荷美爾 (HRL) 2005 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Hormel Foods first quarter earnings release 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. (Operator Instructions).

Thank you.

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

Please go ahead, sir.

Good morning.

Welcome to the Hormel Foods conference call for the first quarter of fiscal 2005.

We released our results this morning before the market opened, around 7:00 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;

Jeff Ettinger, President and Chief Operating Officer; and Mike McCoy, Executive Vice President and Chief Financial Officer.

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

Then Jeff and Mike will provide an overview of the Company's first quarter performance, as well as detailed financial results.

We intend the question-and-answer section of this call for our analysts and shareholders.

If the media has questions, please contact Julie Craven, our Director of Public Relations at 507-437-5345.

An audio replay of this call will be available beginning at 10:00 a.m.

Eastern time today, February 22.

The dial-in number is 800-642-1687 and the access code is 3993088.

It will be also posted to our website and archived for 1 year.

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 materially from these expressed in or implied by the statements we will be making.

Among the factors that may effect the operating results of the Company are fluctuations in the cost and availability of raw materials and market conditions for finished products.

Please refer to Exhibit 99.1 of the 2004 Form 10-K for a complete listing.

Now I'll turn the call over to Joel.

Good morning, everyone.

Outstanding demand for our value-added pork and turkey products allowed us to deliver impressive growth to our top and bottom lines.

Our first quarter earnings per share of $0.46 cents were a 24 percent increase compared to last year.

Our top line grew by 12 percent to $1.3 billion.

Several key brands contributed to our success in the quarter, with the best performance coming from the Jennie-O Turkey Store segment reporting a 55 percent increase in operating profits.

Refrigerated foods also reported great results, with operating profit up 20 percent.

We made a couple strategic acquisitions in the last 2 months that I'd like to discuss.

Clougherty Packing, the company behind the Farmer John brand, was acquired at the end of December 2004.

Arriba foods, which is the holding company of Mexican Accent and maker of the Manny's brand, was acquired at the end of January.

Clougherty Packing, with annual sales of $420 million and manufacturing facilities located in the Los Angeles area, strengthens our presence in the Southwest.

The Farmer John brand has the top market position in Southern California for bacon, breakfast sausage and sliced hams.

It also has a very strong position in hot dogs, fully cooked bacon and spiral hams.

The consumer base is very loyal to the Farmer John brand, with a particularly strong following from Hispanic consumers.

Our integration team has identified many synergies that will improve the efficiency of the business.

We're excited about the contributions that the Farmer John brand will make to Hormel Foods in the years to come.

Mexican Accent with annual sales of $25 million, offers high quality Mexican products, primarily flour and corn tortillas.

This business will further strengthen our growing presence in the ethnic products category.

The tortilla category is attractive because of its size and the 8 to 10 percent growth rate it's been experiencing.

Currently products are only distributed east of the Mississippi.

Both acquisitions are immediately accretive.

As we look forward to the rest of fiscal 2005, we remain optimistic.

Protein demand continues to be very good.

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

And our recent acquisitions offer exciting opportunities.

Based on this analysis, we are issuing second quarter guidance of $0.38 to $0.44 per share and raising our full-year guidance from the $1.65 to $1.75 range to $1.70 to $1.80 per share.

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

Thank you, Joel, and good morning, everyone.

Earnings for the fiscal 2005 first quarter totalled $64.5 million, or $0.46 per share versus $51.8 million, or $0.37 per share a year ago.

Dollar sales for the first quarter totalled 1.3 billion compared to 1.1 billion last year.

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

The Farmer John business added $40 million to this year's first quarter sales.

Volume for the first quarter was 946 million pounds, up 4 percent from fiscal 2004.

The Farmer John acquisition added 35 million pounds to this quarter.

Selling and delivery expenses for the quarter were 10.8 percent of sales this year and 11.1 percent last year.

We expect the full year to be at about 11 percent.

Marketing investments in the first quarter equaled $31.7 million, or 2.5 percent of sales compared with 25.9 million, or 2.3 percent of sales last year.

More aggressive marketing programs were in place for the grocery products refrigerated and Jennie-O Foods Turkey Store segments in the first quarter of 2005.

For the full year we expect 2.3 percent in this category.

Administrative and general expense was 3.2 percent of sales for the quarter, which was the same as last year.

For the full year we expect it to be at approximately 3.1 percent.

Interest expense for the quarter was $6.8 million, which was also the same as last year.

For the year, we expect interest expense to be $28 million, which is approximately $3 million higher than we provided you last quarter.

The last 2 acquisitions used our excess cash and we will add some debt to our balance sheet.

Depreciation and amortization for the quarter amounted to $26 million versus 23 million last year.

We expect depreciation and amortization to be around $100 million for the year.

Our effective tax rate in the first quarter was 37.1 percent versus 36.5 percent in fiscal 2004.

We expect that 2005 effective tax rate to be 37 percent.

Capital expenditures for the quarter totalled $25 million versus 16 million last year.

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

The basic weighted average number of shares outstanding for the first quarter was 138 million shares.

The diluted weighted average number of shares outstanding for the quarter was 139.6 million.

We purchased 44,000 shares of common stock during the first quarter at an average price of $27.94 per share.

We have 8.3 million shares remaining to be purchased from the 10 million share authorization.

We processed 1.9 million hogs in the first quarter compared to 1.7 million last year.

Without Farmer John, we processed 1.7 million shares.

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

The actual live hog cost in the first quarter was $55 per live 100-weight.

This compared with an average live price of $37 in the same period last year.

We expected live prices to be $53 per live 100-weight in the quarter.

We anticipate an average live market of $52 per 100-weight for the second quarter compared with $46 last year.

We expect corn and soy meal prices to be around today's markets for the rest of the year.

I will now turn the call over to Jeff Ettinger to discuss the segment results.

Thank you, Mike, and good morning, everyone.

As Joel and Mike indicated, Hormel Foods reported very good results on both the top and bottom lines during the first quarter.

Our most impressive results came from the Jennie-O Turkey Store segment, which reported a sales increase of 10 percent and an increase in operating profits of 55 percent.

The drivers behind the strong results at Jennie-O Turkey Store were value-added sales growth, favorable commodity meat markets, and decreasing feed costs.

Jennie-O Turkey stores revenues for the quarter were $261 million, an increase of 10 percent, which resulted from securing new distribution of existing products and from continued success with new product introductions.

Individual product categories that delivered double-digit growth included Jennie-O Turkey Store rotisserie turkey breast, the fresh tray pack line, Jenny-O Turkey Store bacon and marinated meats.

The deli and food service channels each reported exceptional results with net sales up 14 percent and 8 percent respectively.

Last quarter we talked about our newly-introduced Jennie-O Turkey Store Oven Ready product.

I am pleased to report the introduction of this product has met our expectations.

We also believe consumers will use this product more frequently because of the ease of preparation.

We plan to expand our distribution of Oven Ready in the coming year and we will keep you posted on its progress.

The turkey industry continues to operate in a very rational manner.

The egg sets and poult placements have been consistently lower for the last several quarters, and with grain costs expected to be at current market levels for the remainder of the year and supplies staying at a reasonable level, we expect that our value-added sales momentum in our turkey segment will continue to shine through.

Refrigerated foods operating profit was up 20 percent compared to last year, and sales were up 19 percent.

As Mike mentioned, the newly-acquired Farmer John brand added $40 million in sales for the period.

Without the benefit of Farmer John, still sales were still up 12 percent.

Both our retail and food service areas reported strong growth.

Double-digit volume performance from retail included Hormel pepperoni, fully-cooked bacon, and fully-cooked entrees.

Food service standouts included Always Tender pork, Austin Blues BBQ and our Cafe H line of ethnic food products.

We have been aggressively supporting our brands within the refrigerated food segment with our Today's Flavor advertising campaign.

We expanded our advertising into new markets and added new programs.

Some of you may have seen our 3-sided billboard in Times Square that went up in December and this was part of that campaign.

We recently announced a new high-pressure processing technology that will be used on our sliced meat products to eliminate food pathogens.

We believe this new process gives our products a competitive advantage because it not only improves food safety, but also provides longer shelf life and delivers a better tasting product.

The high-pressure process allows to us remove preservatives, which can alter the true taste of the product.

We have been using this same technology on our prosciutto ham since 2001.

Our grocery product segment delivered improved results to both the top and bottom line.

Sales were up 5 percent and operating profit was up 2 percent.

Double-digit growth was reported from the SPAM family of products, from Hormel and Stagg chili, from our microwave tray products and from Hormel bacon bits.

We do continue to experience weakness in our Dinty Moore canned stew line of products.

The growth in chili category and in our chili business has been outstanding.

Our total chili sales under the Hormel and Stagg brands were up 22 percent for the quarter.

We recently increased our marketing support behind chili and have seen very good consumer response.

We have rolled out the SPAM singles in 8 more markets.

We believe this convenient new single-serve packaging will help us to grow the canned luncheon meat category.

Our strategy to grow the ethnic line of products within grocery products will be accomplished through both organic growth and acquisitions.

Q1 saw the successful execution of this strategy on both fronts.

Our organic sales growth for the quarter was 8 percent, led by HERDEZ Mexican products of 16 percent and Carapelli olive oil up 15 percent.

On the acquisition side, as Joel mentioned, we acquired Mexican Accents business at the end of the quarter.

This ethnic food business, sold under the Manny's brand, tucks in very well to our existing ethnic food structure.

In the specialty food segments, sales were down 2 percent and operating profit was down 25 percent, or 1.2 million.

We experienced weaker sales from the sports nutrition and managed healthcare channel in this segment.

Operating profit for the all other segment was down 32 percent in the first quarter, primarily due to the divestiture of Vista, which occurred in the third quarter of last year.

Sales were up 1 percent.

Excluding Vista from the prior year, sales would have been up 24 percent.

Export sales of SPAM and fresh pork were the key drivers of this sales increase.

Overall, our core business is very healthy and we look forward to delivering another good year in 2005.

At this time, I would like to turn the call over to the operator for the question-and-answer portion of the call.

(Operator Instructions).

Your first question comes from the Pen Jones of Deutsche Bank.

Good morning.

Thank you, and nice quarter.

Question for you about pricing.

It looks like you're realizing some of the price increases that you implemented last June and I was wondering if you could quantify how much that added to the top line this quarter?

Pen this, is Mike.

We don't -- as you have known from previous calls, we have -- we do not break it down in that much detail.

I think the results that are reflected, that Jeff talked about in the grocery products segment, I think is indicative of that price increase and the fact that we have made that price increase stick and are getting the benefits out of that.

Okay.

But it is definitely contributing to the positive results.

Oh, absolutely.

Great.

Okay.

And then in terms of, again, within grocery products, though and the struggles with the Dinty Moore, how -- can you discuss some of your initiatives to help turn that part of the business around, please.

This is Jeff Ettinger.

What I really can point you to is when you look at the overall canned meat segment and you look at the initiatives that we already have in the marketplace against the SPAM brand of products with SPAM singles and our new SPAM-A-Lot unique product, and you look at the new tetra pack against Stagg and Hormel chili.

I think you can be sure we're not resting on our laurels in terms of looking at the options, but we do not have anything to announce at this time in relation to Dinty Moore itself.

Okay.

The only thing I -- this is Joel.

The only thing I would add to that is that we have seen terrific progress on our tray package, which we have also converted now, are in the process of converting from the Dinty Moore trademark to the Hormel trademark to gain better advertising efficiency.

So there's some moving parts in the portfolio at the same time that I think will leave us in a much more -- in a position for much more efficient marketing going forward.

Okay.

And then just 1 final question, if I may, about Jennie-O Turkey Store and the outlook for turkey pricing.

The poults and egg set numbers are great and very disciplined, but the weights have been up pretty significantly year-to-date thus far, up 6 to 7 percent, so it looks like supplies might be up a bit this year.

Can you comment on that?

Do you see weights being sustained at up 6 to 7 percent in '05?

We definitely have seen that weight increase.

It's been up about a couple of pound average on the Tom [ph] side of the business.

There are a lot of moving parts in terms of the total supply picture on turkey.

There has been a lot of shortages on hen poults and so the hen side of the business looks particularly strong going into the fall season.

Overall, I think what you're seeing with breast meat is a good bell weather for what's happened.

We had an unusually strong winter for the first 2 periods with breast meat over $2, but now we've seen it fall back to much more seasonal levels at about $1.50.

We think it will level off at about this level and we're comfortable at this pricing level that we can continue to meet our operating plan.

Great.

Thank you very much, and nice quarter.

Thank you.

Your next question comes from George Askew of Legg Mason.

Yes.

I'll add my congratulations.

Very nice quarter.

Can you hear me okay?

Yes, thank you.

Yes, thank you, George.

Good.

On the supply front, you addressed the turkey supply issue to some degree.

I wanted to just probe a little bit further, though, are there any structural capacity issues there that is limiting supply or is it more just rational behavior from the producers on the turkey side?

I don't know that there really are structural capacity issues.

We're keeping an eye on the reopening of the Hinton plant in Virginia, the Pilgrim's Pride had closed, but a number of growers have now reopened.

That certainly would add capacity in the industry.

There is also an expectation of a plant to come online in the Dakota area in 2006.

But at this time the market does seem in equilibrium and so we're comfortable with what we're looking at.

On the hog supply side, what are you see there?

Can you give us sort of similar color?

George, this is Mike.

What we see, it's basically flat, not a lot of growth and pretty much all the numbers and all the reports are same numbers year-over-year.

Okay.

And then on the -- on the Dinty Moore question, is stew losing market share to chili and other canned meats?

Is that part of what's going on with Dinty Moore?

There's an element of that in the short-term here, particularly in the Eastern United States where the shelf sets for canned meats are not particularly large as the new players came into the chili segment and we introduced a new chili item, there were some examples of facings being lost, but we see us -- we've been seeing ourselves regaining some of those and so I don't know that I would attribute a lot of that to that most recent activity.

Okay.

Okay.

Good.

And then lastly, on -- on the acquisition front, you mentioned, obviously, you did the 2 good deals this quarter.

Can you remind us of what your metrics are regarding debt, how much -- how much acquisition capacity you may have remaining or how high you would go on debt as you look at deals.

Well, George, we've had the conversation before.

We continue to say that we have -- that we have the ability to put debt on our balance sheet.

We put a little bit on and will put a little bit on this year, reference my comment about increased interest costs for the current year.

But we've said and we continue to say that we want to continue to maintain and be at investment grade as far as our debt is concerned, but with our debt ratios now being relatively low, we have tremendous upside.

And when you look at a debt to -- debt-to-equity ratio of about 20, 21 percent, you can do the math and know that we have a lot of capacity.

Okay.

Very good.

Well, listen, thank you very much and we'll see you tomorrow.

Okay.

Thank you.

Your next question comes from Tim Ramey of D.A. Davidson.

Good morning.

We're always anxiously awaiting for you down here.

See you for dinner, Tim.

Hey, Joel, the very first words out of your mouth were strong demand across the board and that's the feature of this particular market that continues to surprise me and you've been looking at this as long as anyone.

Can you talk a little bit about how you see the demand picture in protein overall?

Are there real sort of tectonic changes that are occurring in that or is this just a good cycle?

I think, we were all right about the decline in the Atkins diet and the South Beach diet, but I think there's 2 component parts of that, Tim.

The demand for proteins, for animal proteins has remained very strong and where I think you've seen the falloff are in the -- the carbohydrate-based products that were reformulated to reduce the carbohydrates or increase the proteins and that were basically chemically tortured to become something they weren't and those have not satisfied the taste expectations of consumers and have really fallen by the wayside.

So that's the part that I think you might be reading about or seeing on the decline in Atkins.

Protein, the protein markets continue to be very strong.

We're not in a position of oversupply anyplace and so the markets have continued strong, driven more by the consumption side of the equation and I think by the supply side.

That's great.

Relating to that overall supply demand picture, if you ask 3 different meat packer who get 3 different answers on whether the Canadian border will -- or the U.S. border will open to Canadian beef, is that a feature of your forecast, or are you counting on that as you look out for the rest of the year and perhaps greater supplies of protein overall because of more Canadian cattle coming in?

We don't have the exposure on the cattle side, so we don't really track that too closely.

I think the impact, if it did open and there were more increased beef supplies coming in, I think that might increase the retailer's features on beef, which would have then a step-down effect on the other proteins.

I think that's potential, but fortunately the demand has been strong.

We have been in the situation of duties placed on weanling hogs coming over, penalties on the Canadians.

We would all be far better off if we went back to the principle of NAFTA and stopped this silliness back and forth between ourselves and Canada.

Frankly, we've got too many producers acting like a bunch of French farmers and looking for support to their markets in places where it shouldn't be coming from.

I would much rather see the borders open the way they're supposed to be.

And just one final one, on the case ready product and progress on value-added fresh meat, any comments there?

In value-added fresh meats in general, we had very strong results.

Our refrigerated entrees in both Jennie-O and Hormel Foods had an outstanding double-digit quarter.

We continue to see great growth in our flavored meats portfolio.

We don't have any particular new announcements on the precept side, in terms of the full program, but we're still working on a number of accounts in that area.

Thank you, Jeff, Joel.

Thanks, Tim.

Your next question comes from Bill Chappell of SunTrust Robinson.

Good morning, and congratulations as well.

Thank you.

Just a couple questions on the grocery side of the business.

I mean, certainly improved results, but if you look at still pretty strong steel prices in what seems to be very high freight rates across the industry, do you see another chance for possibility for raising prices this year?

Well, I would speculate on that, and I would hate to have to do that.

We have seen increases in steel.

There have also been increases in corrugated that was actually offset with purchasing initiatives and then the fuel surcharges are in place.

We were the -- about the first, I don't know if we were the first, to step out with price increases a year ago and led the market there and we will be alert to the necessities going forward, but I'm not going predict any necessary price increases at this time on the grocery side of our business.

So most of the costs are at least manageable from what you're seeing on the near-term outlook?

Yes, manageable or manageable within your target margin ranges for our businesses.

Got you.

Second, on acquisition front, we've seen kind of a flurry in the past 4 or 5 months after a pretty slow year prior to that.

Is there any reason these things are -- everything's closing?

Is the market -- I mean is there more deals out there or is it just timing of things you've been working on?

Probably a combination of both, Bill.

The deals that we closed that Joel talked about and Jeff talked about are ones that were in the pipeline awhile.

These things take time to get done.

And while we don't -- as you know, we don't comment on specific things, we continue to look at things and continue to have opportunities.

And it is still -- acquisitions are still the number one use for our cash.

Right.

Have you seen the valuations or acquisitions change very much?

I think from what we have seen, I think there's some more rational behavior in the acquisition market.

I think people are looking at, with the much more focused on valuations than I think I've seen in the past.

Great.

Thank you.

Your next question comes from Eric Larson of Piper Jaffray.

Yes, good morning, everyone.

Can you hear me?

Yes, we can, Eric.

Quick question on marketing spend.

In your second half last year, you made a conscious decision to step up your marketing spending quite dramatically for new product introductions and a number of other initiatives.

Obviously, you're marketing spend in the first quarter was up fairly significantly as well and I'm sure that a bunch of that was related to your new chili products and the competition thereof.

Can you give us an idea, a little more help on -- an update on what your marketing spend should look like kind of in the next quarter or 2 or maybe the final 9 months of this fiscal year?

Well, I'll jump in, Eric.

This is Mike.

In our comments, we talked about -- we talked about the expectation that it's going to be about 2.3 percent of sales for the full year.

Now, that was in the first quarter, as to your earlier comment, we were a little more aggressive in that and it came in at about 2.5 percent of sales, but look for modeling purposes for the year to be in that 2.3 percent range.

Okay.

I must have missed that initial comment.

We got hooked up a little bit late.

Thank you, and good quarter.

Okay.

(Operator Instructions).

Your next question comes from Farha Aslam of Stephens, Inc.

Hi, good morning.

Good morning.

Can you share with us the outlook for pork exports and how Farmer John is going to help you on that front?

Well, I can talk about in terms of -- this is Jeff, in terms of Farmer John's involvement.

They have already developed a much stronger awful market in the Western United States domestically, and so that's where we're already looking at opportunities to transfer product from core Hormel to Farmer John to take advantage of those markets.

They also, obviously, have better access to the ports and point of calls out in the West United States and so we will be looking for opportunities there as well.

In terms of the export markets, Mike, I don't know if you have any comment on what those are looking like in general.

Well, I think in terms of the -- in terms of what we see on pork as, at least for the first quarter, pork demands on an export basis has been relatively strong, and I do not expect to see that -- to see that go down at least going here in the second quarter.

I think the demand continues to be strong and I think it's going to continue.

Great.

And do you plan to change at all how you source hogs for the Farmer John facility, or are you going to continue to have sort of part ownership, part contract, et cetera?

I would think in the near future that we would continue with the same model.

Okay.

Great.

Thank you.

At this time, there are no further questions.

Gentlemen, are there any closing remarks?

No, just thanks for joining us today.

And just as a reminder, we will be presenting at the Cagney conference tomorrow at 2:30 Mountain time.

If you can't make it in person, please tune into our webcast, which is linked to our website at www.hormel.com Thank you.

Thank you.

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

You may now disconnect.