荷美爾 (HRL) 2004 Q4 法說會逐字稿

Good morning.

My name is Crystal and I will be your conference facilitator.

At this time I would like to welcome everyone to the Hormel Foods fourth quarter 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.

And if you would like to withdraw your question, press star then the number 2.

Thank you.

I will now turn the conference over to Fred Halvin, Director Investor Relations.

Please go ahead, sir.

Good morning and happy Thanksgiving.

I would like to welcome you to the Hormel Foods conference call for the fourth 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 website at www.hormel.com.

On our call today is Joel Johnson, Chairman of the Board and Chief Executive Officer, who by the way was just on CNBC this morning, Jeff Ettinger, President and Chief Operating Officer, and Mike McCoy, Executive Vice President and Chief Financial Officer.

Joel will provide a brief introduction and outlook for the first quarter and full year of 2005.

Then Jeff and Mike will provide an overview of the company's fourth quarter performance as well as a detailed financial results.

It is important to note the fourth quarter of this year is based on a 14 week period and the fiscal year is based on a 53 week year compared to 13 week fourth quarter and 52 week year in fiscal 2003.

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 the 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.

Good morning, everyone.

Hormel Foods delivered better than expected fourth quarter results of 50 cents per share and really outstanding full year earnings of $1.65 per share.

Included in the full year results are 9 cents of nonoperating gains that occurred in previous quarters.

Let's start by talking about the factors that allowed us to raise our guidance in the fourth quarter.

During our third quarter conference call, we announced that we were anticipating fourth quarter earnings pressure because of 3 factors: Higher pork and beef raw material costs that we didn't think we could pass on to our customers;

Second, higher promotion and marketing expenses to support our new and existing brands;

And third, higher grain costs impacting the Jennie-O Turkey segment.

I'm pleased to report that we saw relief in these 3 areas.

And at the same time, our top-line revenue growth remains strong.

In fact, it accelerated.

Excellent protein market conditions combined with our strategy to improve the product mix enabled us to deliver better than expected margins by passing on some of the higher costs in our pricing.

Our Jennie-O Turkey Store segment was clearly the standout.

Grain prices were also lower than expected in the fourth quarter, which reduced our cost of production in the Jennie-O Turkey Store segment faster than expected.

We will continue to see benefits from these lower feed costs into 2005.

The promotion and marketing expenses were not as high as anticipated.

We re-evaluated some of the programs and spent less than expected because of the timing of field initiatives.

Overall, I'm very pleased with the results for the quarter and the full year.

We are having success with our strategy to create a faster growing, better balanced and more diversified business.

Our business model, which is a blend of packaged foods and proteins, supports faster growth compared to traditional packaged foods companies, yet it is less volatile than protein companies.

This balance allows us to take advantage of changing raw material markets and still prosper regardless of the environment.

Strong protein markets such as we experienced in fiscal 2004 benefit our Refrigerated Foods and Jennie-O Turkey Store protein segments.

Conversely, lower protein markets benefit our Grocery Products packaged food segment.

We will continue to build on the success.

As I look forward to fiscal 2005 I'm quite optimistic.

The demand for protein continues to be very good.

Our value-added line of products continues to gain momentum.

And there is an improved price outlook for grain which is a key input for our turkey operation.

Based on this analysis we are issuing first quarter guidance of 40 to 46 cents per share versus 37 cents in the first quarter last year and full year guidance of $1.65 to $1.75 on an operating basis.

Also we are very excited to announce an increase in our annual dividend rate to 52 cents from 45 cents, a 16% increase.

This 7 cent increase is the largest absolute increase in our corporate history.

We're pleased to share Hormel Foods strong cash flow performance with our shareholders.

At this time, I will turn the call over to Jeff Ettinger to discuss the segment results.

Thank you, Joel.

At the segment level, Jennie-O Turkey Store reported our most improved operating profit for the quarter.

This upside surprise was the result of improved product mix, favorable market conditions for both turkey meat and grain, and continued excellent performance in our plants and live production operations.

Jennie-O Turkey Store revenues for the fourth quarter were $317 million, an 18% increase compared to 2003.

Revenues for the full year exceeded $1 billion for the first time at Jennie-O Turkey Store up 14% from last year.

Operating profits for the quarter were up 85% to $31 million.

After registering high single digit growth through the first 3 quarters of the year, sales of Jennie-O Turkey Store value-added products accelerated during the fourth quarter.

All 3 channels of value-added turkey sales, retail, food service and deli, reported double digit growth in Q4.

The recent launch of the Jennie-O Turkey Store Oven Ready Turkey is a great example of our continued focus on new product development.

Initial indications suggest that this product is being well received.

The latest USDA cold storage report indicates that turkey inventories will continue to be tight with cold storage holdings down 16% compared to last year for the month of October.

Operating profits for our Refrigerated Foods segment declined 25% from last year's extraordinarily strong fourth quarter.

The fiscal 2003 fourth quarter was unusual in that ideal market conditions afforded us enhanced margins.

This year's 6% fourth quarter operating margins for Refrigerated Foods is consistent with the full year margin for this segment and is still 90 basis points better than the full year margins for 2003.

Refrigerated Foods reported a 20% increase in net sales with strong growth from both retail and food service.

Product categories in the retail channel that reported good growth included sliced meats, fully cooked refrigerated entrees, marinated flavored meats, and pepperoni.

In the food service channel products reporting strong growth include Always Tender Pork, Austin Blues Barbecue, Cafe Age ethnic product, and precooked bacon and sausage.

These items are successful because they are easily prepared by the food service operator and deliver excellent quality and flavor.

Our Grocery Product segment delivered improved results but continued to struggle with high pork raw material costs and with lower volume in certain traditional products, such as Dinty Moore canned stew and Mary Kitchen canned hash.

For the quarter sales were up 7% while operating profit was down 5%.

The price increase that was implemented during the third quarter helped partially offset the higher input costs.

We continue to look at ways to address the performance of the Dinty Moore canned stew line.

We are considering various options to revitalize this product line but are not ready to discuss the details at this time.

Testing continues in 4 markets on the new Spam singles product.

Initial results suggest that these new items are helping grow the canned luncheon meat category and adding incremental volume to the brand.

Our Crazy Tasty advertising campaign continues to drive awareness and purchase interest in the Spam franchise among younger consumers.

The chili category has seen excellent growth since 2 new national competitors entered the category.

Category dollar sales were up 29% during our fourth quarter.

We began an aggressive marketing program for our chili products in November.

Our shipments in the first 3 weeks of fiscal '05 are up 27% for the Hormel brand and up 79% for the Stagg brand.

Our ethnic products within the Grocery Products division registered another solid quarter.

Overall the ethnic portfolio delivered 8% volume growth in the quarter, led by Carapelli olive oil up 23%, and Herdez Mexican products up 21%.

In the Specialty Foods segments, sales in Q4 were up 8% and operating profit increased by 17% lead by a strong contribution from our Diamond Crystal business.

For Diamond Crystal, the sugar substitute category, reported outstanding results with volume up more than double.

Operating profit for the All Other segment was down 55% in the fourth quarter, primarily from the divestiture of Vista last quarter.

International demand for pork items was very good in the quarter.

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

Thank you, Jeff.

Earnings for the fiscal 2004 fourth quarter totaled $69.8 million or 50 cents a share versus $70.4 million or 50 cents a share a year ago.

For the full year ending October 30th net earnings were $231.7 million compared to $185.8 million last year, which is a company record.

Dollar sales for the fourth quarter totaled $1.3 billion compared to 1.2 billion last year.

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

Dollar sales for the year were another record at $4.8 billion versus 4.2 billion last year.

Volume for the fourth quarter was 990 million pounds up 9% from fiscal 2003.

Year-over-year volume was a record at 3.6 billion pounds up 6% from the 3.4 billion pounds reported last year.

Selling and delivery expenses for the quarter were 10.7% of sales this year and 10.5% last year.

For the year the comparisons were 10.9% this year and 11.5% last year.

Marketing investments in the fourth quarter totaled $22.5 million or 1.7% of sales compared with $20.7 million last year or 1.8% of sales.

Year to date marketing was 2.1% of sales compared to 2.4% last year.

Administrative and general expense was 2.9% of sales for the quarter compared with 3% last year.

For the year the comparison was 3.1% to 3% last year.

For 2005 we expect marketing, selling and delivery expenses and G&A expenses to have similar percentages of sales expense ratios as reported in 2004.

Interest expense for the quarter was $7.1 million compared with 8.5 million last year.

Lower debt levels contributed to the lower interest expense.

For the year interest expense was 27.1 million versus 31.9 million last year.

We expect interest expense to be approximately $25 million next year.

Depreciation and amortization for the quarter amounted to $24.9 million versus 23.4 million last year.

For the year depreciation and amortization was $94.7 million compared to 88 million last year.

We expect depreciation and amortization to be about $95 million for this next year.

Our effective tax rate in the fourth quarter was 36.5% versus 37% in fiscal 2003.

The effective rate for the year was 36.5% compared to 35.8% last year.

We expect our effective 2005 tax rate to be 36.3%.

Capital expenditures for the quarter totaled $23.1 million versus 21.5 million last year.

For the year capital expenditures were 80.4 million this year and 67.1 million last year.

We expect 2005 capital expenditures to be around $100 million.

The new further processing plant that we are building in Everly, Minnesota is the primary reason for this increase.

The basic weighted average number of shares outstanding for the fourth quarter was 138.3 million shares.

The diluted weighted average number of shares outstanding for the quarter was 139.7 million shares.

We purchased 892,400 shares of common stock during the fourth quarter.

We have 8.4 million shares remaining to be purchased from the 10 million share authorization.

We processed 1.9 million hogs in the fourth quarter compared to 1.7 million last year, a 9% increase.

Strong demand for our value-added pork products caused us to process additional hogs in the quarter.

For the year we processed 6.9 million hogs compared to the same number a year ago.

The actual live cost of hogs in the fourth quarter was $56 per live 100 weight.

This compared with an average live based price of $42 in the same period last year.

We expected live prices to be $50 per live 100 weight.

We anticipate an average live market of $53 per live 100 weight for the first quarter compared to $37 last year.

For the next year we believe corn and soy meal prices to be at more historical price levels.

Turkey production forecast for next year indicates similar numbers as 2004, which should keep markets strong in the turkey industry.

And now we'll open up the call to questions.

Operator.

Okay.

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

And we will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of John McMillin.

Good morning, Joel, Jeff, Fred and Mike.

Good morning, John.

Happy Thanksgiving.

In the past, you've quantified the impact of your hog procurement contracts.

I assume they helped you a little bit in this quarter.

Could you give me the number?

In the fourth quarter, John, it was about $4 million benefit against a $3 million loss in the fourth quarter of last year.

And for the year the loss was about $9 million this year against a $67 million last year loss.

Joel, you've had a big kind of loss kitty, if you can -- I mean, you've lost money in these contracts going forward.

As we kind of get into this year and we have hog prices up, I know we also have new hog procurement contracts, will we ever see that money kind of come back?

I don't think you will see it come back in a direct trade off.

It will come back in the context of our revised contracts.

The -- going forward, our contract -- the contract considerations on our P&L will be driven by the -- by the guidelines of our new contracts more than they will be driven by the historical balances.

And John, as you know, from previous conversations on these calls, the new contracts are more market-based value of the hog contracts rather than grain based.

Okay, I think I understand most of it.

As you kind of look at your canned meat franchise, putting chili and stew and hash and all together, isn't some of the weakness in Dinty Moore and Mary Kitchen just tied to the activity in the chili aisle where there has been phenomenal category growth?

I mean the growth of that area has to be coming from somewhere.

Isn't that a factor in the category weakness elsewhere?

The -- I would say that that is in the short-term a possible contributor.

I wish -- I wish that the other brands you mentioned, Dinty Moore and Mary Kitchen, had had strength coming into that period, but the reality is that they've been really relatively soft even before the chili explosion of competition here.

I think we've got -- there are parts of that business that are quite healthy.

There's a microwavable portion, for instance, is growing very nicely and I believe we're up something like 40%.

Year-to-date on microwavable trays within the Dinty Moore line, for instance.

So it's -- you know, to me it is a continued challenge of contemporizing the image, the presentation, the packaging of these products, I think we're making -- we're making progress.

The tetra pack that was introduced on chili moves in that direction.

Microwavable items on Dinty Moore move in that direction.

And you know, hopefully, the single serving pouches of Spam will help move in that direction.

I know these Nielsen numbers only measure -- you tell me, 60, 70% of the -- of your business, maybe less.

But your chili share for obvious reasons is down about 10 points, you know, as Campbell and Bush kind of get started.

Are you seeing things happening in that category as you thought?

Is this about what you expected to lose?

Are you surprised that the category is this strong that your net loss is obviously a lot less or not at all?

Or just in terms of how things are playing out versus how maybe you thought they would.

We're very pleased to see the category respond as it has as opposed to being a pure zero sum game.

If it were a pure zero sum game, then, you know, the pain and the issues with competitive expansion would be much more significant.

But when you have the marketplace respond as it has to the competitive initiatives and, I think, increasingly to our own initiatives it is very reassuring.

So you're right.

The Nielsen is -- you know, can be misleading because it doesn't cover club stores, it doesn't cover dollar stores, it doesn't cover Wal-Mart.

And so you've got to look at the shipment detail at the same time.

And as Jeff mentioned, in his comments, we're really quite pleased with the shipment momentum on our Hormel chili -- our Hormel chili and our Stagg chili franchises.

We ended up having a solid fourth quarter amidst all this activity with the 4% growth overall in the chili and obviously the start with our new advertising here in November is a much more robust numbers.

I guess we would look at these as being -- we're seeing predictably aggressive features out there from our competitors to attain trial at prices that are well below their standard shelf price but it is very early in the game and we're very confident that our activity and our brands are going to hold us in good stead.

Okay.

Thank you.

Your next question comes from the line of Jon Feeney

Hey, guys.

Good morning.

Congratulations.

Thank you, Jonathan.

Looking at your guidance of, you know, $1.65 to $1.75 -- I mean, in reference to the, you know, the impressive 10%-ish type margins we're seeing in the Jennie-O Turkey Store here, is there some assumption in that $1.65 to $1.75 that we will see a decline off those 10% margin levels and perhaps, you know, have the other sides of the business carry the company a little bit more?

I will start with that, Jon, this is Jeff Ettinger.

The 10% margin you saw in fourth quarter clearly -- typically the Jennie-O business had the strongest quarters in the fourth and first quarters.

On an annualized basis, we hope to target that entity up to 7.5 to 8% level.

We may still see a quarter that strong in Q1 but we would not expect that all year long.

Okay.

And I guess secondly, just as a followup to John's question about the chili category, I mean this 20 -- it is great that the category is responding like this but, I mean, are we expecting, you know, this to be flat or up, say fourth quarter next year, off these kinds of levels?

Well, I think, you know, these are all very good products.

I think consumer satisfaction with the products is strong.

Chili is a contemporary flavor system when I look at volumes through other segments, especially food service.

And I would expect it to continue quite strong through the year.

I think there is ample opportunity for growth, when I looked at household penetration and usage rate numbers, I think there is ample opportunity to consider -- to forecast continued growth in the chili segment.

Okay.

And just finally, impressive food service growth, I mean 26% turkey, talking about double digit in Refrigerated Foods, I mean, is this your sales force, you know, being able to target new customers with these innovative products you have?

Or is this a case of existing customers making a greater response to products you've been, you know, talking to them about for a long time?

I would say it's all of of the above.

It is not one or the other.

We do have great momentum in food service, both at Hormel and at Jennie-O Turkey Store.

And it is -- this's nothing that we have changed in our strategy, but we just have continued to execute particularly well within those segments.

We've got a very experienced and focused team that works very closely with the chefs and operators in food service, we benefit because the tide is rising in that business in that more and more consumers are eating food prepared away from home and spending more as they do that.

And I just see continued growth there.

We keep innovating, moving more of the food for the preparation activities really out of the operators kitchens and back into our own plants.

And that's worked particularly well with -- we've expanded a lot of our ethnic initiatives and our barbecue, which in some ways is an American ethnic line of products, and have seen great growth there and we've got a lot of initiatives in the hopper.

So the food service has been a focus area for this company and it is going to remain a focus area.

Great.

And just to clarify that, let me -- let me put it this way.

If you strip out, you know, the move towards, as you said, taking, you know, the labor and taking the work out of the kitchen and moving it up to, you know, Hormel, with more ready to eat products and some of these great food service innovations, if you just compare your products in that vein, labor saving, you know, innovative products with other folks, some of the, you know, larger companies that are doing the same, would you say you're gaining market share or would you say everybody is growing about the same rate?

You're not talking to an objective judge here.

And you aren't, either. [ Laughter ]

I think we are very distinguished in that area.

Clearly, if our volume growths are greater than the industry, clearly we're gaining share.

And that's what happened.

We're adding new customers and our penetration of existing customers continue to grow.

Excellent.

Thank you, guys.

Your next question comes from the line of Tim Ramey.

Your line is open.

Good morning.

Congratulations, guys.

Thanks, Tim.

On the Jennie-O business, Jeff, if you kind of looked at the drivers of that big jump in earnings, you know, the move to value-added, the help from commodity prices, and strong protein markets, would you be tempted to view this as unsustainable levels of margins or is it more the internal types of things that Hormel is doing, the growth in value-added and the cost integrations from the acquisition?

Oh, Tim, we would not build in expectations of having over $2 breast feed markets this late in the year.

This is an extraordinary year for that.

But the gains that the segment achieved on commodity meat this year were really fully offset by the increase in costs on grain during the year and that is abating and so we would expect that picture to actually do better in 2005.

Notwithstanding those commodity market effect, I do think the bigger story is the continued value-added growth gains in the various segments and really some fairly impressive gains on the production side.

I mean, post the merger, we've shrunk the amount of -- the number of facilities down from 10 to 7 and just have a lot greater productivity in the existing facilities and that's paid very large dividends as well.

And on the refrigerated food side, would it be -- I assume it would be a reasonable expectation to look for flat or down earnings for FY '05 versus FY '04.

We're not looking at down but it is close to flat.

That would be our expectation.

We're clearly kind of still off of very strong market years and would not expect to have big gains off of that.

And then just finally maybe this is a question for Joel, just addressing the, you know, the strong demand for the protein markets and, you know, CNBC asked you for a big picture comment as well but I guess I will spin is a different way and say, you know, is this a new phase we're in, Joel?

Or is this the hangover from the Atkins diet?

Or, you know, how would you read this?

Would you build an expectation that, you know, demand has shifted upward for an extended period of time in protein?

That's a good question.

I don't think the Atkins diet has given us a hangover.

We're still high and flying high.

In reality I think the media has started to write-off the Atkins diet, you know, based on a lot of semi-science and semi-market research here.

We continue to see very strong growth and economic demand, you know, volume times price for proteins.

I think the parts of the Atkins related phenomenon that are soft are those products line that were, I guess -- where the formulas were tortured to take the carbohydrates out of traditionally high carbohydrate foods.

In the meat industry, we went through that in the anti-fat years in the late '80s and early '90s and learned that if the products don't fulfill consumer expectations or satisfy consumer, they're not going to come back and I think a lot of the carbohydrate based portfolios are now walking into that.

But consumers -- that is not to say that consumers are walking away.

They may be walking away from low carbohydrate breads and pastas and things like that, they are not walking away from protein and those markets continue strong.

And I don't see any reason why they shouldn't continue to be strong.

You know, from a big picture perspective, on a worldwide basis the, you know, the first thing people do in -- with expanding disposable income is to spend more on food and the first place they spend more on food is to buy more meat.

And, you know, I think that applies even in developed markets like our own.

So the markets are strong today, I would expect them to continue strong.

Thanks much.

Your next question comes from the line of Eric Larson.

Yeah, good morning, everyone.

Congratulations.

Thank you, Eric.

Just a quick question for Mike, and maybe I missed this, Mike did you -- did you give us your live hog prices for the full year '04?

Do you have that available?

I may have missed it.

For the full year '04 the average was at $49, Eric.

Was $49.

Okay.

And then I think Jeff just mentioned something about -- did your fourth quarter turkey breast -- white breast prices were they -- did they average over $2 a pound?

That's what the commodity meat market has averaged during the quarter which is very unusual this time of the year.

It was actually $2.11 for the quarter.

Wow.

And we only sell a portion of our portfolio on a commodity basis.

Obviously our emphasis is on value-added products but it still has an impact on the division's performance.

Okay.

No -- and that makes perfect sense.

And then a question -- John, I know that we've -- or Jeff, we've asked this -- it has been asked a couple different ways here, on your turkey margins, but, you know, this is really kind of I think the first -- the first quarter where we've had reasonable -- well good markets, you know, since you made the acquisition.

So we really haven't seen a margin with your lower -- your structurally lower costs by integrating the acquisition, et cetera, and I believe your margins were 7 to 8% prior to that.

You know, is it a reasonable expectation over time if you were kind of saying 7.5 to 8.5 over time, that your marketing spend will be higher in that business going forward?

Well, we clearly see the Jennie-O Turkey Store brand as one of the leading opportunities in the company.

We don't see significant stepups on the marketing against that brand.

We already have some fairly solid levels against it.

Clearly this year we ended up in about the 7 to 7.5% range and I think what we're telling you is on a more normalized market basis we would expect to incrementally improve that, you know, maybe 50 basis points a year and as we value-add more and more of the portfolio.

Okay.

Great.

Happy Thanksgiving, everyone.

Thanks.

Your next question comes from the line of David Nelson.

Good morning.

Hi, David.

Hi, David.

Could we go back to the hog contracts numbers?

I may have misheard.

The numbers you gave were they the swing factor or were they actually, did I hear the word losses?

No, we had a benefit in the fourth quarter, David, of about $4 million.

Okay.

And last year fourth quarter we had a loss of $3 million.

Gotcha.

And could you do the full year again for me, please?

Full year was approximately for '04 a loss of 9 million.

And last year the loss was approximately 67 million.

Gotcha.

Thank you.

You slaughtered 9% more hogs, I think I may have heard, this quarter, is that right?

That is correct.

How do you do that?

Are you just running on Saturdays?

Yes.

Okay.

That's the incremental -- that's where we get the incremental increase.

Right.

Any thoughts on Canadian duties?

On your ability to source hogs and what that might mean for you next March if they become permanent?

Well, it could have a pricing effect.

I mean, the hog industry has, you know, post NAFTA, really setup a chain of supply that in which, you know, many weanling hogs were routed through Canada and we now have, in a lot of ways, our own government undercutting what they worked so hard to set up in NAFTA.

Right.

We are making adjustments in our supply channel.

I don't think it will be significant.

But it will be an aggravation.

Okay.

Look, you're doing a great job overall, I guess the nature of analysts is to try to pick where there's weakness and Grocery Products does keep going down, it was down quite a bit for the year and I know you're making efforts.

Where do you feel you are in the process of stabilizing that part of your company?

Well, the -- well, first of all, I would point out that our dollar sales were up 1% on the year which reflects some of the pricing that we had to take.

It was a tough year on the margin side of the business with the cost increases from the higher protein markets and we transfer our product costs even internally at market prices.

So Grocery Products felt the impact of that.

I look to a much stronger fiscal 2005.

Most of our ethnic businesses are located in the Grocery Products unit.

We had a terrific year on Carapelli olive oil up over 20%.

The same thing with our Herdez and Mexican items and oriental and Indian cuisines continue to grow, widespread growth of Mediterranean foods.

So I see that part of the portfolio being very strong.

I think the -- I'm expecting good response and results from some of our packaging initiatives that we talked to already, the tetra pack on our chili business and the Spam singles which is currently in a test market.

And beyond that continued emphasis on microwavable products.

So it's a -- we do have to drive consumers back to the center of the store.

It is -- it's clear that there has been more growth, more vitality on the perimeter of the store, of the grocery store and, you know, it is really on us and the kind of products and the news and the excitement that we can generate in the center of the store to get them back there and we're preliminarily encouraged by some of the things we're seeing from these initiatives.

Do you expect profits to be up there next year?

Yes, I would say so.

Okay.

I guess just lastly, and going back to your guidance, and it's always better to have things work out better than you expected and you talked about -- I guess, what I heard was in your opening comments things just being less bad than that you feared.

Could you talk about the whys of that?

Why did things -- were you just being quite conservative?

Or did the markets change?

I will give you one illustration.

This is Jeff, David.

If you look at the Turkey segment, clearly we did not expect breast meat to hold and all the other component meat items to hold at the levels they had.

And so that was one major difference between our going in assumption and what turned out to happen.

Secondly, as I mentioned my comments earlier, although we had had very strong value-added growth throughout the year, I think about the 9% level for the first 3 quarters of the year, we were in the mid to high double digits in the fourth quarter and that was a very pleasant surprise as well as the momentum of those products really paid off.

And then to the top line, Dave, you know, our full year was up 6% on volume tonnage and the fourth quarter was up 9%.

That was better top line performance, frankly, than we had expected.

It accelerated on us and we were pleased to see that.

Great.

Well, thank you very much and congratulations.

Thank you.

Your next question comes from the line of Pen Jones.

Good morning, everyone.

Hi, Pen.

Good morning, Pen.

Just wanted to expand a little bit, if we could, on the margin pressure in Grocery Products from the higher input costs.

What is your outlook for kind of -- I mean, pork, turkey, and beef for fiscal '05?

Will they -- I mean, the outlook is positive, so should we expect that those input costs remain fairly high next year?

I think in line with what Joel's and Jeff's answers to the previous questions were, Pen, I think you're going to see -- you're going to see prices staying higher than what the -- than what historically they've been but they're going to be more in line, I think, with where '04 was and with the price increases that we've -- that we've implemented in Grocery in June, we will get a full year benefit of those price increase, so I would expect that the Grocery margins should be better this year in '05 than they were in '04.

Okay.

Great.

And then the turkey outlook, definitely is very positive considering the supply outlook for next year and with grain costs coming down, I'm just curious, you've typically been a spot buyer of gains with the Asian rust looming.

Can you talk about your philosophy on hedging?

You've mentioned in the past that you were going to revisit your strategy of beng a spot buyer.

Are you thinking of hedging your grain costs going forward?

Well, you know we don't supply complete details of how we handle our hedging program.

Right.

But I think it is safe to tell you that we have locked in some of our corn and soybeans -- soy meal requirements for '05.

Okay.

Great.

Thank you very much.

Have a happy holiday.

You, too.

Your next question comes from the line of Leonard Teitelbaum.

Your line is open.

Good morning.

Hi, Len.

I don't think I could ask any more questions on turkey than has already been asked but happy Thanksgiving anyway and that's the last I'm going to say about turkey.

Mike, if you take a look at the -- first of all, on the conversion of your contracts, how far are you in that process?

Are you 75% done now?

Oh, I would say that's probably a realistic number, Len.

Okay.

And I -- to the extent that you can do it, the -- if we had to break down the swing year-over-year, in basically in the context that we had talked about earlier, how much of that is attributable to the new contracts and how much of that is attributable to the old?

Well, all of the -- all of the loss that we've talked about in my response to the previous questions is against the old contract.

Okay.

Because as we've talked in previous calls, the new contracts are more value based or market based contracts in terms of the value of the meat.

Uh-huh.

So we're not -- we're not in a very good position, frankly, to be able to determine going forward if we're doing positive or negative against -- against those -- other than what you see in how Refrigerated Foods is doing from a performance standpoint.

Okay.

That leads me then to the following.

If we presume that we're going to be probably by the end of -- by this call next year, you could be 100% into the, quote, new form contracts.

Does that mean that the losses that could be attributable to -- certainly versus budget on procurement cost, would be a thing of the past because the spread between market price to you and market price of the farmer would be equal?

Or to the grower, excuse me, would be equal?

If we're having a theoretical conversation I would say that that would probably be true.

So from this point -- so '05 should be minimally -- should be certainly be better than this year, but I'm trying -- what I'm trying to figure out here and I don't want to run too far in one direction, but under the new form of the contract, it should, as I understand it, eliminate these swings due to the hog markets and basically help solidify your gross profit margins.

Isn't that the -- where we're headed with this thing?

We're headed to taking the peaks and valleys out.

You are 100% correct.

Okay.

Now I want to make one thing clear, however.

Uh-Oh.

Is that by the end of next year we still will have some of the old contracts.

Uh-huh.

Because we're not moving all -- we're not moving all of the producers because those were contracts in place that had maturity dates down the road.

So we still will have some, but by and large the majority will be on the new one and we will have, hopefully, eliminated the major peaks and valleys that we've seen in the past.

Okay.

But '05 it still be a little premature to run in that direction?

Is that correct?

I would -- for purposes of your model, for purposes of your model, I think you're -- the way you were going is the right way to go.

Okay.

Fine.

Thank you very much.

I will followup offline and we will see you at Cagney.

Bye-bye.

Your next question comes from the line of Eric Katzman.

Good morning, everybody.

Good morning.

Just a few questions.

I guess one, can you talk a little bit more about the competitive response to the price increase that you put through in Grocery, I guess, now it has been 4 or 5 months, have most of your competitors followed and -- and have you seen any reaction from retailers in terms of private label getting a little bit more shelf space?

Most of the competitors that we would consider to be in the fully branded, more premium segment that we compete in have followed.

There are elements of competition that are -- priced their products more on the private label arena that in certain cases they have not followed but we pay a little less attention to that, frankly.

Okay.

We -- I mean, we adjusted to the market changes with our pricing rather than with our formulations.

And, you know, I think that's what you've got to do to sustain the consumer franchise long-term.

I guess the reason why I ask you, Joel, is because I think if I remember correctly a few years ago you had tried to implement a price increase that wasn't or doesn't appear to be as successful as this one.

I don't think it was us.

This price increase was -- we've -- we have never withdrawn a price increase.

Okay.

And second question is, I guess, with regard to -- maybe it's a followup, I think it was to Tim's question on kind of the growth in demand, maybe more from the supply side.

There's been consolidation in the industry and kind of how do you think that that plays into the, I guess, prices in terms of capacity utilization from the supply side being a little bit more rationale and that's helping to support things?

As opposed to the demand side, which is kind of, you know, Atkins or economic related.

Well, on the turkey side, you know, we went through a couple of years where the industry suffered, you know, great pain as a result of low commodity advantages, especially in years of high grain prices, because they're separate markets and I think there was some rationalization, that, you know, if you look at it over time, there were -- there were people who either went out of business or intentionally, you know, reduced their egg set and Holtz(ph) place and the values of the -- and the volume of meat coming to the market was reduced as a result.

It was probably easier to see that on the turkey side, and I think Jeff's comments having to do with freezer stocks would bear that out.

I'm hard pressed to say that consolidation in turkey or pork, you know, had a lot to do with it.

Okay.

Thank you very much.

Happy holidays.

Thanks, Eric.

Your next question comes from John McMillin.

Hello again.

Hi, John.

Joel, you had an extra week in this quarter, right?

That's correct.

So if you did 9% volume growth in this quarter is that really better than 6% volume growth for the year?

I would say, John, I would say yes, it is clearly better.

You know, if you look at -- and the way that we handle our 53 week basis is it is just another week.

And so all of the week carries the same proportion of expenses that the rest of the year carries and so you get the incremental in terms of the sales and if you really wanted to look at -- if you really wanted to look at it to figure it out because of that is just -- just look at the results on a 14 week basis and divide it by 14 and multiply it by 13 if you wanted to do it on a more 52 week basis.

Because it's business --it's business as usual.

So the 9% volume growth is an apples to apples number?

No, it would be a 14 week against a 13 week.

If I do that the 9 off 14 isn't better -- you follow me?

I'm getting technical but -- okay.

I'm just trying to understand it.

Thanks.

Yeah.

A -- a lot of times the 14th week is more into the accounting mechanism than anything else.

But it was a strong volume period for us.

Thanks.

And your last question comes from the line of George Askew.

Congratulations, nice quarter.

Thank you.

Thanks, George.

Just 2 kind of cleanup questions here.

The marketing costs, you know, 3 months ago you were talking about the incremental marketing costs of 10 to 15 million, it sounds like you've -- you didn't have to invest that much during the quarter.

What did you, and I apologize if this (tape inaudible) was it half that much or what did you spend on the incremental marketing?

Well, what was -- what would show up in the line item for marketing is about 2 to $3 million increase.

But, you know, what -- the way you account for slotting and other instore type promotions these day those come right out of the price and so some of the launch expenses for Spam singles and Stagg tetra would be -- would be in those numbers.

Okay.

And the total (tape inaudible) you counted as 10-15 last quarter, what did you actually spend.

If you roll it all together, I think we were at maybe about half the level of what we had expected.

Okay.

And then on the food service strength, how -- are you finding that your sugar substitute, which has been a terrific growth vehicle, is gaining -- is getting you in the door in more places and helping you attract incremental customers that you are then able to layer on other products to?

Is that part of the food service story?

I would have trouble pointing to a situation where that was the case.

Clearly, the Splenda product is growing across all channels and is helping us within our Diamond Crystal operation.

But I would be hard pressed to say that it is opening new doors.

It's -- we have -- we are in most accounts already.

And so that it is more of an expansion of our business, at existing accounts than the other way around.

Right.

Okay.

Well, good deal.

That's it for me.

All of the other questions were asked.

I appreciate it.

Have a good Thanksgiving.

Thank you, George.

At this time, there are no further questions.

All right.

Thank you.

And thanks for joining us today and have a great Thanksgiving.

This concludes today's Hormel Foods fourth quarter conference call.

You may now disconnect.