荷美爾 (HRL) 2003 Q3 法說會逐字稿

Good morning.

My name is [LaShonka] and I'll be your conference facilitator today.

At this time I would like to welcome everyone to the Hormel Foods Corporation third quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question-and-answer period and if you would like to ask a question during this time, simply press star and the number 1 on the telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Halvin, Director of Investor Relations, you may begin your conference.

Thank you.

Good morning, everyone.

I would like to welcome you to the Hormel Foods conference call for the third quarter of fiscal 2003.

We released our results this morning before the market opened around 7:30 am central time.

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

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

Joel and Mike provide and overview of the Company's third quarter performance and detailed financial results and provide the outlook for the fourth quarter and give you an opportunity to ask questions.

We intend the call for the communication between the analyst and shareholders and the media should refrain from asking questions at this time.

First, the Safe Harbor Act, some of the comments made today will be forward-looking statements and made under the Private Litigation Reform Act of 1995.

Actual results may differ and factors that may cause this are identified on page 26 of the Company's annual report to the shareholders for year ending October 26th, 2002.

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

Thank you, Fred.

And good morning, everyone.

Exceptionally strong performance by refrigerated foods was offset by commodity value pressures in the Jennie-O's Turkey Store segment in the third quarter.

Refrigerated foods increased sharply as a result of normalized pork contract results and increasing demand for Hormel branded value-added products.

The very difficult turkey market put more pressure than we anticipated on the overall performance and caused us to miss the guidance range by two cents.

Even though we're disappointed in the third quarter results, the health of the Jennie-O's core business is very good.

We continue to execute our long term strategy to add value to products and the growth in these areas is very encouraging.

These benefits will become more visible, once the turkey market returns to normal.

Jennie-O's Turkey Store reported an operating loss of $127,000, compared to an operating profit of $15.4 million last year.

This paints a very clear picture of the difficult market the turkey industry faced this third quarter.

In response to these conditions, we have accelerated the reduction of the sale of commodity products by scaling back production.

We're pleased with the Turkey Store acquisition that occurred in 2001 and are confident that the true value of this business will be more evident in a normal turkey market.

We have no doubt that the industry will work out of the surprised situation and we're very well positioned for that day.

Jennie-O's Turkey Stores ranks among the lowest cost, most highly integrated producers in the U.S. industry.

Things are actually beginning to more in the right direction for the industry.

Since the end of the third quarter, we've seen the breast meat market strengthen from an average price of $1.18 for the third quarter to a current market of $1.43.

This is still below the normalized market of about $1.75.

The new quota for shipments to Russia seems to be putting new strength back into the market as well.

Other exports markets like Mexico and Asia are ahead of demand.

All of that being said, the latest from this industry-wide inventory, as reported by Earna Berry is still up 9% compared to a year ago so it will take some time to recover completely.

Third quarter Jennie-O's Turkey Store sales were $224.3 million, a 5% increase over last year, this is a testament to the consumers increasing preference for expanding array of turkey products.

This increase was led by 8% growth of value-added through retail, food service and deli channels.

Retail products experienced double digit growth including Jennie-O's Turkey Store frozen burgers, fresh dinner sausage and fresh bratwurst and double digit growth including premium season turkey breast, home style turkey breast and rotisserie turkey.

The refrigerated foods segment rebounded very strongly in the third quarter with a 61% increase in operating profits Sales for the quarters were up 3%.

Higher hog markets allowed us to purchase contract hogs at prices lower than the open market for the first time since the third quarter of 2001.

Hog markets peaked earlier than many people expected.

Still, the current forecast indicates that hog markets will be in the normal ranges for at least the next 12 months.

The value-added products continue to show strength in this segment, with Hormel freshly cooked entries up 7% and bacon up 17% and Always Tender fresh pork up 9%.

The long awaited announcement of the of the first pre-set foods customer, Super Target, occurred during the quarter.

This first important customer is a great platform in which to build future business.

We believe that preset foods could reach $500m in annual revenues over the next 3 to 5 years.

We continue to outpace at aggregate food service industry during the third quarter.

Food service volume was up 3% compared to a year ago for the quarter, despite the fact that the industry growth projects are softening for this year.

Few of the value-added that saw double digit growth is Always Tender bones pork, Austin Blues BBQ products, Premium Bacon items, and the Cafe H line of protein and ethnic sauces.

Specialty foods reported a 51% increase in operating profits including Diamond Crystal Brand, which we acquired in December of 2002.

Without Diamond Crystal Brand operating profits were even with a year ago.

Hormel health labs and other business in the segment reported record third quarter sales, up 21% compared to last year.

Operating profits here increased 5%.

I'm pleased to report, in the acquisition of Century Foods International, a manufacturer of nutritional products, dairy proteins and blends and cheese products.

This company reports as part of the specialty food segment but did not affect the third quarter results because it was purchased after the quarter closed.

The addition of Century Foods and Diamond Crystal Brand brings more diversification to the Company and provides new opportunities for growth.

As these businesses grow, the impact of commodity market conditions on our results will be reduced.

In this context, it's worth noting that our Diamond Crystal Brands made a positive contribution to the positive segment in the third quarter and continues to meet our expectations.

The grocery product segment faced higher pork and beef costs in the quarter, as we cautioned in the second quarter announcement.

This resulted in an 8% decline in segment operating profits for the third quarter.

Dollar sales were up 1% compared to last year.

A few of the stand out product lines included Hormel Bacon Bits and Hormel Chunk Meats and Hormel Chili all reported digit volume growth.

Sales for Chi Chi products and the Spam were down for the quarter.

It's worth noting that Spam reported extremely strong growth last quarter and I suspect led to higher than normal pantry inventories that had to be liquidated in the third quarter.

Our volume market share for this category held at a strong 74.6%.

Operating profit for the all other segment was up 11% in the third quarter.

Improved earnings from Vista, [our casing company] and (inaud) our cooked beef were the key drivers behind this increase.

Difficult, fresh and frozen international pork markets continued to impact international export business, however, international sales of the Spam family of products and Stag Chili were up over 30% and our China operations continue to make good progress.

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

Thank you, Joel, and good morning, everyone.

Earnings for the fiscal 203 third quarter totaled $34.7m or 25 cents per share versus $38.3m or 27 cents per share a year ago, a decrease of 9%.

Earnings for the first 9 months totaled $115.4m, or 83 cents per share, compared to $121.4m, or 86 cents per share a year ago, a decrease of 5%.

Volume for the third quarter was 803 million pounds, up 1% from fiscal 2002.

Overall, the new tons from the Diamond Crystal acquisition was offset from the tonnage lost from closing the Rochelle, Illinois slaughter operation.

Volume for the first 9 months 2.5 billion pounds, up 2% from 2002.

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

Selling and delivery expenses for the quarter were 11.7% of sales this year and 11.9% last year.

For the first -- for the 9 months, the comparisons were 11.8% this year and 11.7% in fiscal 2002.

Marketing investments in the third quarter totaled $25.8 million, or 2.6% of sales, compared with $29.7 million or 3.2% of sales last year.

About half of this decrease is from lower marketing spending at Jennie-O's Turkey Store.

The market conditions in the turkey industry required us to review all spending.

And this is an area that was affected.

Year-to-date marketing expenses total $81.5 million compared to 88.6 million last year.

Again, Jennie-O's Turkey Store represents about half of this reduction.

Administrative and general expenses were 2.8% of sales for the quarter compared to 2.5% last year.

Higher pension costs of $3.2 million caused most of the increase.

Pension costs will continue to outpace last year's level in the fourth quarter.

Interest expense for the quarter was $8.3 million compared with $7.7 million last year.

Depreciation and amortization for the quarter amounted to $21.8 million versus $21 million a year ago.

Our effective tax rate in the third quarter was 35.25% versus 34.9% in fiscal 2002.

The effective rate for the remainder of the year is expected to be 35.25%.

Capital expenditures for the quarter totaled $15.4 million versus $13.3 million last year.

We estimate the capital expenditures will total approximately $60 million in fiscal 2003, which is -- which is revisioned downward from the $80 million previously discussed.

The basic weighted average number shares outstanding for the third quarter was 138.4 million shares and the diluted average number shares outstanding for the quarter was 139.8m shares.

We did not purchase any shares of common stock during the third quarter.

We have 9.8m shares remaining to be purchased from the 10m shares that were authorized in the fourth quarter of last year.

We processed a million 6 hundred thousand hogs in the third quarter compared to a million 8 last year and 11% decrease due to the discontinuation of hog processing at Rochelle, Illinois.

We projected live hog prices would average $48 per hundred weight for the third quarter.

We actually saw an average base price of $45.75 per live hundred weight.

This compares with an average life price, last year, of 35 and a quarter – $37.25 in the same period.

During the third quarter, the hog contract gained from purchasing hogs blow market was $5m versus a loss of $13m last year.

Our fourth quarter plans anticipate an average live hundred rate for hogs for $42 and anticipating $38 for the first quarter of 2004, $40 for the second quarter and $47 for the third quarter of 2004.

For turkey, our fourth quarter plans anticipate $1.37 breast meat market.

This compares to $1.78 market in the fourth quarter of last year.

After the post-holiday season, we'll have a better visibility for the 2004 markets and we'll provide our estimates at that time.

We believe corn prices will trend about a dime per bushel higher between now and the end of the year.

Even though we don't expect any problems at this time, it's worth mentioning that we are in the very early stages of negotiating labor contracts that expire in September for five of our plants.

Austin, Fremont, Belloit (ph), Atlanta and Agonea, (ph) Iowa are impacted by the negotiations.

I'll now turn over to Joel for our thoughts on the future.

Thank you, Mike.

Now that the pork markets have returned to the normal conditions, I'm excited about I improvements in the value-added products made in the refrigerated foods segment.

A lot of the progress we've made over the past 18 months in pork, has been overshadowed by the protein over supply.

Going forward the results should be more visible.

As I commented earlier, we're still cautious about the outlook for turkey.

Just as other proteins have corrected their imbalances of supply and demand I am confident that the turkey industry can do the same.

Our strategy to market and develop value-added has not changed through the difficult environment.

Our branded positioning continues to strengthening which contribute to greater profitability for the quarters to come.

It's useful to keep in mind, the market shares of the value-added pork and turkey products leave plenty of room for growth at retail and in food service.

Growth prospects remain strong for the specialty product businesses.

Taking into account the plans of each of our business units, which are in place, we are issuing, by earnings guidance, of 36 to 44 cents for the fourth quarter.

And now I'll open the call for questions for Fred or Mike or myself.

Operator, would you please start the questions?

At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on the telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

The first question from David Nelson.

Good morning.

Joel, you mentioned the grocery profit down and some Trade D Stocking with Spam, do you think that's over with?

Well, I didn't say Trade D Stocking.

Pantry.

Pantry inventories.

We get measures and have a good sense where trade inventories are, retail and wholesale, there's no measurement of pantry inventories.

Right.

And in the second quarter, and indeed in the first quarter as well, we were in a very unusual position with.

Iraq.

Iraq and war threats and terrorist threats and harsh weather that led to people stockpiling non perishable products that we built up a pantry inventory.

Clearly not to the level that we saw back in Y2K, but they were built.

And, so, we've seen some liquidation of those pantry inventories, we believe, effecting some of the businesses.

Okay.

How about you clarify a couple of numbers the first being in turkey and I got your numbers on breast prices but you also said something was 9% higher, was that excess, breeding stock?

That was frozen industry inventories.

Okay.

That's still above the normal and probably more above the normal than any of the other proteins.

Right.

And, then, on pre-set, I guess we don't have to ask when you will make any more announcements.

We have some very encouraging announcements to be -- to be issued in the relatively near term.

We continue to be optimistic that the line has been well-received through Target, and I expect we will have some other announcements sooner, rather than later.

And was the number there, to clarify, was that $500 million over the 3 to 5 years?

Correct.

Okay.

All right.

With your shares, where they are, given what you think, and seems to be depressed markets, why not go for those 9 million shares that you have authorized to repurchase?

That's a good question, David.

And we continue to look at this, as we have stated to you and to all of the analysts in the shareholders that follow our company.

You know, share repurchase will be, and continues to be, number two on our radar screen behind acquisitions.

And knowing that we were very close in the third quarter to completing our deal with Century Foods and the fact that that particular transaction did allow -- did force us to borrow some money we held off on repurchase of stock in the third quarter.

Well, to me it looks like you got a pretty un-levered balance sheet.

Absolutely.

Anyway, thank you very much.

Okay.

Your next question from John McMillin.

Good morning, everybody.

Good morning, John.

Good morning.

I guess this quarter didn't surprise me, but, Joel, on this Q4 earnings guidance, you know, is much lower than what I would have thought.

And just to kind of look at it simplistically, turkey cost you .07 in this quarter.

I don't think that gets worse.

And to have a low-end number that's .13 below year ago levels in the Q4 implies that the rest of your company, the non-turkey, 80% non-turkey part is also running down.

And, you know, I just -- if you could just go into a little bit more of the Q4 earnings guidance, and if you could repeat, again, what turkey breast price you're assuming in the fourth quarter, was it $1.37?

$1.37, John, in the fourth quarter.

You raise a good question.

Let me attempt to answer that the best I can.

In the fourth quarter last year, the operating profit from the turkey operation was about $28 million, in round numbers, I don't have the exact numbers in front of me, it was about $28 million.

On an after-tax basis and put a tax rate against that, et cetera, you're looking at about $19m worth of contributions that the turkey operations made to the overall profitability of Hormel of the Q4 last year.

You take the shares outstanding against the $19m and you get into the 14, 15 cent range and that's the impact.

And when we're looking at $1.78 average last year on breast meat and we're forecasting this year, and we hope we're wrong, we hope -- based on all of the information today -- we're looking at an average in the fourth quarter of $1.37.

So, that's a significant difference over where it was last year.

So, I would strongly disagree that the other part of the businesses are being affected.

It's really -- it's really the turkey situation, presently, that's impacting us and why we've lowered guidance in the fourth quarter.

And let me do it another way, Joel.

Okay.

One could argue that whatever hit you got in the third quarter from turkey, the $15m, was basically offset by the swing in hog procurement?

Well, the refrigerated business did move the other way.

That's -- that's very true.

And, you know, that in the mix with the decline in profitability that we were discussing in response to the last question, in grocery products, were the real drivers in the variation analysis here.

I just -- we all sat through the dinner and it was very informative, but I guess, I just had no read on the -- you know, that the grocery volumes would be down in this quarter.

I know you can't, you know, give specific guidance at some dinner, but, just, there was no read that the volume trends had slowed so dramatically and that there was this build-up tied to, you know, war fever or whatever.

I just--

Well, you know, I guess, would say, you know, a lot of the focus, at that investor dinner Minneapolis was really on the Jennie-O's Turkey Store and the issues we were facing there.

But, we did -- we did review the absolute fantastic first and second quarter we had in grocery products.

And, you know, our belief was that that progress was non-sustainable, in the near term.

I mean, that was very clearly going on in our minds and we did not see that -- that kind of momentum carrying forward into the third and fourth quarters, because it was so inconsistent with the history of these relatively flat categories in the core parts of the business.

I'm not talking here to -- to the ethnic or higher growth components, but, more to the core, non-perishable items.

Okay.

Fair enough.

Thank you.

The next question comes from Jonathan Feeney.

Hello.

Joel, I want to, maybe, in terms of grocery products, dig a little deeper.

Looking at -- first of all, do you think -- you know, Mike mentioned a cut-back in marketing spending, is it possible that cutting back marketing, I know half of it was Jennie-O's and presumably the other half came from somewhere, the fact that your volumes could be and ongoing drag as far as the marketing spending?

I don't feel in the sense that we feel that that directly, and that quickly, in fact, we have reason to believe aggressive plans for grocery products marketing in the fourth quarter.

And, that -- you know, that support is going to be there behind the business.

The reduction set that Mike spoke to were really focused on the Jennie-O's Turkey Store, and our observation that, you know, given this environment, competition and ourselves, had trouble supporting the business at historical level, so, our money was focused on the new initiatives and the recently expanded geographic areas, where we wanted to be sure that -- that the businesses got off to a good start.

And we were quite encouraged, frankly, to see the kind of growth that we continued to maintain on the value-added parts of the turkey -- of the turkey business.

Certainly.

And, you mentioned, you attributed the Spam, specifically, to perhaps, high pantry inventories, on the Chi Chi that's been a great growth product.

Do you think there's pantry stocking there?

To what could you attribute--

I think the issue there, really, is a category story, Jonathan.

The Mexican sauces are up just a half a percentage point.

I'm looking at the category numbers here for the year-to-date.

The salsa category is just about exactly flat and our shares are level.

So, you know, the -- I think the huge growth momentum of that category has about peaked.

That would not be a category that would have been stockpiled for any of the reasons that I talked about.

A condiment like that is supposed to be a staple to be used on an emergency-bases.

I think the Spam and Chi Chi's numbers are for different reasons.

I would definitely be taking the Chi Chi into my bunker!

To turn just for a quick final question, the strong performance in refrigerated foods, could you give us a ballpark estimate in what percent, in terms of pounds, you shut down the Rochelle plant that's going out in some value-added form?

What percent of meat?

John, this is Fred.

Well, our overall branded for the total company is right at 80%, branded, 20% commodity.

And, that's further broken down into refrigerated, which is about 75% branded, 25% commodity and now it's getting better everyday with the reduction of Rochelle.

Okay.

And the growth of the value-added initiative.

Right.

The offset is that those products are continuing to move into the value-added categories.

Great.

That answers my questions, guys.

The next question is from Tim Ramey.

Good morning.

I was quickly trying to calculate the impact on the hog procurement contracts for last year's fourth quarter, the release just said it was $81 million for the year.

Could you share what the 4Q '02 number was?

I'm sort of pressing on John McMillin's question and wondering what the positive swing is in hogs that is what we're talking about, as somewhat of an off-set to the negative swing in turkeys.

Hang on.

Hang on.

Hang on, we're researching.

We're looking to pull out the number of the last year Q4 we lost $35 million on hogs.

I mean, that's fairly substantial, even with the, you know, even with the $19 million at risk with turkeys to say another way, the year-to-date earnings are down 5% at the net line and the guidance’s are down for a 20%, kind of, fourth quarter if I take the mid point of your range.

What else do we need to be worried about?

I think you did take down the forecast of hog prices for the fourth quarter if I'm not mistaken.

Right.

Which will have an impact on what we were originally looking at in terms of our gains off the hog contracts.

And that, you know, is kinds of an interesting phenomenon right now, one of the things that is kind of cautionary, as we look at these markets today, and there's other people a lot smarter than I, in terms of this, but, with the back-up of beef in Canada, we're getting a lot more in the amount of features that are being run on Canada on beef, the U.S. is receiving a lot more hogs than you would normally be expecting at this time of the year out of Canada, which is having the effect of moving hog prices down, somewhat, compared to what the -- all of the prognostic indicators were looking at for the rest of the year.

So, think that's going to be an impact and we have moved our prices down and at so some of those levels, if corn prices continue to move up, and we're thinking we're thinking 10 cents a bushel between now and the end of the year, it's going to have impact on whether or not the hog contracts will be profit bell for the rest of the year.

So, in essence, your best guess is that they're probably about break-even for the rest of the year.

Best guess right now, that's where we're at.

Okay.

Thanks much.

Sure.

And the next question comes from Daniel Goldstein.

Hi, guy, Daniel Goldstein, Bloomberg News.

Dan, this is Fred Halvin with Investor Relations and this is just for the analysts.

Can you answer my question after the call?

Sure.

You can call Julie Kraven, our media contact.

That's fine.

The next gentleman comes from John Emery.

Couple of unrelated question and I'll ask them separately.

Just backing up to 30,000 feet again-- At the end of the last quarter, in the press release and the conference call you talked about the pain that turkey was causing and you didn't expect it to -- you didn't have any visibility as to when it would get better.

Looking at some of the prices out there that was a great forecast.

It doesn't look like it got worse, either, though.

So, I'm wondering, with the previous range of guidance, 27 to 33 cents if turkey had come in the way we expected I would use the mid-point of the earnings range as 30 cents as a logical point estimate and we came in a below that what was the other bigger contributors to the short fall from that point?

I would -- I would say that, quite frankly, we thought, and while we knew that we anticipated that we weren't going to get back to normalized levels on turkey breast meat price, I think the expectations were the turkey breast meat prices were going to higher than $1.18 per quarter.

That’s not what you said-- I don't recall you saying that, I thought you said the opposite there was no visibilities as to when there's improvement in turkey.

And we still don't, quite frankly.

And I think I'm trying to answer your question.

Right, okay.

From the stand point that we anticipated that in terms of what the markets were telling us, that breast meat prices were going to move up in the third quarter, when, in fact, they didn't.

Uh-huh.

And, in the fourth quarter, our best guess, right now, as I said in my comments, that we're going to be looking at -- we're going to look at breast meat prices at $1.37 average for the Q4 against last year at $1.78.

Last year at $1.78 in rough numbers the turkey operations and there's other contributing factors in thigh meat and everything else, but, last year in the Q4 at $1.78 breast meat prices and fairly normal prices in dark meat and thigh meat, et cetera, the turkey operation made operating profits of over $28m.

Uh-huh.

And $1.37, they're not going to make $28 million.

Uh huh.

And that's the key point.

You know, John, if I could build on Mike's response there.

We had forecast that, through the balance of 2003, turkey prices, and we'll focus on breast meat prices because it's one of the most critical items, we had expected them to move up.

But, we had expected them, as we were looking, albeit with limited visibility, we expected them to move up in the third quarter and they did not and that really accounts for the miss versus our range.

Now, as we've just been discussing, they have moved up, in the first portion of the fourth quarter, it's just that our timing in terms of our anticipation was off considerably.

And the impact was negative, as a result, for the Q3.

Ok.

It's--

And also, don't lose sight of the fact that the gross or other products -- grocery division or operating segment, higher beef costs that Joel talked about in the comment also impacted because the beef costs are input costs to GP and that in our Q2 we talked about anticipation that those prices were going to be higher.

Right.

So the forecast, though, is for sequential improvement and, I'm just wondering, what is your -- what's your earnings estimates for the Q4 and assuming about turkey operating profit or loss?

Right now, I'm frankly, from where we're sitting today, because -- well, while breast meat that Joel talked about is moving up, we also see -- can tell you that thigh meat is basically flat.

And the whole birds, which is a -- which is a big component of Jennie-O's profitability in the fourth quarter are not moving at this point.

Those prices are basically the same prices we saw here in the Q3.

Uh-huh.

So, in answer to your question, if everything stays where we're at today, you're going to see results of the turkey in the Q4 about what you saw for the third.

Okay.

Thank you.

And I still am not totally clear on, you know, kind of -- everyone is trying to do high-level math.

It's tough.

The swing in profitability in the high contract prices double in the year-over-year change in turkey and, yet, we're having significant down earnings comparisons.

And I still haven't -- I'm guessing, one of the things you would say, but haven't heard, that you said in the past is, while, looking at the hog contract prices doesn't take into account the raw material cost on the other sides of the business.

But, I'm still having trouble balancing out just those two or 3 variables.

And I--

Yeah.

John, this is Fred.

We can cover this in more detail on the implications of the hog contracts.

As we always said, the hog contracts aren't a one for one, you get $35 million back on the hog contract but got higher material prices for gp and a whole different margin profile on the refrigerated side of the business and there's a lot of moving parts to what that means to the bottom line and there's no magic formula that allows us to pinpoint that.

Directionally we know.

That's kind of the quick answer to your question, if you would like to cover that--

No, as I said in the asking, that's what I anticipated you would say.

And, we'll talk about it offline of the last question, other income in the interest and investment income looks like up ten fold, sequentially.

And that's really, really the result of two things, we got in the Q3 the accounting level of 20% we account for them as dividends and they paid the dividend in the Q3.

Is the dollar amount, even though shifted as a line item, is it dollar amount similar to last year?

the dollar amount --.

You dropped below 20%, so maybe not.

No, it would not be dollar for dollar

Okay.

But it was wasn't a ten-fold increase?

No.

No.

So really a line item change?

Correct.

Did you talk at all about potential increase or dilution from Century Foods or can you ballpark anything about that?

We said, because we're going to basically have 12 weeks of century foods operations in this quarter, that it would, basically, be -- or in this remaining year, or this coming quarter, that it would, basically, be flat and accretive next year.

Thanks.

Thank you very much.

The next question from Pen Jones.

Good morning.

Good morning, Penn.

In terms of turkey, I was wondering, could you quantify how much production you intend to cut back, and let us know what you've heard of others that intend to do the same?

I know Pilgrim Pride said they're going to cut back 15% in the next fiscal year.

We're reducing our production right now about 5%.

Okay.

And so that, in live pounds that's about -- that's about 60 -- 60 live pounds.

Okay.

And, in terms of the industry, I think the only thing I could point to is the information, public information regarding the Exset data last week, that reflected about a 3.5% decrease compared to last year, which would [be a caution that] we got production coming out of the industry but there's no guarantee that will continue next week.

Right.

At least there's some indication now, in terms of excess, that there is going to be a decrease.

Great.

So that's turned fairly recently, because at the June investor dinner production was still looking up year-over-year pretty significantly.

That's correct.

It was still growing and you have to remember, through this point in the year, we've had ideal growing conditions, which, is kind of a double whammy.

Right.

But the livable weights is excellent, the weight gain is excellent.

The late weight from that gain, usually goes into white meat.

So, that has -- those factors have condition contributed the surplus situation.

But, it's very clear that we don't know what the competition is doing, but the pain, if Webb felt it as the low-cost producer and the most vertically integrated operator, we just have to know that other people are feeling the pain even worse.

And we got to know that those numbers are going to come down.

Okay.

And, then, in terms of breast meat, specifically, you mentioned that it's risen recently up to $1.37 a pound.

Can you--

Actually, $1.43. $1.37 is the estimate for the quarter.

Sorry about that.

Yep.

What accounts for the recent increase?

Because it appears that cold storage inventories are still at fairly high levels.

That's -- you know -- it's much art as science here.

Right.

But I there have been more plants authorized for export shipments, especially to Russia.

I think that's had a factor.

I think the hot weather in -- that would have been facing here in the upper Midwest has paused those ideal growing conditions to reverse and live ability of weight gain there.

And finally, there's been a significant government program with the School Lunch Program purchase of, approximately, 20 million pounds, as I recall, of meat.

So, I this there have been some elements that have -- that have factored into this increase.

Okay.

And, those are, hopefully, potentially, sustainable through the Q4 to get you to the $1.37?

Yeah.

Okay.

Well, you know, if the $1.43 holds.

Then, my final question, if I may.

In grocery products, you mentioned that profits were pressured by the higher pork and beef input costs.

I was wondering, what percentage of your inputs across the portfolio are beef and what's your outlook for beef prices, particularly, considering the ongoing partial ban and Canadian beef.

I don't have those numbers with me, county let you know.

Great.

Thank you very much.

the next question from George Askew.

High, George Askew, Legg Mason.

On grocery products, we kind of ask questions different ways, but I have two questions, one, the Spam pantry load.

Do you have a sense of whether that has, you know, abated or do you expect more impact from that in the fourth quarter, specifically?

Hello?

Yeah.

Yeah.

Our volumes are up a couple of percent year-to-date on Spam.

Has it abated?

I can't point to any specific piece of information that would talk to where we stand on the pantry inventories, because, again, that's not a syndicated measurement that you can buy from any objective source.

I don't think there would be -- I don't think that the build was enough to have an impact beyond the quarter.

So, I don't expect that to be a pressure into the Q4.

Okay.

So, can we -- can we assume that grocery products here in the Q3 had a bit of a low water mark in sort of seasonal-- well, in terms of volumes, hopefully, and, perhaps, even, you know, the margin dip?

I mean, clearly margins are impacted by higher input costs, but, they're impacted, frankly, more than I thought.

There's been more volatility in grocery products this year than usual and that's because of the great first and second quarter that we had and the pressured Q3.

We're going to continue to feel the impact of beef prices.

Remember, Chili is one of our biggest items, corned beef hash is big.

We have utilized quite a bit of beef and to the earlier question Fred will get back to you with the specific numbers.

We're affected by the transport prices for the raw materials that go into Spam which is felt in the grocery products margins.

Right.

I guess my concern is, you know, the fourth quarter is a big quarter for grocery products, seasonally, very big, it seems, and if volumes are soft and margins are soft, I mean, that's a big, it seems like, that is really the real culprit behind the lower guidance, it seems to me.

I know we've kind of walked through the turkey impact and what not.

I guess the surprise to me is grocery products.

Am I looking at that--

Well.

-- incorrectly?

Well, not -- not exactly.

There is increased marketing support factored into our fourth quarter and that's largely behind the grocery products initiatives there.

Okay.

Okay.

Well, good.

Thanks.

The next question comes from Steve Tab.

I'm not an analyst but I would like to know, I'd like some comments on the increase in the intangibles and other assets on the balance sheet.

The increase in the -- from last year through July, are basically the results, Steve, of the Diamond Crystal acquisition that was completed in December of 2002.

Okay.

Thank you.

Your next question from Peter Balm.

Hi, this is Ashley [Allston], good morning.

Good morning.

I wanted to get details on Cap Ex, why is it coming in $20 million below what you anticipated and provide outlook for next year on Cap Ex as well?

It's coming, I think, at the lower level, quite honestly, because of the situation where there's projects that we just don't think at this point in time can be justified from an EBA standpoint, number one, particularly in light of some of the market conditions the runs aren't there.

And, number two, which, as you know, then, is significantly below what our depreciation is from a cash flow standpoint.

I'm going to get, quite honestly, right now, know what I know today, we haven't finalized the but gets for next year, probably in the $70 to 75m range for next year, still below where we are from a depreciation standpoint.

Absolutely and I notice the cash and accusations of share re purchases any thought on the possible dividend increases?

The dividends as always happens, that is a standard topic for our board meeting in November.

Uh-huh.

Historically, as you well know, we continue to increase the dividends year-over-year, in fact, 37 or 38 straight years of dividend increases.

Right.

We increased the dividend last year 7.7%.

I would anticipate that it will be a topic and we'll see where it goes.

Okay.

Great, thank you.

Your next question from Ted Choi.

Yes.

Hi, good morning.

Good morning.

I had two questions about the turkey business.

First of all, just so I can get a better sense of what a normal supply cycle, how long that would be, what is the average sort of time that it takes to raise a turkey and then sell it on the market?

How long would you expect to see it to take to see that 3.5% decrease in the excess to translate in 3.5% decrease supply on the market.

There's two answers to the questions.

If you're raising hens and they're hen sets that's about 14 weeks.

If you're raising Toms, it's about 22 weeks.

Okay.

And the cycle, that might mislead you.

By the time you get back to breeding stock, and setting eggs, it's longer than a 22 week-cycle.

I'm not suggesting that it's a year-long cycle, but it's longer than 22 weeks to feel the impact of any significant changes.

So, so if it's shorter than a year and longer than 22 weeks, can you help me out and sort of -- you know, that's pretty wide range.

What is the typical production cycle for the turkeys?

Well, the -- the growth duration is what Mike had indicated.

That 22 weeks for the further processed Toms.

But, I -- I would put it more in the range of a quarter to, you know, to work that out.

Okay.

And I guess the second question--

I'm sorry, six months.

One quarter to 6 months?

Yeah.

Okay.

And the second question has to do with some of the pricing.

You had mentioned that even though you expect breast prices to increase sequentially, that operating profits for the segment would be flat.

And this was because of what you guys are seeing for whole bird pricing.

And, apparently, the whole bird pricing is more significant or more relevant for the profits for the division.

Can you give us -- or can you share with us what some of the whole bird pricing, what sort of pricing you're seeing, but this quarter and year-over-year and what your projects are for the fourth quarter?

First off, I want to do that, before I -- but before I give you those numbers I want to make sure you understand one important point.

In terms of the Jennie-O's operation, the whole birds, really, the whole birds are sold in the fourth quarter.

I mean, you accumulate -- you accumulate in frozen inventory those birds but really they're geared towards Thanksgiving and the Christmas holidays, which ship in October, impact the Jennie-O's results significantly in the fourth quarter on whole bird sales.

And that's really, on Jennie-O's perspective, where the majority of the whole birds are sold in the fourth quarter.

If you look at -- if you look at where whole birds were last year, in October, whole birds got to about 59 cents a pound.

And that's looking at an 18 to 22 pound frozen Tom.

This year, you're below those numbers and an anticipation -- and like I say, they haven't moved and we need to get them to at least that level here in September and October, when those birds ship.

Okay.

When you say that they're currently below, can you give us a sense of where that is?

Well, 56 cents.

Okay.

So, basically, if we see the prices move back up to, maybe, maybe, 59, 60 cents, that would be ahead of what you're projecting, you would have a plan?

The easier answer is yes.

Is makes it easier.

The easier answer is yes.

There's other components we talked about in terms, you know, that's assuming grain prices don't go higher and all of these things.

There's a lot of components rather than saying if that bird price moves to x, that your profitability is going to up y.

It's not a dollar for dollar number.

Okay.

All right.

Well, thank you very much.

That was very helpful.

Next question comes from Tim Ramey.

Hi, this is just a follow-up for Joel on the dividend question.

Just, earlier, you indicated that, you know, share repurchase is still the number two priority and I would be interested in your thought process as you balance the attractiveness of share repurchase versus increasing the dividends at this point.

Well, I, again, acquisition is the primary focus or priority.

Dividend versus share repurchase hasn't really been, you know, active trade-off analysis here.

We have, you know, we have moved up our dividend consistent with policy.

We paid our dividend.

Our last quarter was 300th consecutive difficult dividend we haven't missed a dividend in 75 years, never missed a dividend, paid it for 75 years, and as Mike indicated 37 years of consecutive increases, which is every reason to believe we'll continue.

I don't see us, you know, anything, majorly, out of our historical pattern here.

The recent tax law change doesn't increase the attractive necessary of dividends from your perspective.

I don't think it will have significant bearing on our analysis and the board's decision.

Okay.

Thanks.

Your next question comes from John McMillin.

Mike, just the last turkey question, hopefully.

Normally, turkey prices improve the closer you get to Thanksgiving.

Isn't that true?

Do they improve?

Yes.

Um, historically, John, if you look at historical numbers, as you get closer to Thanksgiving, breast meats, normally, would go down.

Thigh meat would go, basically, remain flat.

If you look at -- if you look at whole birds, whole birds, as you get closer to Thanksgiving day, historically have come off because people are stuck with inventories and the closer you get to November, 24th or 25th, whatever the Thanksgiving date is this year, historically those prices have come down.

You're in the business of making turkeys and you would think that that business would come more profitable as you come to the seasonal, strong point period.

Historically I would agree with that.

There's a dynamic in the market John that you got to take into effect.

With the whole bird sales through the holiday season and the immediate period after the holiday season, we actually see, you know, a decrease in some of the shipments and the demands for component parts for breast meat and that kind of thing because people are a little bit OD'd on turkey after fine finishing the 20 pound bird over the holidays.

And, so, the breast meat market has frequently softened, early in the calendar year, as a result of that of that phenomenon.

In whole bird sales, I think it's a little bit of supply, you know, and demand.

Some retailers cover themselves early in the year, others who wait to buy opportunistically, and, and that can vary considerable year to year in terms of the pricing for the whole birds for the holidays.

Can I just ask a question on your acquisition policy, Joel?

I mean, I've been watching you for a while and I guess there was a seven or eight year period I was complaining that you weren't using your strong balance sheets to buy almost anything.

You were very cautious and now you made a number of purchases and I see growth in the new area, and it looks to me you're almost a private-manufacturer of the products.

We know about the salt and pepper move and so forth.

Does the strong acquisition move in the last two or three years signal unhappiness with the base business?

You talk about a desire to diversify I'm looking at the change of behavior and trying to understand it.

No.

I think that's -- that would be the wrong direction, John.

The Jennie-O's -- or the Turkey Store move was as much for the trademark and the retail business that the Turkey Store brought, that -- foods brought to the equation, really, excellent supply chain of branded products called Turkey Store with the green awning that we're doing well and continued to do well and we've merged the businesses together well.

In fact, integrated the trademark to Jennie-O Turkey Store to build off the leverage of both.

That's clearly a branded play.

The move with Century, and the most exciting part of Century, frankly, is what we might do in the future with our Hormel health labs initiative.

Hormel health labs is, in fact, a branded initiative, value-added initiative, focused on managed care, health care, pharma foods, maybe, would be a little bit of a stretch , as the gray aria between food and pharmaceutical comes to bare.

We think there's great value in having a jump start on the development of new products for that market, which could play out institutionally in food service, and could, eventually, play out in broader consumer markets, as well.

But, we felt that there was a great opportunity to learn about that industry, to jump start with good R&D and production capabilities and there was also an opportunistic element to the buy in the way of the finances for us.

Okay.

Thanks.

At this time, there are no further questions.

Are there any closing remarks?

I don't have any.

I would like to say thank you to everyone for attending this conference call.

Thank you.

This concludes today Hormel foods conference call.

You may disconnect.