me?

Yes, we can.

Hi, congratulations on a solid quarter in a tough environment here.

I wanted to ask you about, I see, were you surprised at all by -- we've seen some strong performance in hog futures?

Your hog price outlook, certainly bullish in the rest of '03, but then for Q1 and Q2 you talked about 38, $40 type prices.

Are you seeing anything in the future that's disturbing to you about -- considering the good numbers you've been getting out of the U.S.D.A.?

At this point, Jonathan, no we're not and I think we're comfortable with what we're forecasting in terms of our numbers and prices based on the market research that our pork people do.

We think that's realistic at this point in time.

I guess I could ask, nearer term do you feel like there's any potential, you know, very short-term benefit to beef pricing should this Canadian situation last more than a couple of weeks?

It's really hard to speculate.

I think a lot more will be known, frankly, in the next couple days as the depopulation of the herd takes place and the animals are tested.

It's my judgment if this all comes back negative, things will proceed in an equilibrium environment.

If there are problems, longer term with Canadian beef supplies, that leads to the speculation we would have that that might be favorable to other proteins on the fresh side of the business.

But I really think it's too early to tell this happened, became public two days ago, and we're still waiting and seeing -- and not adjusting our formal plans in any way.

What we're doing is more contingency planning than aggressive planning.

And just as a final follow-up, you mentioned how you're not -- it's too early to tell or you're not really sure exactly what's going on with the turkey inventory situation when pricing will improve there.

Are you hearing any chatter around the industry that your turkey producers are going to follow their brethren in first cattle and then most recently hogs and take out supply and adjust these-- improve the situation or do you have any read on whether other producers actually get it?

Well, there's got to be a lot of pain in the industry financially.

We believe that we're in a good position, we know we are a more than competitive on the cost front.

We know we're a low-cost producer in the total industry.

And we know we have -- we think we have about the best portfolio of value-added branded items in our mix which are less susceptible to the commodity pressures.

So if we're feeling the pain, I'm sure that others are feeling it and even worse.

So, I don't know that I would speculate who is going to fold their hand first and where, but it would not surprise me were that to happen.

Okay.

Thanks very much, guys.

Thank you.

Our next question comes from John McMillin, please state your company name followed by your question.

Prudential.

Good morning everybody.

Hi, John.

Good morning, John.

Joel, thanks for being on the call.

I thought you and everyone else would be watching Annika, she's one under from what I hear.

I might lose a bet then.

Yeah.

Just, you know, just in terms of the whole DSE issue, what happened in Europe was that people stopped eating meat period.

I guess I see your point, but the flip side of it is it might wind up hurting the entire industry.

Have you thought about that alternative in the last couple days?

I do believe that Americans have a lot more faith in our U.S.D.A. and our regulatory authorities than was the case in Europe.

Where the regulators and authorities clearly bollixed the situation.

It seems to me the Canadian and U.S. regulatory authorities have handled this in a balanced, prudent way to date and we'll just have to see.

We haven't seen anything remarkable, any remarkable turmoil in the market in this very short-term.

I think the American public is going to -- it's going to give us a wait-an-see on this and wait for further evidence.

I agree.

Just in terms of The Turkey Store for a second, have you calculated the financial impact to the company in this fiscal year from the acquisition or is it just too integrated now, you can't tell?

It's completely integrated, John.

We've integrated the staff, the finances, the sourcing, we've integrated the labels and the advertising.

It's now Jennie-O Turkey Store and as you can see on the sell-side, it's difficult.

We do have our synergy targets and I assure you that our synergy targets are being exceeded in terms of what we've done.

The pain on the commodity side would be greater if we hadn't integrated it very well.

So, that is not the issue.

The issue is not that The Turkey Store was not well-integrated.

And just in terms of the food service number of flat, was really much better than a lot of your competitors, Sara Lee meats and other people.

I guess one, given the food service environment, how have you been able to do so well?

We have a very good food service division.

And they have great momentum and respect in the marketplace.

I think there's a couple things behind this.

One, is the direct and dedicated sales force.

Second, continued focus on the operators, the actual restaurant operators and chefs.

And finally, a strategy that we call our pre strategy that I talked about before, with labor pressures and cost pressures and food-safety pressures and employee safety pressures on operators, we are doing as much as we can in our facilities to precook, premarinate, preslice, precut, preportion products.

And we can do it better and more efficiently than it can be done in the thousands of restaurants out there.

So, I think that that value-add component continues to move us up to mix.

We have had good momentum in food service for considerable length of time and we don't intend to lose it.

And just my last question, you know, to the extent that marketing was down, Joel, there haven't been many quarters that marketing decline of this nature.

To the extent, you know, it almost begs the question, did you cut marketing to do your numbers?

We cut marketing in the turkey operation more than anything.

I mean, really all the decline is there.

I think that's just prudent, given the realities of the industry.

I mean, there are times when you can afford it and there are times when you cannot.

We have continued our marketing support.

We had good, aggressive marketing support in the grocery division behind that excellent growth we generated there.

We continued our support in the refrigerated pork business behind all those initiatives, talked about growing the pre-cooked entrees and marinated tenders and those kinds of initiatives.

So that's been there.

But on the turkey side, we have said that there are times to -- when you can afford to go ahead aggressively and there are times when you have to play it a little bit quieter.

And that's the reality of what we did.

Okay.

Fair enough.

Thanks a lot.

All right.

Our next question comes from John Emeridge Please state your company name followed by your question.

Brick Law Capital.

A couple of unrelated questions.

First, around a 4, 4.2 or $3 million charge from the Fleming debt reserve.

Was that in G&A?

That is in G&A, yes.

Okay.

So that explains that jump.

And the expected accretion for the year that you forecast for the Diamond's Brand acquisition, has that started to flow flew, have you seen it on a pro rata basis, is it not here yet but growing throughout year?

We saw benefit in this quarter and will in the third and fourth quarter also.

Great.

So the operating profit in turkey down 60% to $6 million, that's about $9 million year-over-year?

That that kind of cost you see, relatively speaking?

That's correct.

On an operating profit basis.

Right, okay.

So all right that was about 4 cents or so.

What is the hog floor now, the contract, do you share what that is?

With the present corn prices, is approximately $41.

Great.

Yeah, you know, just an observation, the fact that you -- we lost the cost us $23 million, $9 million in turkey, and you guys still grew earnings, you know, up to 26 cents a share from 23 is fantastic and -- in my view.

And but the --

It's frustrating to have something like this Fleming come up on you, but -- it's the business.

That's what it is.

Now, the 23 million we lost in the kind of due to the hog contract, isn't a total net loss because we had some gain on the proprietary food side of the business, if you will, from lower cost; is that not right?

That is correct.

There's a little bit of a natural hedge in the mix of our business.

Order of magnitude, what would you say that the real net loss was half of that 23 million a quarter?

You know, we get asked that question all the time.

And that's very, very difficult for us to do because of -- because you end up paying a little more for the hogs but with market conditions where they are, you're getting that back and how you put all that together, I think you have to look at the fact that refrigerated foods is up over last year, in spite of the fact that hog losses are greater, et cetera.

So I think you got to look at that whole refrigerated foods complex because what is going through there is the net, and what gets to the operating profit line is the important number.

Good point.

Thank you very much.

Our next question comes from Tim Ramey Please state your company name followed by your question.

D. A. Davidson.

Good morning.

Question for Mike.

You were -- I really appreciate you providing the forecast on the hog prices for the coming year as well as the information on the contracts.

But if you assume the $46 number, and you assume that's in the money by, you know, kind of $5, what is that swing potential for the third quarter from, you know, loss to profit in the contracts?

We're guessing right now, Tim, that that's probably going to be a swing year-over-year of about $7 million.

About seven.

Right.

Okay.

Gee, I would think it would be bigger than that.

It would probably go -- well, I'm sorry, sequentials, I'm thinking sequential swing.

Certainly you would go from the 23 million loss to some profit;; is that right?

That is correct.

Okay.

And I would defer and have maybe have Fred get back to you as far as the mechanics.

I would tell you, knowing from previous conversations that you get, that we don't get it back on the upside as fast because there's a split on the upside 50-50.

We may be positive, but that positive isn't as much in actual nominal dollars because of the splits.

A quick question for Joel on the 10% volume gain in grocery products which is stunning.

Is there think one item that you can kind of point to there, any particular wins on particular products or just broad-based strength?

It was broad-based strength on the quarter, Tim.

We were very pleased with how strong grocery product came in and it was a lot of the proven, established brands.

I mentioned Spam, I mentioned Hormel Chili and Dinty Moore Stew.

We saw good category strength and good share performance there.

I think the harsh weather up and down the East Coast probably helped the business a bit.

I think with, you know, terrorism and war, maybe there's a little bit of stockpiling, but our marketing poll was strong there and the business really had excellent performance.

But it was across the board, it was not like we were pipe-lining a new product in the quarter.

They were on established businesses with good distribution bases to begin with.

And just an observation, Kellogg has now reiterated the last couple of times they spoke publicly that their board has passed a resolution against trade loading and, you know, when you see a volume up 10%, kind of thing the first thing you worry about is maybe that was a load of some kind.

Have you guys ever considered putting something like that in a formal resolution form?

No, we haven't but that's not the way we have really ever run the business.

The only time that, you know, we would expect to see inventories increase somewhat would be seasonally as we move into the winter months.

This would not be a good time to load the business because the summer is, you know, a seasonally weaker period for some of these canned hot products.

So, no, when I was talking about inventory, it would have been in consumer pantries more than it would have been trade.

There's no real measure of that.

Sure, yeah, I know.

Thanks again.

Our next question comes from Penn Jones, please state your company name followed by your question.

Deutsche Banc.

Thank you.

Good morning everyone.

Good morning.

Just following up on these break even prices, Mike, if I may, sorry to beat a dead horse here, but your $41 target, is that for just the next two quarters fiscal third quarter and fiscal fourth quarter, or can we assume that through the next four quarters?

That assumes -- that's basically through the period of -- assuming that corn prices stay steady is what I said in my comments.

Right.

When you say steady, are you at the $2.40 or more of a historical average of $2.30?

$2.30.

Okay.

Great.

I was wondering if you could provide or describe the competitive landscape in pork these days, particularly in the value-added segment.

For instance, Tyson with their new branding effort, I was wondering what inroads they're making.

Could you touch on that, please?

In the precooked entrees, I know we have continued to grow.

We mentioned 22% in the formal text of our announcement and we've had good share performance.

And I might indicate that the share performance is not just Hormel, but also the Jennie-O Turkey Store initiatives where we have got the So Easy line, a very parallel line, and continues to gain in distribution and volumes.

I know value-added is up was about 8%, I'm sure it was at least the same kind of number there.

We are growing share in that category.

But even as share leaders in the meat and sauce segment there, it's still a fragmented business with plenty of growth opportunity.

Our aggregate shares between Hormel and Jennie-O are below 20%.

And so that says there's plenty of opportunities for growth as we come forward with a lot of marketing and promotional initiatives.

Okay.

And also, one of your strategies in the past in addition to strengthening your existing brands and building emerging businesses such as food service and ethnic was to launch new products.

What can we expect in terms of new products going forward, anything on the horizon?

Well, we are -- you know, we are continuing to line-extend the successful initiatives that we have had within the pre-cooked entrees within the different flavors of pork and turkey.

We are going to see continued aggressive expansion within food service of our initiatives as we take our ethnic brands and flavors across channels, dry grocery, refrigerated and food service.

In fact, food service has been a real driving force behind what we call our Cafe H initiative which is ethnic foods into food service.

That was one of the hit items at the National Restaurant Show last weekend in Chicago.

It attracted a lot of attention for us there.

We're going to continue pushing that.

Great.

Okay.

My final question, if I may: Case ready business had another strong quarter.

I was just wondering if you could provide an update on your JV with Cargo and Precept, where do things stand there?

We are aggressively getting our ducks in a row or hogs and cattle in a row for a launch with the first significant customer, which I would fully expect to announce during the next quarter.

But given the internal planning procedures and needs at this customer and potentially other customers, we are not announcing the specifics of that launch at this time.

Okay.

Thank you very much.

We remain optimistic for the future of Precept.

Thank you.

Our next question is from Eric Larson, please state your company name followed by your question.

Hello everyone, Piper Jaffray.

Hello.

I wanted to go back to the Jennie-O for just a second, I'm sure it's incredibly frustrating to do as well in pork as you are and have turkey harm your results as much as it has, but if you go and look at the market conditions in turkey, if you could give us a little more flavor on that, it would be great.

If I look at your -- if you just take the market cost of feed, year-over-year, it looks like feed costs could have accounted for at least the $9 million short of all versus the profits last year, in feed cost alone, maybe even a little bit more.

Can you kind of give us the denounce of the supply on the market and what feed may have done in that -- in the quarter in the first half?

I think Mike and I will share the answer here.

There is still a situation of oversupply.

The frozen stocks are still too high.

The most critical commodity pricing measure for us and I suspect for many of our competitors, is we earn a varied price on breast meat, which is today and has been for several months at a $1.20, which is well below prior years, well below our plan.

And the source of the real financial pain on the commodity side of the business.

Now, in the turkey operation, we're about 30% -- pardon me, about 70% branded, about 30% commodity and that breast meat is the biggest commodity price.

And when that's under water like it is today, and that's the source of the pain.

Now, grain, feed costs in general, the grain and fat, have been higher than we had forecast and that has augmented the pressure there.

I don't know, Mike, if you've got any specific dynamics on that?

Eric, in terms of the feed component, you're right in that that is -- if you just looked at that, that is a significant year-over-year cost and it's not quite 9 million, but it's over seven.

The other component in picking up what Joel has talked about, the inventory stocks of both whole turkeys and turkey parts really have remained relatively high year-over-year.

In fact, if you looked at the April freezer report that came out, overall -- the overall poultry section was down 5%, the turkeys are up 10 to 20%, depending on the category.

There is, and that augments what Joel is talking about in terms of the breast meat component and it is at really historical lows in terms of that.

I would also continue in terms of the answer and tell you, and Joel alluded to it in his earlier comments today, the things that we have done from the acquisition point of view and the synergies that we're delivering, the positive synergies that we're delivering and the combination of the operations, the improvements that we've had in livability of our birds and weight-gain efficiencies of the birds, et cetera, have gone to offset some of this tremendous negative on the commodity pricing and on the feed pricing.

Yeah, I just -- to summarize, I want to emphasize that we are staying the course on the strategy.

We have continued to evolve our vertical integration in the turkey business into more and more branded and value-added product.

And that was up, as I said earlier, about 8% on the quarter continuing the momentum we have.

We've had a lot of growing initiatives in the marketplace.

And one place you can see this is in the second quarter results even with this extremely weak commodity pricing, we were still up 1.2% in sales in dollar sales on the quarter, which does reflect the continuing mix of the business.

So, I am convinced that when this negative cycle is over, we will, in fact, be moving strongly ahead at Jennie-O Turkey Store.

Thank you, that was a very informative answer, I appreciate that.

Have you-- this is the only follow-on question to that, which is something we can't see as analysts but you might through intelligence in the field et cetera be able to come up with, are you seeing capacity coming out of there, or are the banks finding a new way to lose money?

Capacity, processing capacity, I won't talk about borrowings because, you know, growing, that can move more quickly.

But capacity in processing, slaughter and cut and processing, tends to be added or removed in big chunks in this industry as opposed to adding a shift or slowly increasing or slowly decreasing.

The moves tend to be major when they happen.

And that's history and I wouldn't be surprised if that were the case in the future.

Great.

Thank you everyone.

Our next question comes from George Askew, please state your company name followed by your question.

Yes, Legg Mason.

Good morning.

Hi, George.

On the Diamond Crystal Brands acquisition, can you give us a sense of what it's done for you this quarter, your first full quarter in operation.

Has it helped you penetrate incremental accounts?

And can you quantify for us the top line in EPS accretion benefit there, it sound like it was about 40 million on the top line?

Yeah, just hang on one second, George.

In terms -- I'll answer the first part of the question, the penetration of new accounts.

I can't say that that's been in the mix.

They have continued to grow their business and we are working very hard at integrating some of the back end of the business because these are all dry mix and pack type businesses that we had in our pre existing specialty products business.

And indeed largely true in the Hormel health labs as well.

So in terms of production, logistics, transportation, we're integrating a lot of that.

I can't say, though, that there has been much customer expansion as a result of this.

And picking up in terms of -- we talked about it publicly and the way I answered the first question earlier in the conference call is it's about a penny, accretive from the Diamond Crystal in this quarter.

Got you.

Okay, good.

On the grocery products you suggested from a household level there may have been a little bit of stockpiling in the quarter.

You know, what should we look -- how should we sort of forecast that business in the current quarter?

Do you think it sort of normalizes back down to a more normal growth rate or do you continue to see momentum there?

Now, we saw a strong take away, retail take away for the categories and on our shares for the business.

I remain optimistic, I don't think we're going to have another plus 43% quarter, but I remain optimistic that grocery products will continue to perform well.

I mean, high single-digit volume growth, is that reasonable?

Uhm, yeah.

The comparison would have to be to year ago because there's seasonality in these businesses.

But I don't have a specific number.

Okay.

And then lastly, Hormel's health labs, can you just -- I know that there's been some talk over time about a number of initiatives there.

Can you give us a sense of an update on that business where -- to the extent there are initiatives, new initiatives going on there, just some of the dynamics in that business, please?

Yeah, there's continued new-product initiatives and account penetration, but I believe this is a business where the tide is going to continue to rise for the business in the category with the aging population, with more attention to food as a -- diet as a part of health management in senior citizens.

And so I continue to see that.

I mean, calorie enhancement for people in managed care, and dysphasia products continue to drive our results and this is one where, you know, I expect to see some continued growth for the foreseeable future.

Okay.

Great.

Thank you.

And the business is doing well.

Thanks.

Our next question comes from Jennifer Hills, please state your company name followed by your question.

Goldman Sachs Good morning, I just had a quick question, I was wondering if you could provide an update on your acquisition strategy, how aggressively are you looking at this point in time and what areas are you focusing on?

Yeah, we continue to look aggressively because we believe that our portfolio and organizational structure is such that we could, in fact, put additional businesses on our structure.

And financially, we've got the capability to move ahead.

We continue to generate cash strongly, we've got a good cash position.

We have plenty of leverage opportunity in the market.

So we are going to continue to look.

But we are, at the same time, very hesitant on over spending on anything.

I would also say that the -- that in our minds, the Jennie-O integration is behind us, the -- and the Diamond Crystal acquisitions, really two of them, two successive parts, are increasingly well-integrated.

So, the organizational effort that goes into doing a good job in the acquisition world is behind us, and that would also indicate that we've got the capability to go ahead.

So, our focus would be on branded consumer products or those targeted to demographic groups that we see have good growth profiles in front of us.

That's it.

Thank you.

Our next question comes from David Nelson, please state your company name followed by your question.

This is Rob Moscow actually with CSFB.

I had a question about the dinner kits line.

Conagra's Home Bakes line was about $125 million in its first year.

I wanted to know how big you think your Classics Baked Dinner Kits line could be?

Well, I don't have a number.

I know that, you know, these general product categories that provide dinner to time-pressured families and households continue to grow both in dry or shelf-stable as well as refrigerated and I suspect frozen where we don't compete.

I suspect the categories are very well positioned for long-term growth.

But I don't have a specific number for you in terms of, you know, one line in our total portfolio ended this segment.

Okay.

Thank you.

Our next question comes from Steve Tamph, please state your company name followed by your question.

I have two questions, first I noticed you commented on your food service under two categories.

Can you give me an idea, what is the food service volume compared to the total revenues as a percentage?

Steve, we don't break food service out as a part of the refrigerated foods category.

We give the volumes but that's as far as it goes.

Uhm-hmm.

All right.

You give an estimate for the next quarter of 27 to 33 cents and if I take the midpoint of 30 cents, this would compare to 38 cents you made a year ago.

And hopefully we'll --

We made 27 a year ago.

Twenty-seven?

Oh, I see, where is the major problem areas, I know your pension expense is still going to be up, $3.3 million?

Yes.

And you're anticipating that your turkey operations are going to continue to show a loss of about $9 million.

Is that what you're having there--and but you expect a swing in your hog situation of how much?

I mean, I'm just looking for the major components of the swing.

You just hit on the major components of the swing.

How much of a swing is there you expect in the hogs, for example?

Well, I said earlier that we anticipate about a $7 million swing year-over-year in the hog contracts.

Uhm-hmm.

I see.

And you expect the turkey to remain at a loss of about the same magnitude you had in this quarter?

That is correct.

Thank you very much.

Our next question comes from John Emeridge, please go ahead with your question.

Thanks, I just forgot a couple.

The -- I'm guessing depreciation was 21 million or so, depreciation amortization?

It was 22.

22.

And cash flow from operations then around 74 million?

It sounds about right.

And you already gave us cap ex at around 16.8, right?

That is correct.

Okay. thank you.

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At this time there are no additional questions.

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Okay.

Well, thank you, operator.

And thank you everyone who participated in the call.

We appreciate you joining us today and have a happy Memorial Day weekend.

Thank you.

Thank you, sir.

Ladies and gentlemen, this concludes the Hormel Foods Corporation second quarter earnings conference call.

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