荷美爾 (HRL) 2004 Q1 法說會逐字稿

Good morning.

My name is Lisa and I will be your conference facilitator today.

At this time, I'd like to welcome everyone to the Hormel Foods first quarter earnings conference call.

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

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star 1 on your telephone keypad.

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

Thank you.

Mr. Halvin, you may begin your conference.

Good morning.

I'd like to welcome you to the Hormel Foods conference call for the first quarter of fiscal 2004.

We released our results this morning 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 web site 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 first quarter performance, as well as detailed financial results.

They will then provide the outlook for the second quarter and full year.

You will then have 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 and factors that may cause this are identified on exhibit 99.1 of the 2003 Form 10-K.

Now I will turn the call over to Joel.

Thank you, Fred, and good morning, everyone.

Exceptional demand for our value-added pork and turkey products led to better-than-expected results in our first quarter.

Our protein businesses, Refrigerated Foods and Jennie-O Turkey Store, have made significant progress in improving their product mix.

Products that offer both great flavor and convenience were the best performers in the quarter.

These included Hormel Pre-cooked Bacon, Fully Cooked Entrees and Jennie-o Turkey Store, So Easy Fully Cooked Entrees.

With pork and turkey markets back to normal, the distortion from the protein oversupply have dissipated and the benefits of our value-added production are more visible.

Our Precept Foods joint venture continues to grow our K-30 business with dollar sales up 70%.

Foodservice also delivered a strong quarter with dollar sales up 15%.

The surge in demand for high protein, low carbohydrate products fits the profile of our product portfolio perfectly.

Our great tasting pork, turkey and beef products have the attributes of low carb consumers are looking for.

We have not quantified the new demand that Atkins has caused, but we do know that it is a positive for our business.

We will continue to emphasize our high-quality proteins and we will continue to develop new products to bring these nutritional benefits. to consumers.

Results from our Jennie-O Turkey store segment were very good.

Excluding last year's $4.2 million nonrecurring earnings, operating profits improved 62%.

Volume from value-added products grew 11%.

This growth reflects success in gaining new distribution for existing products and continued progress in new product development.

Product categories leading this growth include Jennie-O Turkey Store So Easy Entrees, Brats, Bacon and Stuffed Breast items.

The breast meat and thigh meat markets were better-than-expected in the quarter.

This was driven by strong domestic and export demand.

Industry forecasts lower -- industry forecasts low -- project lower levels of live bird production in 2004 compared to last year.

This should result in better markets for the coming year.

However, higher feed costs will push production costs higher in 2004.

The earnings power of our turkey business will become more significant now that the Turkey store has been fully integrated and market conditions have returned to normal.

You may recall that we announced turkey production cutbacks last year.

Thanks to more efficient growing, bird weights and volumes were higher than last year, even though we actually processed fewer birds in the 2004 first quarter.

As a matter of fact, bird weights and food efficiencies reached record levels in the first quarter.

At present we are monitoring the discovery of Avian Influenza, or AI, on the East Coast and the resulting ban by some countries of U.S. poultry.

The strain of AI identified in the U.S. birds appears to be low pathogen, and is not the same as the high pathogen strain currently in the Far East markets.

In the past, low pathogen strains found in the U.S. and the corresponding export issues have tended to have immediate impacts on exports outside the immediate states where the outbreaks occurred.

Today's issue has been somewhat compounded with a greater awareness of AI.

We do not expect any disruption of our Turkey business at this time.

The grocery products segment faced higher pork and beef costs in the quarter.

This resulted in a 24% decline in operating profits.

Lower sales from Dinty Moore Classic Bakes caused most of the sales and volume decline for this segment in the first quarter.

The decrease reflects two factors, last year's pipeline fill and this year's below-planned sales.

We're disappointed with the overall results of our Dinty Moore Classic Bakes product and the category it competes in.

However, we continue to see success in selected markets.

Carapelli Olive Oil had strong sales in the quarter with volume up 17%.

To further strengthen our ethnic portfolio, we launched a new pasta and sauce product line under the Carapelli brand in the northeast region of the U.S.

This line of products will bring authentic Italian flavor to the category.

We also launched 12 new Hormel Micro Cup items in the quarter.

It's our objective to contemporize our products and bring innovation to the consumer in order to deliver growth in our grocery product segment.

With that thought in mind, I'm excited about the initiatives we have planned in 2004 and our opportunity to grow the categories and increase our market share.

Specialty products reported a 42% increase in operating profits, including contributions from Diamond Crystal brands and Century Foods International.

Because of full -- because of the full integration of the new businesses, it's difficult to provide comparative operating profits, excluding the two new businesses.

Hormel Health Labs, an operating segment of specialty foods, reported a volume increase of 11%.

The integration of Century Foods International, which was purchased in July of last year, is meeting expectations and we should see its profitability improve as the year progresses.

Century Foods and Diamond Crystal Brands bring more diversification to our company and provide new opportunities for growth long-term.

Operating profits for the all-other segment was up 22% in the first quarter.

The International Division delivered great results, driven by strong margins from the Spam family of products, Stagg Chili and continued earnings from our China operations.

Our cooked beef subsidiary, Dan's Prize, also reported strong results, despite the disruption caused by the discovery of BSE in the United States in December.

We continually analyze our business with a view toward assuring that every part of our company is strategic and provides the level of returns mandated by our economic value-added discipline.

Operations that do not meet either of these requirements are ultimately divested.

As most of you already know, we divested our investment in Campo Frio at the beginning of February.

After holding this investment for over seven years, we felt that we could re-deploy our capital in other strategic areas and get a better return.

We believe we can bring innovation from our refrigerated foods product lines into the Asian markets and generate better returns as a result.

We are also in the final stages of selling our Vista International casing business.

We have a non-binding letter of intent for the sale of this business and expect the deal to close in our second quarter.

Terms and conditions of the sale have not been disclosed.

Another important step that we have taken to make our operation more efficient is to realign our sales organization through a project we call Delta.

This realignment will provide better service and give Hormel Foods additional leverage with its customers.

As you may have noted in the earnings release, our general corporate expense included a $2.1 million charge for the cost of this restructuring.

This new sales structure will be implemented before the end of this fiscal year and I'm very excited about the potential of the new sales structure.

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 2004 first quarter totaled $51.8 million, or 37 cents per share, versus $46.9 million or 34 cents per share a year ago.

The prior year results include 2 cents of nonrecurring net earnings items from Jennie-O Turkey store.

When you adjust for nonrecurring net earnings out of last year's results, earnings per share increased 15.6% and net earnings increased 17.2% for the quarter.

A reconciliation of this calculation is posted on our web site, www.hormel.com.

Click on the investor tab and then click on the audio archive button.

Dollar sales for the first quarter totaled $1.1 billion, compared to $1 billion last year.

Four of our five segments reported sales growth.

Volume for the first quarter was 908 million pounds, up 5% from fiscal 2003.

Now I'll turn to the profit and loss and balance sheet comparisons for the first quarter.

Selling and delivery expenses for the quarter were 11.1% of sales this year and 11.8% last year.

Marketing investments in the first quarter equaled $25.9 million, or 2.3% of sales, compared with $28.1 million or 2.8% of sales last year.

Lower spending occurred in grocery products and Jennie-O Turkey Store.

Administrative and general expense was 3.2% of sales for the quarter, compared with 2.8% last year.

Higher salaries and wages of $3.8 million, the biggest increases coming from $1.5 million from our two acquisitions last year, and $800,000 from expensing stock options, pension costs of $2.7 million and amortization costs of $1.5 million, represented most of this increase.

Interest expense for the quarter was $6.8 million, compared with $7 million last year.

For the full year, we expect interest expense to be approximately $27 million.

Depreciation and amortization for the quarter amounted to $23 million, compared to $20.5 million last year.

For the year, we expect depreciation and amortization to be around $92 million.

Our effective tax rate in the first quarter was 36.5% versus 34.7% last year.

As you recall, the 2003 rate was lower than normal because of credits received from an audit settlement.

The effective rate for the year is expected to be right at 36.5%.

Capital expenditures for the quarter totaled $15.8 million versus $13.4 million last year.

We expect 2004 capital expenditures to be around $85 million.

The basic weighted average number of shares outstanding for the first quarter was 138.6 million.

The diluted weighted average number of shares outstanding for the quarter was 140.1 million.

We purchased, during the quarter, 340,000 shares of common stock with an average purchase cost of $25.62 a share.

We have approximately 9.4 million shares remaining to be purchased from the 10 million share authorization.

We processed 1.7 million hogs in the first quarter, compared to 1.9 million last year, a 10% decrease due to the discontinuation of hog processing at our Rochelle, Illinois, plant.

The actual live hog costs in the first quarter was $37 per hundredweight.

This compared with an average live-based price of $30 in the same period last year.

During the first quarter, our hog contracts required us to pay $17 million above the market versus $46 million last year.

We expect to have about 25% of our existing hog contracts converted to the new meat value contract by the end of this fiscal year.

This new contract lowers our exposure to grain markets.

We expect higher live hog markets in 2004 compared to 2003.

We anticipate an average live market of $42 per live hundredweight for the remainder of the year.

For the rest of the year, we believe corn will stay about at current market prices and soy meal will probably trend lower.

We anticipate more normal market conditions within the turkey industry in 2004 compared to last year for the key parts of the bird, such as breast meat and thigh meat.

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

Thanks, Mike.

Now that the pork and turkey markets have returned to normal conditions, I'm excited about the improvements our value-added products are making in the Refrigerated Foods and Jennie-O Turkey Store segments.

The work that has been done moving products up the value ladder will be evident in improved operating profit margins.

Taking into account the plans each of our business units has in place for 2004, we're providing earnings guidance of 28-34 cents for the second quarter, and a $1.46 to $1.60 for the year.

And now I will open it up to questions for Mike or Fred, or myself.

At this time, I'd like to remind everyone, if you would like to ask a question, please press star and then the number 1 on your telephone keypad.

Your first question comes from John Feeney.

Hey, guys, congratulations.

Thank you, Jonathan.

A couple of questions.

You know, first of all you -- you mentioned, you know, the disappointment with the Dinty Moore, I guess, Supper Bakes line.

You know, what is the source of the difficulty there?

Do you feel like the category wasn't on trend?

Or do you feel like it's the competitive landscape?

And what implications do you think that has for your other potential line extensions?

Well, at the -- we're disappointed there with both the way the category has developed and, you know, and also our position with it.

It has not turned into the big category, you know, we had expected at the time.

We had a lot of pipeline volume in the first quarter of last year and the category just hasn't developed.

I don't see a big implication for our other initiatives.

Again, this was a grocery product item that would serve an entire family, and, you know, we're discovering that, for instance, the Dinty Moore trademark really does work better in single-serve or just double-serve packaging applications.

For instance, our Dinty Moore American Classics, the product in the microwaveable tray, we had a packaging innovation there, taking that product out of the box and selling it now with just a band around it, and that business has jumped, you know, week to week by 30 to 40%, a gain since we made that change.

So, we're pleased that the consumer continues to be, you know, responsive, to that particular trademark, when we bring it in a packaging form that's very visible and meets consumer needs.

Thanks.

And just one other one.

I know you don't have a crystal ball and I'm sure you wish you did.

But, you know, making I guess $42 live-weight hog price estimate for the rest of the year, that's a touch lower, I guess, than where you are at moment or right around where you are at the moment.

You know, given what is usually a powerful, positive seasonal trend, and it having been quite a while since we, you know, the contract spent any meaningful time above break-even for hog producers, you know, what is it about the industry that makes you think, you know, production is going to be maybe thinly profitable, if profitable at all, for the remainder of the year?

Well, Jonathan, this is Mike.

A couple of things, I think, that enter into that.

First off, I think that we said the average is going to be for the year at 42.

And, as you well know, we're going to get into a period of time here in April, May and June, where the markets will move up and then they will fall back off when you get into the real heavy months of September and October, and we think that that trend will continue.

But there is also, you know, there is also the impact of operations that have had and experienced some real difficulties here in the last couple of years and frankly, I think you're seeing some people not expanding production at all.

In fact, in some cases, cutting back production, for the same point or the same reason that you're talking about, is it's been very thinly-margined profitable in terms of the years.

And --good.

So, then I guess, why an average of $42?

That just seemed to be a little conservative.

Well, I think that -- I think that we're looking at -- the grain prices are going to have some impact, but also I think you do have some high levels of production.

In fact, you know, one of our competitors has announced that they're going to cut back on some of their own company-owned hogs because of this.

Absolutely.

Thank you very much.

The next question comes from John McMillin.

Good morning, everybody.

Good morning, John.

Sorry you're not down here in Arizona, even though, Joel, the sun is not out, so it's not much of a golf day!

It's beautiful here in Minnesota, John.

I'm going to cross-country ski today.

When you say things are normal, between the Avian flu, BSE, you know, $1.3 billion jury verdict and Atkins, I don't know what-- if this is normal, I don't know if I can take it anymore.

I guess BSE has had no impact on your business, is that a fair statement?

Well, the -- you know, the -- the impact, there are all these different winds, you know, pushing at us, some up and back.

It's hard to break them out, one apart from the other, but I would say that BSE has had little discernible impact on our business.

That would be fair to say.

And do you have any comment about that jury verdict against Tyson?

You know, not really.

I don't understand it.

It doesn't strike me as right, but as far as it applies to us, you know, our contracts have, in fact, protected our producers to a major, major degree.

I think there was a period back when hog prices absolutely tanked, where we effectively subsidized our producers to the tune of $80 million or so, through a very painful period.

So, as far as I look at it, our contracts are intended to protect the high-quality, loyal suppliers through a period of downturn.

To me, you know, it's -- you know, it's unfortunate.

I don't know how this thing's going to shake out eventually, but it does not sound like a justice to me.

And the volume, Mike, in the quarter, the reported volume in the quarter was up 5%?

Correct.

What was it on an apples to apples, excluding acquisitions?

Up about 2%, John.

So, basically Turkey offset the -- That would -- that 2 includes the cut out of Rochelle?

Yes.

That would include the cut-out of Rochelle.

Significant in terms of tonnage.

Right.

And, Joel, just in terms of taking -- I mean, all you did with your earnings guidance is take the bottom end up from $1.44 to $1.46.

I guess I know you're conservative by nature, but if you really do feel that things are "normal," why did you just do that, you know, somewhat conservative increase on the bottom end?

Well, we do feel, you know, pretty good about the momentum of our business, but I -- yeah, may be conservative by nature.

I just don't want to put any pressure on our business to "meet the number."

We don't manage the business that way and, you know, and don't want to going forward.

I would say that, you know, when you review the impact of -- the potential impact of feed prices and high costs, I mean that's a -- that's a pressure we could face into, obviously with our Turkey operations, and also could have some impact on our older contracts for hogs.

So there continues to be some wind in our face on grain costs.

And just the sales reorganization, which I guess cost you about a penny a share in this quarter.

Can you just explain again how you re-organized?

What we're looking to do here is to reflect the fact that, as our customers have consolidated and gotten much bigger - you've seen evidence of that over and over again in presentations, the concentration on the customer side - they have become appropriately more demanding in terms of the skill set that we provide to them at their headquarters in terms of marketing assistance, merchandising assistance, category management, supply chain management, on and on and on.

And what we are doing is redeploying our assets, our people assets, such that we're in a much stronger position to meet those demands and to -- and to leverage our skills.

Now, that will require us to consolidate some of our selling organizations, so that, whereas we used to provide within our meat products group or our refrigerated products group, and then with our grocery product group, two distinct and separate sales organizations, we will be consolidating, you know, these sales forces to provide more sales skills as we approach them.

I think it's important to note that, you know, that we are not doing this with any kind of a restructuring charge.

We are covering this within the course of our ordinary business, that's the way we've always gone to market,and that's the way we will always address you folks and that's the way I'd like to do it going forward, as well.

Great.

And just, the last question, on the grocery side, where the numbers were short of my expectations, are there any bigger areas where you're losing share and that these declines are coming to the benefit of others?

Well, you know, those categories have not been vibrant, outside our ethnic area.

So, I mean, our ethnic categories, you know, continue to grow vibrantly and they are principally within the grocery product segment.

But some of the older line canned categories have not been vibrant growers and that's where we're looking to some pretty significant innovation coming forward.

We're not ready to go public with some of the packaging changes, but we've got a couple of major ones that we're about to implement in the marketplace with the intent of making that center store more competitive against what's going on in the perimeter of the store and what's going on in the Foodservice area.

Okay.

Well, thanks for all of that.

And the next question comes from the line of Bill Chappell.

Yes, good morning.

Just a couple of follow-ups there.

On the grocery products operating margin, maybe if you could quantify it, I'm not sure if you can, it being down year-over-year like 900 basis points.

Just trying to understand how much of that is higher commodity cost and how much of that was maybe toward lower sales?

Bill, this is Fred.

Virtually all of the operating profit margin decrease is made up of higher raw material price.

Okay.

So, when you talk about absolute, you know, absolute dollars, then it changes a little bit, but the difference in input costs drove the operating profit margin down.

So, is this a good number to kind of use going forward?

Or could it get worse or better, you know, based on kind of your outlook on hog prices?

No.

The 18-19% operating profit range, 18% to 20%, would probably be good for the rest of the year.

You can pick the number.

Okay.

And -- the second thing, staying on the margin story, I mean Turkey margins were obviously better than I think everyone looked for, and I just want to understand, are these numbers sustainable?

How much more upside is there from even the current quarter margins?

And what's your outlook there?

I would -- Bill, was I say that as we say, and I said in my comments, I think that we're in more normal markets, but I would caution you in terms of are they sustainable -- I think we're going to be impacted to Joel's earlier comments with higher grain prices, so that the feed that's not going into the birds is at a higher cost than the feed that went into the birds in the first quarter.

So, you're going to see -- you're going to see some of that margin contracted a little bit, but we're in more normal markets now and I think that you'll see better margins, probably not as good as in the first quarter, but better than what we've seen in prior years.

Gotcha.

And then just one final question on the guidance.

It seems to be a pretty wide delta for second quarter guidance in terms of EPS.

You know, is there any factors that -- that we're missing that could do such a wide range?

I guess we're only 20 days into the quarter, but why such a wide range?

Well I -- I would answer that, and Joel may want to jump in here, too, but I would answer that kind of like he talked about in his answer to John McMillin, and that is, you know, we don't -- we don't try -- we've tried to encompass both upside potential and downside potential in the number.

And while we think that we're right in terms of corn price projections and why we think we're right in hog price projections, you know, a deviation, as you well know from your modeling of our business, a dollar deviation can have significant impacts, positive or negative.

We think the range takes into both the high and the downside and so that's why we put a range out there that we have.

I think that covers it, Mike.

Great, thank you.

Your next question comes from Penn Jones.

Good morning, thank you.

Nice quarter.

Thanks, Penn.

Just to start the -- the marketing expense in the quarter was down about 8% year over year and much lower than I had expected, accounting for about 2 cents a share, rather.

Why was the marketing expense down so much, particularly when I saw it -- you said last quarter that you had increased A&P support behind the grocery products division, for example?

Well, I will jump in on that with a couple of comments.

First off, you know, as Joel talked about, we had a major campaign last year first quarter revolving around our launch of the Dinty Moore Classic Bakes.

We've cut that, frankly, we've cut that back significantly this year.

The second thing that was done is that based on earlier market projections, we went in with the idea that we were going to reduce and realign some of the spending that was done at at Jennie-O Turkey store.

And frankly, with what we saw in the first quarter, we would hope that we could ton have the business meet our expectations without putting a lot of additional money to drive product usage and demand in that product going forward, Penn.

Okay.

I'd add one thing to that.

For both the refrigerated foods group and Jennie-O Turkey Store separately, I think we're managing the business on the advertising side to much higher levels of efficiency with umbrella advertising campaigns.

On Hormel, we now have an umbrella campaign that supports our pepperoni business, our marinated meats, our precooked entrees under the same campaign.

And we're seeing awareness in attitudes toward the Hormel brand jump positively in a couple of tracking mechanisms that we're very pleased with and we're able to do that with, I think, more efficient spending at the same time.

And, of course, at Jennie-O Turkey Store we also have a consolidated advertising campaign.

Great.

Okay.

But, so with your more efficient spending you're getting this year, might the marketing expense for the full year of '04 be lower than you had originally intended going into the year?

I think that it's possible but I'm going to -- I'm really not going to commit on that, because if we have some of our initiatives really take off, we're going to maintain the flexibility to spend behind the winners, and support them however high they can go.

And, you know, we've built our budgets in that way.

Okay.

And then one final question if I may.

I'm kind of following up John McMillin's, looking a little longer term, do you worry that the U.S. could be facing another protein glut similar to the one following the Russian chicken ban of a couple of years ago, if export markets don't re-open for U.S. beef and U.S. chicken exports that are, you know, partially impaired by the Avian Influenza in the Mid-Atlantic states?

I think it's right.

There are a lot of things -- there are a lot of things up in the air right now.

You know, I believe that most often the markets have over-reacted to the headlines.

I suspect that will be the case again, but it's really hard to project when you've got all of these things up there.

BSE has not had a major impact.

I mean the Atkins diet has trumped BSE, I think, in the consumer's mind.

And, you know, hopefully AI is, as I indicated, the lower pathogen strain that that ultimately will not have a, you know, a huge impact.

If we can be successful in getting the politics out of the export markets, we will be a whole lot better off than if we let the scientists just deal with it.

Right.

Okay.

Thank you very much.

Your next question comes from George Askew.

Yes, good morning.

Nice quarter.

Hi, George.

Hi, George.

A couple of questions.

On your divestiture of Campo Frio and your comments on Vista International, are there other assets that you're sort of looking at to peel off?

Will this be a year of sort of getting rid of sort of the EDA-negative items or less attractive items?

Or are those really the two deals -- divestitures we should look for this year?

They are the only two of significance.

But we have focused on our portfolio and made sure it's in alignment with our strategic plan, and against our EDA disciplines and -- and made sure we are -- we're preserving our resources to deploy against strategically critical business.

We want to stay focused in the right areas for ourselves.

These are both very good businesses, very good companies.

We wish Campo Frio the best of luck.

There are a lot of good people there.

And, in fact, Vista is also a very solid business that has, I think, greater potential in someone else's portfolio than it does in our own.

Okay.

With the cash that you'll receive from those proceeds and one thing you have on the balance sheet, I mean, Mike mentioned, share repurchases, are you still, you know, as aggressively in the acquisition market as you have been?

Yes would be the answer to that.

Okay.

We are continuing -- continually assessing our options there.

We've been aggressive in the last couple of years in the specialty foods area, and we're always looking for good new segment or add-on acquisitions.

Okay.

On Precept Foods, you mentioned -- Mike, I think, mentioned the dollar sales or, I guess, Joel, you did.

Dollar sales up 70% in the case-ready beef JV there.

Are you seeing a benefit from BSE?

I mean, are people moving toward case-ready beef or branded beef because of, you know--

That -- I don't, you know, I don't think I'd tie those two together, BSE and case-ready.

No, it -- BSE should not have any impact on our Precept Foods initiative because all the -- it's only young cattle that are going into those -- that -- the premium product that we're selling, so, there is no BSE exposure as we understand it scientifically.

But I don't think there's really a link between BSE and case-ready.

If anything, you know, with -- with very strong prices and BSE concerns, I think there have been -- there's been a little bit of a reluctance on some accounts to change things as much as they might.

So, while we're still growing and we're still on our, you know, still holding to our expectation of a half-billion-dollar business here, within our strategic horizon, you know, there are a couple of accounts that are on the cusp of moving forward, that I think will happen as soon as we get some of these distortions and some of dis-equilibrium behind us.

Okay.

And then lastly, interest in investment income might jump this quarter, ut seems.

Is there a benefit from the Rabbi Trust there that we can isolate?

There are some.

There are some, George, yes.

Okay, but no other, you know, other extraordinary dividends or anything?

No.

Nope.

All right.

Thanks.

That's all for me, thanks.

Thank you.

Your next question comes from David Nelson.

Good morning.

Good morning.

Hi, David.

Hi, David.

Got a few random things.

Mike, you mentioned that you're seeing hog market -- hog production cutbacks, but aren't we continuing to see more hogs coming to market than the USDA has been estimating?

We are.

At this point, that is correct.

But I -- I think that's -- if you read, David and you're better and knowledgeable than I am at this point in time, I think that going out, I think that those numbers are supposed to be coming off.

Yeah.

Let's hope so.

They've been supposed to be for a while.

Oh, I know!

I know.

And I don't want to beat the BSE thing, but aren't your pork exports being helped by that?

Say to Japan?

You know, that is not as huge a portion of our business as it is for others.

Demand is very strong worldwide for both pork and turkey.

But for us, you know, it's more an off-all (phonetic) business than anything.

Our export business is up nicely over a year ago.

The real thing I wanted to dive into, please, is, you know, the strength you're seeing in value-added meat, both pork and turkey.

Joel, could you take a deeper dive into what products, what markets, you're getting the growth?

What retailers are particularly receptive to this?

Yeah, I think we've got wide retail -- I don't think it varies retailer to retailer.

I don't think that's -- that's any part of the story.

To me it goes back to making the fresh meat case more of a value-added consumer-friendly section of the supermarket, and bringing to that commodity line, that branding wasteland, the fresh meat case, is some more consumer benefits, to the extent that, you know, consumers are not differentiating much between cooking and re-heating these days, and the fact that we've got products that are pre-marinated or come with their own gravy, consumers don't make gravy today.

And those kind of initiatives on both the pork and turkey sides, principally, but also with product lines as in our precooked entrees that also include chicken and beef, we're seeing -- we're seeing good growth and we're seeing the growth coming out of a relatively new section of the supermarket force, not just the processed meat case or the shelf stable segment.

So, I think to the extent that we can provide family-friendly products that are, you know, available to put on the shelf anywhere from 5 to -- on the table anywhere from 5 to 15 minutes with great levels of consumer satisfaction, I think we're going to continue to move there.

We're pushing hard against it.

The trade and the consumer is responding well to the initiatives.

Of the precooked products, are you selling -- are you -- what's the comparison between sales to the consumer versus Foodservice, and which is growing faster?

I would think it would be particularly adaptable to Foodservice, restaurants?

Yeah, we've had a lot of success in in Foodservice, though there are different kinds of lines.

We've had an Austin Blues line that is barbecue-based, where we smoke the meat and provide it in user-friendly forms, such in the account uses their signature sauce, whatever that might be, on the product.

That's it -- that's done extremely well and it is precooked.

And an initiative we call Cafe H, which is really bringing our ethnic initiatives to the Foodservice channel with Cornita Meat and Bogatella, those kind of things, El Sabuco, (phonetic) have received good support.

If we can take a lot of the labor preparation out of the kitchen in the back room of the restaurant and do it in our plants, we can do it better and more efficiently for the Foodservice operator, and it's these value-added products that's done well.

Foodservice had a really terrific first quarter, both in Hormel Foodservice and Jennie-O Foodservice.

So, you know we've -- we feel that we're moving in the right direction.

Our strategies haven't changed in eight years here, at least, and we're going to continue to put more coals on that fire.

Great.

Well, congratulations.

Thanks.

Your next question comes from Timothy Ramey.

Good morning, guys.

Congratulations.

Thanks, Tim.

You know, as you know, I think everyone who's called in this morning is down here in Scottsdale and we're hearing a lot of sort of happy talk about low carb and Atkins, but, you know, as usual, you know, the food industry has kind of largely missed this trend and has not responded very proactively.

I would think that you guys would be in a very unique position to kind of fill the holes on protein snacks, meat snacks, you know.

Can you talk a little bit about what, if anything, you're doing to , you know, play to those trends, since you've certainly got the product knowledge and the expertise?

Well, you know, it is a little easier for to us sell pork than turkey as high protein, low-carb foods than it is for bread or cereal or pasta makers who have to totally restructure the chemistry of the products.

We are benefitting because of the fundamental consumer understanding.

We're experimenting with the right kind of label bursts on our products.

There's a lift in our business.

I mean you can see it in the results, Tim.

I just -- I don't want to climb on any fatty bandwagon here and I don't think we have to, because the product, the fundamental portfolio, is so well-aligned with what consumers want in these diets.

Okay.

I just was curious whether, you know, something like your Pillow Pack Pepperoni or things like that could play more into a snack market than--

Well, that's the exact value that we're marketing them.

I mean, they're great snack products as well as supplementing frozen pizzas or whatever else consumers are going to do.

And just the one-line mention of the 12 Micro Cup items.

How are those different, if at all, from what were introduced, you know, 10 or 12 years ago?

Well, we've incorporated more of our ethnic flavors into them, so that they are much more ethnically-based, Oriental, Italian.

Okay.

And, Mike, would it be your guess that the Hob (phonetic) contract number would be close to a break-even number for the 2Q?

For 2Q, we think that it will be fairly close to a break-even, yes, Tim.

Okay.

Thanks, guys.

Your next question comes from John Emerick. (phonetic)

Hi, thank you, guys.

Hi.

Sorry for asking this question that I know, Fred, you've answered for me once before, but you referred to, obviously, feed costs and you've provided some outlook on corn and soybean.

Are the two of those commodities, you know, close to the majority of the influence on feed cost, number one?

And are they somewhat equal contributors as far as your business model is concerned?

John, this is Fred.

Yeah, they are major components to the inputs, of course, of hogs and turkey.

Corn is a bigger piece.

Okay.

Okay.

And, I'm just interested because the outlook you provided for soybean, does that have, you know, kind of equal science behind it as the forecast you've provided in the past for say, you know, hog prices?

Well, we look at, you know, we look at the world dynamics of what's going on and the Brazilian soybean crop.

Right.

Which is currently being harvested, seems to be pretty good.

Yep.

And the folks believe that's going to push the markets down as that comes in.

I think that's right.

And the -- a question on AI.

The, you know, the trade impact is on "poultry," yet the specific press releases that I've seen have referred only to chickens, you know.

As a generalist which I am, could you help explain the rationale.

Are most of those producers on the east coast that have suffered the exposure in their chicken side, are they also raising turkeys, as well?

No.

I think the -- we don't have great expertise in chicken, but I don't think there's a lot of turkey production in northeast section of the country, where there have been outbreaks.

So, the big markets are Minnesota, number one one, and down in the North Carolina area, for turkey production.

So, it's geographically different.

But the-- all poultry is vulnerable to these strains.

Okay.

Yeah, it just didn't seem logical or necessarily to me why you'd ban both, but I guess if the risk is there and you're going to play it safe, that's the route folks go.

Last question, just within the range of EPS guidance you provided for the year, what do you -- you know, order of magnitude, what is the kind of free cash flow look like before dividends or share repurchases or acquisitions or anything?

About $200 million.

At this time, there are no further questions.

Thank you very much.

Thank you.

This concludes today's Hormel Foods first quarter earnings conference call.

You may now disconnect.