荷美爾 (HRL) 2004 Q2 法說會逐字稿

Good morning, my name is Mary Ann and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Hormel Foods second 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, then the number 1 on your telephone keypad.

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

Thank you.

I will now turn the conference over to Mr. Fred Halvine, Director of Investor Relations.

Sir, you may begin your conference.

Good morning.

I would like to welcome you to the Hormel Foods conference call for the second quarter of fiscal 2004.

I hope you enjoyed our commercials that played while you were on hold.

If our strategy works, each of you will be compelled to pick up a couple of cans of Spam and other Hormel products on your way home tonight.

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 at our website, 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's performance, as well as detailed financial results.

They will then provide the outlook for the third quarter and the 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 part - are made under the Private Securities Litigation Reform Act of 1995.

Actual results may differ and factors that may cause these are indicated on exhibit 99.1 of the 2003 form K. Now I'll turn the call over to Joel.

Thanks, Fred.

And good morning, everyone.

Success continued for our value-added pork and turkey products, enabling us to deliver better than expected results for the quarter, with GAAP earnings per share of 38 cents--up 58% from last year.

This quarter's results included a 2 cent per share one-time charge from early retirement package related to our sales reorganization which we call project Delta.

The second quarter also includes a 3 cent per share gain from sale of our investment in Campofrio in Spain.

Despite increased cost pressures from the grain markets, our protein businesses--refrigerated foods and Jennie-O Turkey Store--reported outstanding results due to strong demand for branded value-added products.

Products like Hormel bacon, Pepperoni, and Canadian bacon delivered double-digit growth.

Growth leaders from our turkey business included Jennie-O Turkey Store bacon, Home-style deli breast, and marinated tenderloins.

Our food service business unit was a key contributor to the strong results, with dollar sales up 22%.

Food service product lines that had double-digit growth include Hormel Premium bacon, Always Tender boneless pork, Austin Blues Barbecue, [Red-Ready] Meats and [Cafe H] ethnic products.

Our [inaudible] business continued to grow with dollar sales up 40%, and volume up 21%.

Our fastest growing products meet consumers needs for convenience, great taste and consistent quality.

Improved market conditions and strong demand for our value-added products drove operating profit up 167% at Refrigerated Foods and 165% at Jennie-O Turkey Store compared with last year.

We continue to gain new distribution on established and new products.

For example: distribution gains were particularly strong in key categories like Deli, Bacon, Pepperoni and Entres.

As we noted in the earnings release, Jennie-O Turkey Store's volume was down 7%.

This planned reduction was announced last year, and it's consistent with our strategy to better align our production of pork and turkey raw materials with the demand for our value-added products.

This move has allowed us to allocate more of our resources, plants, people, and money to the development, production and marketing of value-added products.

This strategy also lowers our exposure to the commodity cycle, and improves profitability.

Developing and growing value-added products within our Refrigerated Foods and Jennie-O Turkey Store segment, is a key strategy to create additional shareholder value.

For the second half of the year, we're excited about our growth prospects from these new products.

The protein industry appears to be in very good shape despite all the disruptions caused by Mad Cow Disease and Avian flu.

Inventories are below last year's levels, and the outlook for supply is stable.

This market health, combined with strong demand and record pork export levels, support our projections of strong protein markets through at least the rest of the year.

Reopening export markets for poultry and beef will add even more demand for protein.

The grocery product segment did not meet our expectations this quarter.

Their operating profit results were down 22% compared to last year for a couple reasons.

First, pork and beef costs continued to rise in the second quarter, raising product costs and putting additional pressure on margins.

In an effort to offset a portion of this price cost increase, we announced a price increase that will be effective June 14.

Second, last year's second quarter was an exceptional one with volume up 10%.

We believe this was driven by the hoarding mentality generated by the terrorists alerts leading to the Iraq conflict.

Dinty Moore can products felt the most pressure in the quarter, down 30%.

We based the volume comparison that was up 32% last year.

Also our Dinty Moore Classic Bakes products were down compared to last year.

We've significantly reduced our distribution on this product line because it is not meeting our profit objectives.

In fact, the entire product category has not developed as expected.

Our ethnic line of products delivered double-digit growth in the quarter, led by Carapelli Olive oil, up 36%;

Herdez Mexican products up 20%; and Patak's Indian products up 34%.

We're also excited about our new Spam singles product line which we have rolled out to full markets.

We continue to focus on innovation to keep our grocery products contemporary.

For example, the launch of ten new varieties of pasta Microcups continues to gain distribution.

I'm also very excited about the initiatives we have planned in the second half of 2004, and these not quite yet - ready for public announcement items--what they could mean for grocery products.

Century Foods International and Diamond Crystal brands, delivered strong results in the quarter, driving specialty foods operating profit up 76%.

We have enhanced efficiency within the specialty foods segment by completing several product realignments, so common product categories are all sold by the most appropriate sales team.

The sugar substitute category reported a 69% volume increase over last year.

This was one of the key drivers behind the strong results reported by our specialty foods segment.

We're starting to see the full benefits of the Century Foods and Diamond Crystal brands acquisitions, now that these businesses are fully integrated.

Diversification, and new opportunities provided by these two businesses will help us build long-term shareholder value.

Operating profits for the "all other" segment was up 28% in the second quarter.

International demand for pork items was very good in the quarter and our cooked beef subsidiary--[Dan's Prize]--also reported strong results.

We mentioned last quarter that we were in the process of selling our Vista International tasting business.

We have not yet finalized that sale.

We continue to make great progress on our sales reorganization--again called project Delta--which essentially combines sales forces of our grocery products and Refrigerated foods segments.

As I mentioned earlier, we took a 2 cent per share restructuring charge to the quarter's results to account for early retirement packages.

This streamlining will help us deliver even better service to our customers.

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.

Earnings for the fiscal 2004 second quarter totalled $53.7 million, or 36 - 38 cents per share versus $33.8 million or 24 cents per share a year ago.

As Joel just mentioned, this year's results included a 2 cent restructuring charge for the early retirement packages related to project Delta, and a 3 cent gain from the sale of our investment in Campofrio.

The net result excluding these nonrecurring expenses and gains resulted in earnings of 37 cents per share.

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

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

Earnings for the first six months totalled $105.5 million versus 80.7 million a year ago.

Dollar sales for the second quarter totalled $1.1 billion compared to $1 billion last year.

Improved product mix and better market conditions were the key reasons for the strong top-line growth.

Dollar sales for the first six months totalled $2.3 billion versus $2 billion last year.

Volume for the second quarter was 861 million pounds, up 4% from fiscal 2003.

Volume for the first six months was 1.8 billion pounds, up 5% from the numbers reported last year.

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

Selling and delivery expenses for the quarter were 11.2% of sales this year compared to 12% last year.

The lower expense - expense ratio was driven by the delusion of fixed selling expenses over rising sales dollars.

Marketing investments in the second quarter equaled $27.2 million or 2.4% of sales, compared with 27.7 million or 2.8% of sales last year.

Lower spending occurred in grocery products because last year included the new product launch of Dinty Moore Classic Bakes and the realignment of some of our marketing programs.

Administrative and general expense was 3.4% of sales for the quarter, compared with 3.3% last year.

Interest expense for the quarter was $6.6 million compared with 8.1 million last year.

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

Depreciation and amortization for the quarter amounted to $23.4 million versus 22.3 million last year.

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

Our effective tax rate in the second quarter was 36.3% versus 35.3 last year.

We expect the effective rate for the year to be 36.5%.

Capital expenditures for the quarter totalled $18.5 million versus 16.8 last year.

We expect capital expenditures for 2004 to be around $75 million which is down from our previous guidance of 85 million.

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

Diluted weighted average shares outstanding for the quarter was 140.3 million.

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

We have 9.4 million shares remaining to be purchased under the present 10 million share authorization.

During the second quarter we processed 1.65 million hogs compared to 1.71 last year, a 4% decrease--primarily related to reduced production at our Fremont, Nebraska plant during a renovation in our coolers at the plant.

The plant is now back to running at normal levels.

The actual live hog cost in the second quarter was $46 a 100 weight, this compared with an average live base price last year of $36.

During the second quarter our hog contracts, paid producers, market rate prices resulted in break-even performance on the contract.

This compares with payments of $23 million above the market last year.

We have continued our acceleration of converting our hog contracts away from our grain-based previous formulas.

We expect to have only only 30% of our total hog requirements purchased under a grain formula by the end of our fiscal year.

This new contract approach reduces our exposure to the grain markets.

We anticipate an average live market of $50 per live 100 weight for the remainder of the year compared to $44 last year.

For the rest of the year, we believe corn and soy meal will trend down slightly.

We anticipate strong market conditions within the turkey industry for the balance of 2004, based on the high demand and tighter supply.

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

Thanks, Mike.

The high-protein, low-carbohydrate diet aligns perfectly with our product portfolio--and we're taking full advantage of the demand this is creating.

We believe this way of eating has become a valid choice for many consumers, and that the diet will be around for some time.

We haven't changed our strategy as a result of this new consumer demand.

As a matter of fact, diet trends have played directly into our strategies of delivering convenience, great-tasting food products that just so happen to be high in protein and low in carbohydrates.

We recognize our grocery product segment has been disappointing over the last several quarters, but we're confident our strategies will deliver improved results in the upcoming quarters.

Taking into account the plans each of our business units has in place for the balance of 2004, we're providing earnings guidance of 30-36 cents for the third quarter, and $1.50-$1.62 for the year.

Now I'll open the call for questions.

Operator, are there any?

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

Your first question comes from [Bill Chappell] with Sun Trust Robinson Humphrey.

Good morning and congratulations.

A couple of questions, I guess, on the guidance.

Looking forward, are you expecting any other charges from the restructuring of Project Delta--and also does that include -- when you had done the original guidance, you included the Campofrio sale in there?

Bill, this is Mike.

No, in terms of the guidance on Campofrio , we did - have not included that in our guidance because we anticipated that the market - that you as analysts would discount that anyway.

So, when we gave guidance, we did not include the Campofrio gain in our guidance.

The second - the second part - or the first part of your question in terms of Delta, as we talked in the first quarter, we - we basically take those charges just as normal operating expenses, and - they go through our earnings and they're included in our guidance.

This was a little different because this was - this was a severance package for employees who will be - who will be basically retiring as a result of the changes coming out of Delta.

So we felt that the market and you as analysts needed to know that.

But we don't anticipate any major expenses going forward.

So, so just to be clear, the - your guidance, the high end of the range would be, have additional 3 cents for the Campofrio sale.

The high-end, for instance, would be $1.65 instead of $1.62, if I added that in?

That is correct.

Okay, great.

That is correct.

And then, just a second question.

Just trying to understand, you know, with now the cash on the balance sheet building, any other opportunities you see on the near-term horizon, on kind of how to put that cash to use?

Well, I think it's - it's safe to say that we continue to look at opportunities that would be - good fits for this Company--and - and we're continuing to do that.

Okay, great.

Thanks

Your next question comes from Eric Larson with Piper Jaffray.

Yeah, good morning, everyone.

Two questions.

Oh, by the way, congratulations on a good quarter.

What were your average turkey prices in the quarter versus a year ago?

We can start with breast meat - breast meat averaged $1.90 for the quarter--up against a $1.19 a year ago.

That's a very strong market--and your dark meat prices on the same - on the same measure?

Yes - thigh meat - 93 cents this year--

Yep.

53 cents last year.

Okay, great.

Wow that's - would - would you expect those markets to stay that strong, or, you know, those are kind of on the high-ends of where those numbers have traditionally been.

They have - they've held at this level for quite some time.

And - I think, Eric, there's just as much up-side potential as there is down-side risk in those markets as - as we look at them today based upon forward-looking indicators like [inaudible].

The industry has not gone aggressively after new production, perhaps remembering the pain of the last couple years.

There also is, you know, some question about production capacities with a couple of plants in the industry in limbo.

And inventories, finished goods inventories at reasonable levels.

So, I hope I'm right in - in forecasting that these markets ought to hold more than go down.

The - the other side of the equation, though, remains the grain risk.

The higher-value grain has continued to work its way through our growing flocks, and hence will put more pressure on margins going forward as we get the full realization of those higher production costs.

Sure.

Now - now right about the time that you folks were kind of, I think, completing or getting fully integrated with the Jennie-O operation and reducing some capacity and moving toward the value-added side, you saw the - the sort of the collapse in the pricing in the turkey business--which, you know, I believe you were about the only one that was still profitable or maybe even slight break-even in one quarter, but profitable throughout most of it.

What - now that you're in better markets--excluding what the grain prices might be doing--what kind of markets can your turkey business generate?

I think - I think that we'd probably be looking at operating margins in that 8.5% range, Eric.

Okay.

All right.

That's fair.

And then just a final question.

Acquisitions, this might be for Mike--acquisitions in the quarter-- you've got a little bit of benefit, I believe, in your specialty business.

Do you have that broken out by the - by the number?

No, the only thing - the only thing we broke out was--and it's- and it's very difficult because of the way that we integrated that business, the only thing we broke out was the tonnage number.

Okay, gotcha.

Thank you everyone.

Your next question from [Penn Jones] with Georgia Bank.

Good morning, thank you.

And congratulations as well on a strong quarter.

Just following up on the Jennie-O Turkey Store.

Can you talk about the competitive trends in turkey these days particularly in the value-added segment considering Pilgrims Pride just came out with their new Signature Turkey line.

How do things look there?

The - per capita consumption, you know, has remained stalled in the - in the turkey industry for some time--and the real news has been increased consumption level or the improved mix of products toward the value-added versus the commodity.

What we have been doing is to- is to share the initiatives of Hormel's Refrigerated products initiatives with Jennie-O Turkey Store and vice versa.

I mean, when Jennie-O Turkey Store has innovated something that we - we thought Hormel should follow, we've done that.

So, we're continuing to move in that direction with - with both analog products, case-ready initiatives, marinated products, pre-cooked options that are going into the fresh meat case.

And - you know, I would have to say--not to be cavalier, Penn, but we're focused on - taking our initiatives and - being first.

I - I suspect there are, you know, many competitors who are trying to follow what we're doing, and we're just trying to get there first and continuing to do it better than anyone else.

So, that would be my response to the competitive side of it.

Okay.

And then turning to food service, wondering if you could elaborate that - elaborate on that a little more.

Another tremendous quarter with 22% sales growth.

How much did - can you break out, like how much the industry grew, and then how much - obviously we know how much you guys have grown, but by taking share, was it simply the industry grew?

Well, we are continuing to outpace industry growth very clearly.

You know, adjusted for inflation, I think the growth of the food service, last numbers I saw from [inaudible] had the industry up about 1%.

What was it--4-5% maybe adjusted for inflation.

So, we - we are clearly outpacing the industry, so we got to be taking the business from some place.

The - the other thing that's really working for us here is the mix of products.

It's - it's really the branded value-added initiatives that are driving our growth, so the returns to the bottom line are - are really quite healthy there.

And a lot - there really aren't any new initiatives to talk to in this quarter.

It's just continued play out of programs that we've taken in the past - Cafe H, our [inaudible] beef business - [inaudible] beef business is very strong, some of the other ethnic products.

Bread-ready meats.

Premium Bacon continues to do extremely well for us.

Old smoke house.

Applewood smoked.

Jalapeno Bacon a major breakthrough, for instance, with the Dairy Queen organization and a signature sandwich that they have utilizing our Jalapeno Bacon.

So it's - it's been pushing the differentiated products that continues to do well for us in food service.

Great.

And then one quick final question, if I may, the -the price increase within grocery products.

How has the retailer response been, and do you anticipate a buy-in, or will you allow a buy-in?

Well, we - we operate against our - you know, our standard policies which, you know, is in the range of four weeks worth.

But it ought to be, you know, fully within the quarter if that's where you're going with the question.

I wouldn't expect - if there's any buy-in, it won't be beyond the degree to which it would be liquidated within the quarter for the - for the most part.

I'd also have to say that, you know, it seems like every day, probably every week , that some competitors are following the lead we took on pricing.

So, you know, clearly there is - there is inflationary pressure.

We haven't moved the grocery items since the year 2000, and it was time.

I mean, the - the - our segment results, you know, report - clearly give evidence for the needs of that pricing.

Okay.

Great.

Thank you very much.

Your next question comes from Tim Ramey with Davidson.

Congratulations, guys.

Hi Tim--thanks for the publicity holding up the Spam singles.

We were showing that around the office.

That was great.

Whatever show you were on.

Thank you, Spam is always the star.

Just to follow up on Penn's question on the food service.

You know, those are usually long programs.

Can you - do you have any sense of visibility or is it just the general rising tide, rather than specific programs that's really driving the number?

Well, I think the - the tide has been rising.

The economy has improved.

Food service sales are a leading economic indicator that we have, because of still the discretionary aspects of a lot of dining away from home, business travel, and the consumer eating out.

So the market has been improving.

Although there - you know there are some signals out there that may be [inaudible] - the upturn in the market has been particularly strong over the past six months, and we may be approaching some leveling out--I'm starting to get that sense from the market.

But nonetheless - nonetheless--our initiatives have driven our results more than it's been lifted in the market because, again, we've exceeded the market growth by so much.

Sure.

And a couple of questions for Mike.

Mike, I wasn't clear on an earlier question when we we're talking about the non-recurring impacts.

Are you really thinking that the GAAP guidance is $1.65 or are you thinking it's $1.63, the high end of the GAAP guidance?

High end of the GAAP - high end of the GAAP guidance would be at - well it'd be at $1.63 right now.

Okay.

You answered that at $1.65 earlier.

Well, I -- okay.

And just a question on the reduction in Cap Ex.

The - is there anything specific you can attribute that to?

You said you were originally planning on doing 85 million there.

Well, there's a couple of things.

I think the first - first off is we continue, as we continue to take and move forward our EBA initiative, I think people establish their plans at the beginning of the year, and as - as we move through the year, and they look at their operational needs and the paybacks, et cetera, Tim, they continue to re-evaluate their original budgets, and that's all you see here.

That or allocation of capital.

That is correct.

And just finally for Joel, you know, with a couple of your major competitors, Kraft and SaraLee, not backward integrated in the business in any meaningful way, do you think that - is there a competitive shift, as we get into some of these higher priced points--under way, you know, I would think they would be feeling a little more heat even than you in the value-added businesses.

You know, I think that's a - good question .

I believe that we are better off vertically integrated in this environment, and we're better off long-term vertically integrated--not just for the cost, but also for the consistent quality that we get out of the integration, as we make more of these historically commodity-based products, more value-added and put our name on it, we want the consistent quality that - that we believe that we can get much better through internal production.

But I've - I've got to suggest that you've got to ask them.

I'm glad that - all I can say is - I'm glad we're not buying a lot of [inaudible] on the spot market.

And finally, any impact from the Maple Leaf foods thing, should they start shipping hogs here, or is that too small to - to matter for the markets?

I - I don't believe we'll see any impact on our business.

Okay, thanks a lot, guys.

Your next question comes from John McMillin with Prudential Equity.

Good morning everybody.

Hi John.

Good morning.

Joel, will you see any impact on your business from the new Chili introductions by, I guess, Bush's is out and Campbell's is out?

Bush and Campbell's are both going, they're both good competitors.

I think it's going to be a very interesting period in the chili market, so 2004 could be the year of the chili wars.

Could be Chili and Chili, huh?

The - we're seeing the price of big category.

It's a pretty healthy category.

We've got two brands, two significant brands, in our portfolio, Hormel and Stagg, with areas of real regional strength, and we've got a couple of competitive reactions planned.

I - we have not backed away from our targets.

I think the category, usually when you see this kind of intense competitive pressure all at once--over my career, the categories have responded positively.

I would hope that would happen, and we would see increased consumption of prepared chili.

I really don't have any doubts that's going to happen with all the - the marketing flying around the category.

But I am satisfied with our plans.

I think we're - we're well set.

There's some initiatives we would have been doing anyway.

And we'll have to see how it plays out.

But, it will be good for the category, if that's where your question was going.

And you did take pricing in chili as well, didn't you?

Yes, we did.

Now, sometimes when you have a diversified portfolio, and one side of the portfolio does particularly well as Refrigerated Foods and Jennie-O, and even specialty has kind of done in this period, sometimes you kind of dial down the other side of the company, you reinvest plans for future activities--it doesn't seem like that was the case here with grocery--where, you know, I mean you certainly over delivered on earnings but you didn't throw extra marketing at grocery.

I don't know, if you could just kind of comment on it.

It just - - -

No we did well - as I said, there are some initiatives planned, and it would have been out of - out of sequence to advance the marketing support when - you know when it's coming - you don't want to curve ball to break too soon, John.

And also, the - some of these businesses have a seasonality, and this isn't typically the season we would be supporting chili or stew or hash as aggressively as we do in the fall.

So, as you give the second half guidance, you're obviously - the third quarter is helped a little bit by this buy-in, and then one would assume you'll - you'll be pretty aggressive in that fourth quarter, you know, to support - - -

I - I think - that that's a reasonable projection, yeah, John.

And just for the - the inventory increase, is that - is that just tied to the higher prices in - of pork products?

Yeah, John, in fact, the tonnage of inventory is actually down year over the year.

It's all pricing.

Okay.

Thanks a lot.

Your next question comes from David Nelson with Credit Suisse First Boston.

Congratulations.

Thank you, David.

Actually given the strength here, and maybe except for the buy-in that John was just referring to, I was wondering why you wouldn't be even more optimistic about the full year?

What clouds might you see out there?

Well, I think it's still on the grain-side of the equation, would be the biggest - the biggest question mark.

You know, I - I was just reading your report, David.

You know, when I got somebody like you talking about buying all the grain, I hold my breath.

You just issued that report last week.

So, that - that would be the most significant thing that we would be anxious about right now.

Well, it all depends on the weather.

And grocery products.

Anything more that you could say about where you're introducing these - these new products this fall?

What categories?

Are you going to keep your powder dry on that?

We're going to keep the powder dry a little bit longer.

With - but we've got some marketing initiatives that we're quite excited about.

The Spam signals - singles has already been identified as where we could import lead markets with that.

But, we've got a couple other initiatives we're going to hold on just a little bit longer.

Okay.

And then just lastly on the pork side, are you seeing and hearing signs of sow herd liquidation?

Yeah.

I think there is some going on.

I saw a report recently, I don't recall the author--that suspected that there were some producers who were going to take advantage of the high sow prices in order to do some liquidation that the - - - Maybe it was your report that talked about that.

So that's a possibility.

Great.

Well, thank you very much.

Thank you.

Your next question comes from [John Emerick] with [inaudible] Capital.

Thank you.

A couple unrelated questions.

I'll ask them separately.

First the pre-tax, the charge for the sales reorganization--was that in G&A and what was the pre-tax dollar amount?

The charge was in G&A and it was $4.2 million.

Great.

And, so let me understand it, the feed stock for commodity pressure for turkeys is weak and in the past though it's interesting --

Did you just say weak?

Yeah.

No, it's not weak.

What is the?

Corn and soy.

That's what I'm getting at.

And last quarter it seems like soy was the more dominate commodity influence on key stock price in your protein business and today you are talking more about wheat prices.

No.

No?

No, no, no.

I don't think we said anything about wheat prices.

It's corn and soy are the two that impact the turkey operations.

Okay.

And what about hogs?

Same.

Same, that's what I thought.

That's my mistake.

Now I'm back to thinking I understand.

So, on the soy side, as you guys--it took a little while--but as you predicted in the last conference call, that's finally starting to help a little bit, while the protein prices are pretty stable.

guess where I'm getting at, it seems like if you combine the - both the protein businesses where the protein prices are staying high, and you've got a little bit of pressure on one of your food stock commodities, the other one is coming back from the highs it's been on.

Then on the grocery product side, where you are getting margin pressure from the higher costs, you finally have price increases coming through.

Seasonally if I look back, it doesn't look like the next quarter is usually very different from the quarter just reported.

So, I'm trying to figure out why it seems like we've got a kind of glass is half-empty outlook balancing our next quarter guidance.

And I don't know why the next quarter wouldn't be--if nothing else changed from this level--all that we know remained the same and, the price increases came through, and there were no other external shocks, why the next quarter wouldn't be at least as good as the quarter just reported.

Well, and that's pretty much, I think, if you look at - well in line with what our guidance was for the - for this quarter that just ended, and our guidance for this next quarter going forward, we have - we have really moved our guidance up slightly from what it was last quarter.

So we are reflecting, at least in terms of our guidance, a little better quarter than you would normally have expected a third quarter to be--based on our past history.

Okay.

But I also want to come back, because you said something I'm not sure that I totally agree with.

That the feed prices have come off and come down slightly.

But they are still significantly ahead of where they were last year at the same time.

And I understand, but the year over year comparisons in this - your company because all the moving parts are almost impossible to make.

And I have narrowed this thing down to general ledger line items.

That's why I tend to look more sequentially at very recent performance, and I can't remember what your - what was your guidance for, say, the April quarter that just?

What - what was it for this quarter just reported?

28 to 34.

Okay. 28 to 34 we did, you know, kind of operating 37 cents or whatever it is.

And historically, you know, the last two years revenue and earnings in July have been flat to up slightly from the April quarter.

Again, a lot of moving parts, but a lot less moving parts when you start going year over year.

I don't know.

I understand, I appreciate the, you know, underpromise and overdeliver thing as much as anybody else.

I just want to make sure I wasn't missing something really, really obvious in my - in my kind of sequential comparison here.

This is Fred.

One of the things, a point that Joel made--there's a timing issue between when the grain prices move and when we fill the load.

So, you know, we had in the second quarter, different grain markets over the period of growing cycles that the turkey business has as well as our hog contracts.

I'd be happy to kind of walk through that with you offline.

That'd be great.

Okay.

Last question is, kind of rephrasing an earlier question.

We've got - you know, this is just - this is just a fabulous business.

I mean, you've got, you know, $200 million of cash on the balance sheet--again this seems like overnight you're generating $200 million a year.

I really can't -- I'm not seeing the accretion in my models from Century and Diamond brands.

It doesn't seem like you're willing to kind of put a number on what it's going to be, and that's - I understand.

But, you know, it just seems like - I don't know what you could possibly be earning on the $200 million of cash or how close you are to seeing something that's meaningful in the acquisition front, but you could, you know, take out 4.7% of the share count today, even at this price, even though the stock has done well, this business is so profitable and generates so much cash.

You know, if you did your $200 million stock buy back in the next 12 months at this price, that alone would be almost, you know, 5% accretive.

So, again I just want to kind of re-hear your philosophy on kind of allocation of capital and the - influence on shareholder returns that factors into that thinking, if you will.

I think you asked a number of questions, here, and I'll try to bring it down to its lowest common denominator.

Okay.

First off, you know and we continue to tell the street and everyone else that we are continuing to look at acquisitions.

We've done that in the past.

We've lost out on some and made some.

The other thing in following up is, I think that we have always delivered in terms of when we promised the street something in terms of an acquisition, in terms of synergies, et cetera, we have delivered on that.

And I think you see - you see that in what's going on with the specially foods operating profits being up the way they were in this quarter.

Now it's - it's only roughly $3.5 million, in dollars, but in percentages is up fairly significant as we grow, continue to grow that business.

But we're going to continue to look at acquisitions, and if we can't - if we are - convinced that we are not in a position of being able to pull one off, obviously we're going to - we're going to do like we've done before and that is to continue to repurchase shares.

Okay, thank you very much.

And great quarter again.

Thanks.

Again, I would like to remind everyone in order to ask a question, press star then the number 1 on the telephone keypad.

Your next question comes from George Askew with Legg Mason.

Yes, good morning, congratulations.

Thank you.

Thanks, George.

Grocery products, the volume was down 6% there, sales down just 1.

Was there - you know, can you characterize the price mix benefit there?

It would be - it would be mix.

A mix of the product would be the key difference, because there was not any significant pricing in the - in the mix.

I think the strength of our Olive oil business, Carapelli, which was up substantially--would be one of the key - key drivers there.

Okay.

As you look at new product initiatives in that - in that segment, are you -- is there strategy on one hand to introduce new items that include pork and turkey raw materials as inputs or is there strategy not to do that, or do you just go where the opportunity is?

I'd say it's more the latter, George, going where the opportunity is.

We don't have a strategy that says take the raw materials and use them.

I think that's a - a failed strategy for the long-term.

What we are attempting to do is - with a portfolio that has many established products in it, to make them as contemporary as possible with line extensions as we have with turkey versions of Spam and chili and stew, for instance, with packaging innovations as we've done in microwaveable products.

And secondarily, to continue to build the nice portfolio of ethnic businesses that we've developed.

Most of those ethnic businesses in the soup market side, the soup market channel, are in fact grocery products.

And they are a key driver for us in grocery.

So those would be two principle strategies there, contemporizing our established brands and continuing to build our ethnic portfolio.

Alright.

Okay.

And then on the - Diamond Crystal brands success.

I mean, clearly the Splenda sugar substitute - was big this quarter.

Can you characterize the agreement with McNeil there.

I mean, is it strictly Splenda for the table top or can you sell 5-pound bags into food service operator or restaurant chain?

No - we've got the - the industrial and food service component of that business, but not the retail.

Right.

So if - if a Ruby Tuesday is baking brownies with Splenda, that's you guys.

You would sell that into them?

Right.

Okay.

Good.

All right.

That's what I had.

Thank you.

Your next question comes from [Jordanna Augalauch] with Neuberger Berman.

Hi.

My question was answered.

Thank you.

Your next question comes from Mike Hamilton with RBC Dain Rauscher.

Good morning.

Could you just kind of give a perspective without getting into detail on acquisition pipeline at this stage?

In terms of - that's a acquisition pipeline?

Yeah, there are some.

Without getting into detail .

There continues - there continues to be potential for some nice acquisitions.

Are you seeing any changing in dynamics of the pricing environment?

I think - we seem to have - we seem to have more financial players on the peripheral than we've - than maybe we've seen before in some of these deals.

Okay.

Thanks.

At this time, there are no further questions.

Mr. Halvine, are there any closing remarks?

No.

But thank - thank everybody for participating in today's conference call.

And If you have any follow-up questions, please give me a call.

Thank you.

This concludes today's Hormel Foods conference call.

You may now disconnect.