荷美爾 (HRL) 2005 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hormel Foods third 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 one 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. Halvin.

Mr. Halvin, you may begin your conference.

Good morning.

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

We released our results this morning before the market opened around 7:00 a.m. central.

If did you not receive a copy of the release you can find it on our Web at www.hormel.com under the Investor section.

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 fourth quarter of 2005, then Jeff and Mike will provide an overview of the Company's third quarter performance as well as detailed financial results.

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

If the media has questions, please call contact Julie Craven, our Vice President of Corporate Communications at 507-437-5345.

An audio replay of this call will be available beginning at 10:30 a.m. central today, August 25th.

The dial-in number is 800-642-1687, and the access code is 8740934.

It will also be posted to our Web site and archived for one 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 those expressed in or implied by the statements we will be making.

Among the factors that may affect the operating results of the Company are fluctuations in the costs 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.

Our third quarter earnings per share of $0.37, which was in the middle of our guidance range of 34 to $0.40, was a 16% increase compared to last year's adjusted operating earnings of $0.32.

Last year's GAAP earnings were $0.40 and included a one-time $0.08 gain from the sale of the Vista packaging business.

Our top line grew by 17% to 1.4 billion.

Adjusted for acquisitions and divestitures sales were up 4%.

Our turkey segment delivered another outstanding quarter with operating profit up over 200% compared to last year.

These results were driven by continued value-added growth, lower grain markets, and efficiencies in our production facilities.

We expect similar condition for the fourth quarter.

Impressive growth from several of our value-added products in Refrigerated Foods and key categories in the Grocery Products segment benefited the bottom line as well.

We continue to focus our attention on building our value-added business by upgrading commodity items into higher margin value-added products.

We've been very successful executing this strategy in both our Refrigerated Foods and Jennie-O Turkey Store segments over the years.

As we assess acquisition opportunities, one of our key measures is the opportunity to add value to the target company's portfolio.

The Farmer John acquisition is a perfect example.

While Farmer John has a lot of branded products in its portfolio, it still has a higher mix of commodity items compared to Hormel's Refrigerated segment.

We see this as a great opportunity to add value.

Our proven track record with the Refrigerated Foods and Jennie-O Turkey Store segments gives us confidence that we can achieve similar results at Farmer John.

Short-term we've experienced slight overall dilution to our operating profit margin, but long-term we're focused on the value-add opportunity we can create.

The outlook for our business looks good going into the fourth quarter.

Though last year's fourth quarter included an extra week, solid performance from all segments should enable to us deliver improved results for the quarter compared to last year.

Based on this analysis, we're issuing fourth quarter guidance of 50 to $0.56 which tightens our full-year guidance range to $1.73 to $1.79.

This moves the midpoint of our range from $1.75 to $1.76 per share.

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

Thank you, Joel.

Earnings for the fiscal 2005 third quarter totaled $51.4 million, or $0.37 per share versus $44.8 million from adjusted earnings from operations, or $0.32 per share a year ago.

Last year's GAAP earnings were $56.3 million which includes $11.5 million after-tax gain from the sale of Vista, or $0.08 per share.

Dollar sales for the third quarter totaled $1.4 billion compared to 1.2 billion last year, a 17% increase.

Acquisitions added $163 million to the top line in the third quarter.

After adjusting for acquisitions and divestitures, all five segments reported improved top line growth.

Volume for the third quarter was 1 billion pounds, up 22% from fiscal 2004.

Acquisitions added 151 million pounds to this quarter.

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

Higher freight costs this year were offset with lower expenses from other areas.

Marketing and investments in the third quarter equaled $29.4 million, or 2.2% of sales compared with 24.9 million, or 2.2% of sales last year.

For the full-year, we expect the percentage to be 2.3%.

Administrative and general expense was 3.1% of sales for the quarter compared to 2.8% last year.

Last year's expense was slightly lower because of a $2.4 million credit, or a reduction to post retirement benefits.

For the full-year we expect the percentage to remain at approximately 3.1%.

Interest expense for the quarter was 7.3 million compared to 6.6 million last year.

For the year, we expect interest expense to be $28 million.

Total debt at the end of the quarter was 4, or $432 million compared to 388 million last year.

This year's higher debt reflects borrowing from our credit line because of the use of cash flow to finance $340 million worth of acquisitions this year.

We plan to pay down our short-term line of credit by year end, which would leave us with $375 million of debt at the end of the fourth quarter.

It's worth noting that our strong cash flows have allowed to us finance the $340 million of acquisitions that were made earlier without taking on any additional long-term debt.

Depreciation and amortization for the quarter amounted to 32 million versus $23 million last year.

The new acquisitions caused this increase.

We expect depreciation and amortization to be around $118 million for the year.

Capital expenditures for the quarter totaled 28 million versus $23 million last year.

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

Our effective tax rate in the third quarter was 36.9% versus 36.5 in fiscal 2004.

We expect the 2005 effective tax rate to be 37.4%.

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

The diluted weighted average number of shares outstanding for the quarter was 139.5 million.

We purchased 552,000 shares of common stock during the third quarter at an average price of $29.84.

We have 7.6 million shares remaining to be purchased from a 10 million share authorization.

We processed 2.2 million hogs in the third quarter compared to 1.6 million last year.

Without Clougherty Packing we processed 1.7 million hogs.

The actual live hog cost in the third quarter was $53 per live hundred weight.

This compared to an average live base price of $57 in the same period last year.

We expected live prices to be $51 per hundred weight in the third quarter.

We anticipate an average market of $48 per live hundred weight for the fourth quarter compared to $56 last year.

We expect grain prices to trend slightly lower from 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.

Jennie-O Turkey Store continued its recent outstanding performance in the third quarter delivering operating profits of just over $27 million, up from $8 million last year.

The division's operating profit margin was 10.2% compared to 3.2% a year ago.

I would like to point out that Jennie-O Turkey Stores third quarter traditionally has the lowest operating profit margin of the year.

A large percentage of our whole bird sales occur during this time of the year which are lower margin sales, and in addition, the turkeys that are processed in our third quarter carry higher growing costs from the winter months.

Sales for the Jennie-O Turkey Store segment increased 3% driven by double-digit growth through the deli channel.

Deli products with excellent growth included Jennie-O Turkey Store rotisserie turkey breast and premium seasoned turkey breast.

Our retail business also enjoyed strong sales of Jennie-O Turkey Store fresh tray pack products, turkey burgers, franks and hams.

Turkey exports for the quarter were excellent reporting a 59% increase over last year.

The overall condition of the turkey industry remains favorable.

Production, based on data from Urner Barry, shows flat egg and poult numbers, freezer inventories are down 15% compared to a year ago, and foreign and domestic demand remains good.

Our Refrigerated Food segment reported operating profit of 29.7 million down 17% from last year.

Exceptional prior year pork margins continued to create difficult comparisons for this year's results, though we did see a relative improvement from our Q2 year-over-year results.

The retail side of this division enjoyed double-digit growth from Hormel fully cooked entrees, party trays, and Di Lusso Deli Company items.

Our Foodservice business was also up reporting a volume increase of 3%.

Their increase was driven by growth from pre-cooked breakfast sausage, Always Tender pork, Austin Blues Barbecue, Applewood smoked bacon and our Cafe H line of ethnic products.

In previous calls we mentioned our high-pressure processing technology, or what we call our true-taste technology, which is used on our bread-ready pre-sliced meats line for Foodservice.

I am pleased to report that the introduction of this technology is being well accepted by our Foodservice customers.

This food safety intervention process allows us to eliminate preservatives and extend the shelf life of the product, and we are testing the use of this technology on other products as well.

We have completed the integration of Lloyd's Barbecue Company into the Refrigerated Foods segment.

Excellent progress is being made achieving cost synergies and sales volumes are tracking at planned levels.

Also the integration of Farmer John continues to reveal cost savings opportunities.

We are excited about how these two businesses fit into our structure and look forward to the contributions they will make to the Refrigerated Foods segment going forward.

Grocery Products reported improved results with dollar sales, volume and operating profit all showing increases for the quarter.

We continue to experience exceptional growth from our Hormel microwave line of products.

These items are proving to be a perfect fit for today's busy consumer.

Our SPAM family of products was also a key area of growth in the third quarter.

SPAM singles continue to provide positive results by adding incremental volume to the category.

We have focused our marketing efforts at the next-generation of SPAM users and the continued growth indicates we are making good progress.

We were also encouraged to see improved sales from our Dinty Moore canned products during the third quarter.

Dollar sales were up 8% compared to last year and we continue to explore ways to restore long-term growth in this franchise.

Our chili sales were off in the quarter versus last year partially due to pipeline inventory gains last year that the Stagg chili brand was expanded nationally.

The launch of our 15-ounce microwave bowl product for both Hormel and Stagg chili has been well received by many retailers and should drive incremental volume going forward.

The integration of Mexican Accent into the Grocery Product segment continues to go well.

Going forward we see a lot of opportunity to tie some of our other Hispanic products in with the marketing behind Mexican Accent products.

The operating profit margins in the Grocery Product segment continue to track lower than historical levels because of high pork and beef input costs.

We hope to see margin improvement for this division in future quarters.

Our Specialty Foods segment also registered a solid quarter.

Sales were up 16%, up 6% excluding acquisitions, and operating profit was up 10%.

Our Diamond Crystal business and particularly its Splenda business, continues to do extremely well.

Our Century Foods business, which manufactures sports nutrition products, did report lower sales for the quarter.

Finally, we are making solid progress on the integration of the Mark-Lynn Foods acquisition into the Specialty Foods segment.

Operating profit for the all other segment was down 25% in the third quarter primarily due to the divestiture of Vista that occurred in the third quarter of last year.

Sales were down 5%.

Excluding Vista from the prior year, sales for the all other segment would be up 11%.

Export sales of fresh pork were strong during the quarter.

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

Thank you. [OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Bill Chappell.

Morning.

Just first on the Grocery margins maybe as you look out towards the fourth quarter, do you expect to see some of the benefits of the lower input costs and maybe actually have year-over-year margin improvement, or was that more going to happen as we look to 2006?

Well, Bill this is Jeff.

It's hard to predict exactly.

Even during the third quarter pork costs didn't fall quite as fast as we had expected them to.

We are seeing a big drop this week, and if that were to continue we would see a significant improvement during the quarter, but one way or the other, whether it comes at the beginning of the quarter or the middle or at the beginning of next year we do see that trend being favorable for Grocery Products.

Can you talk a little bit about the competitive landscape what you're seeing from Campbell's others as you move into the, especially the big chili season?

Well, obviously this is the time of year where all the canned chili franchises focus a lot of attention, Campbell's with their sponsorship of the National Football League where we obviously expect a major push by them when that season comes into form, but we're still, frankly, just a little bit before seeing the visible activity either from our brand activities or from theirs, so I can't really add a lot more as to what's actually happening in the marketplace yet on the consumer side.

Is there an expectation for an estimate you can give of us kind of how much more you're spending in marketing or advertising this year versus last?

I think our fourth quarter should be fairly typical to what we spent last year.

Obviously every year we reassess what our priorities are within our brand portfolio, and we'll be responding accordingly to any competitive incursions against our franchises.

Great.

And then just one housekeeping.

Can you give us an idea what now with these acquisitions what the D&A run rate will be?

Around 118, 120 million.

Okay.

So on a go forward basis that will stay the same in '06?

Right.

Perfect.

Thank you.

Your next question comes from Tim Ramey.

Good morning.

Congrats.

You mentioned, and Smithfield mentioned as well, that you're expecting lower grain prices and I'm just wondering, with your location kind of on the edge on the western corn belt there, I think things are better on the crop there, are you seeing any particular advantage or is that just negligible versus others?

Well two, comments, Tim.

We have definitely experienced lower grain costs in our current business, particularly at the Jennie-O Turkey Store side where they have the full grain exposure.

We really aren't calling yet what we think the going forward market will be based on this year's crop.

It clearly is more favorable in our region than it is in, say, Illinois where they've had more drought.

Our best guess right now would be to say grain seem maybe they'll be about flat year-to-year but we're not quite ready to make that call in terms of what the impact could be on our '06 numbers.

Is it fair to say that Farmer John is slightly behind your going in expectations?

It sounds like you're saying a little dilution there.

I don't recall you saying that.

I think what we're trying to point out there is if you're focused on a percentage operating margin, now that Farmer John is in the mix and given the fact that it has a lower percentage of value-added than Hormel Foods --

In aggregate.

Yeah.

You're going to see the percentage in Refrigerated Food go down for awhile until we build that percentage value-added up.

But in terms of contribution dollars, it's every bit delivering what we expected from the entity.

The acquisition is frankly above our acquisition plan, Tim, and we continue to be delighted with it.

The, what I wanted to point out in the paragraph I read is that when we look at synergy, there are synergies that we can bring to some of these acquisitions through our proven marketing strategies, and we're seeing that already at Farmer John and this continued room to grow, and we know exactly what we're going to do in that.

To look at the aggregate margins immediately pre and immediately post acquisition, is not, in our opinion, the proper way to evaluate the impact on our business, because it doesn't take into account what we're going to do with the business.

Okay.

Just one last one on the branded fresh business.

I don't think you made a comment on that.

Is there any update on that business?

Are you talking particularly the --

Case-ready and Hormel branded fresh.

We do not have an announcement at this time, but we're still encouraged that progress is being made and hope to have something for you in the coming months.

I think it would be fair to say that we continue to be extremely pleased, as is Super Target with the results in that account.

Thank you.

Your next question comes from Leonard Teitelbaum.

Good morning.

If I could just kick it back a little on Tim's question.

If I understood, trying to add up some of these parts, frankly, I thought the gross margin, you did about what I thought you were going to do in the quarter but I thought the gross profit margin would be a little bit higher.

Now, I think you've explained it by saying, look, we've got some acquisitions that don't quite carry the same margin.

Is that it, or is there something more going on here?

Is it the timing?

I mean, look, I could have been wrong, too, let's put that into the mix, but I think I, like some of the others, had thought that we would get a decrease in the input cost maybe faster than we're seeing.

Is that just an error in judgment on our part or is there, have you hedged it in, or is there something going on that we don't see from the numbers?

Well, no, Len, I think, you've got a lot of questions embedded in what you just asked there in your one question, but if you look at the individual units, you look at Refrigerated Foods to the comments that both Jeff and Joel have made, is that the margins out of Farmer John are less than the margins that we had from Refrigerated Foods.

Yes, sir, we knew that.

Go ahead, yes.

And we talked about that.

So that's having a slightly dilutive impact on Refrigerated Foods results.

You see, frankly, we thought pork prices would be lower so we thought that the benefit in GP would have been better this quarter from an operating margin basis than what actually happened.

Okay.

So I think those are what's impacting the analysis, but the things that we've talked about continue to be the things that we're focusing on as far as the business is concerned.

Thanks for that.

Now, Jeff, are we going to look at turkey for the balance of this year maybe as we go into next year, have we about peaked out in terms of revenue and margins?

Well, one thing I will concede, Leonard, as you move into the fourth quarter the comparisons are going to obviously move much more difficult.

We started turning the business significantly as of the fourth quarter last year, and so a year-over-year for fourth quarter, while we still expect a gain, we're not going to see a 200% gain like we did.

True.

Okay.

Now, I guess that would carry through to the following year, correct?

I mean, you can look out so far.

I cited the Urner Barry numbers.

That kind of in [termed] the production levels takes us out for probably the next five to six months at least and it's looking solid and favorable, but things can turn later in the year.

We'll just have to keep our eye on that.

But for now the complex seems to be being well managed overall.

Great.

Thanks.

Now, just on a, how were you fixed or sourced, now you don't use, you have to buy 100% of your input.

Now we just heard Smithfield Foods that pre, came on before you, and it seems to me, and to, unless I heard it wrong, that the supply available for purchase by individuals like yourself is going to get a little bit tighter.

Are you seeing that, or are you hooked in with enough diverse suppliers that that should not be a problem as we move through?

I assume you're talking about hogs now.

Talking hogs, excuse me, yes.

We buy very little on the spot market any more in this business, and most of our procurement needs are under long-term contracts with a variety of suppliers in regions that are logical for our Fremont plant, our Austin plant, and nowadays even with our Farmer John pork slaughter operation.

So, no, we do not anticipate having any problem securing hogs for our operations.

In what percentage of your contract --

In fact, we saw hog prices down.

As I think Mike indicated our estimate for the fourth quarter is about $48 a ton.

Yes, sir.

But as I understand it, the cut-out values seem to have increased.

What percentage of your contracts are based on cut-out value currently?

I had it about 55%, but that could be old information.

Right now it's in the 30's, but moving up.

That is our contract of choice that we've been converting with our growers as they come off of other contracts.

35%.

Roughly.

Okay.

All right, thanks.

I'll follow up off-line.

Thank you very much.

Your next question comes from Eric Larson.

Good morning, everyone.

Good morning.

Just a quick question back on the Grocery side of it.

Your volumes were up 6%, you took your pricing up over a year ago now.

Are you, has all that gone through, and have you seen any adverse volume impact from that pricing to your best of your judgment?

Well, yes, definitely all the pricing has gone through.

You know, the only franchise I could look at and say that you could argue there might have been an impact would be some of the Dinty Moore issues that we've had over, in past quarters.

Obviously we were very gratified to see this quarter that business is up on a volume and a dollar sales basis.

But chili, there are so many other things going on in that category with new entrants and with us expanding Stagg out East and with the tetra-pack and everything else that I think the pricing change is just one of a lot of factors going on in what's turned out to be a very vibrant category as that category has grown double digits this year.

Great.

Thanks.

And maybe a question for Mike.

Mike, last year in your third quarter you had about a $4 million benefit from your hog contracts.

Did you have a benefit this quarter as well?

Same number.

Same number.

Yes, sir.

Okay.

Thank you.

You're welcome.

Your next question comes from George Askew.

Yes, good morning.

Hi, George.

A couple of things.

On the turkey side, are you seeing any capacity adjustments there, either additional capacity or otherwise in the industry?

There is a new processor in the Dakotas that's going to come on line early in next calendar year that we're certainly aware of.

The plant's been being built, and from what we've heard is on schedule.

What we've heard is it's going to be a kind of slow ramp-up, and based on egg set numbers, demand from the primary breeders and everything else, we're not seeing any disruption of the market as related to that entity opening up.

You indicated that this July quarter is typically the lowest margin quarter, or a low margin quarter during the year due to the bulk whole bird sales, et cetera.

Should we expect the next three quarters to be, to continue to stay in the double-digit range where you've been?

I don't know that I could go out that far.

I'm pretty comfortable with the next quarter being at that level.

It's all kind of relative to the year-over-year and I guess that was the point I was trying to make is that within a given year's overall conditions, the third quarter would tend to be the lowest and so while last, I think second quarter we ended up at the 12, 13% operating level, this quarter it was 10, but that's excellent for the third quarter and we, on a relative basis continue to expect very strong performance.

But in terms of the specific number being that high going forward well into '06 I guess I wouldn't want to comment on that yet.

Jeff, why don't you address the supply situation in terms of eggs and --

I mean, that's obviously a number that we have, everyone has access to those numbers.

They're in equilibrium.

Really, the growth that's coming in the turkey industry this year is coming from higher bird weights.

It's been net-net just under about a 2% total volume increase and obviously the industry's been well able to absorb that.

We've had down numbers in terms of eggs and poults two years in a row and so we obviously hit a reasonable level, and if we can continue to manage it to equal the demand we should be able to stay in an equilibrium.

We are clearly not in an oversupply situation, so that ought to be encouraging for pricing going forward.

Shifting to Grocery Products, volumes, if my notes are right, volumes up 6%, sales up 10%, your pricing is already, you know, is in the numbers, are we seeing a mix shift there helping this quarter?

What drove the faster sales growth versus volume?

George, I think that's something that I hope we would continue to show you.

It's our expectation within that division that dollar sales should outstrip volume.

I mean, you're talking about a division that historically its volume are the canned items that have been around for awhile, and although we're certainly going to continue to work at growing those franchises, if you look at some of the new businesses we've brought to the four, you've got our ethnic items, the Manny's line, our microwave line, a product like SPAM singles or bacon bits.

These are low weight items but high dollaring, excellent margin, good consumer franchises.

And so what we want to drive in Grocery Products is dollar growth, and this quarter was a good example of how we're doing that.

Okay.

Obviously you mentioned that margins here were weak in Grocery Products at 12.7%.

Looking back, in prior fiscal years you've regularly, on an average basis, done around close to 19, 20% for a full-year.

Can we get back to that level, in the future?

Not this year, perhaps, or next year, but soon, in the next couple of years, or is there something different about the portfolio there that may keep us below that kind of 19, 20% level?

George, I don't have all those numbers in front of me, but I'm guessing at least one caution I would give in there is that you may be comparing a full-year number with a quarter number, and I don't know all the necessarily what the nuances of the third quarter for our, what would be typical.

Clearly, in a more normal cost environment, if we had lower pork and beef inputs, we would expect certainly a couple hundred basis point increase in margin return out of Grocery Products.

I don't know that it would get, cover the full gap you just mentioned.

Okay.

All right.

Great.

Thank you.

Your next question comes from Jon Feeney.

Good morning, guys.

Congratulations.

Thank you, John.

Jeff, the turkey market from our contact seems to be a little bit more of a mystery maybe than the others because it's small.

You certainly have a ton of experience there.

What kind of things do you think that we would see before a period in which maybe, you know, the outstanding margins you're doing might get trimmed back a little bit?

We're obviously seeing a benign supply environment right now from the published data.

In the past when we get ourselves into trouble a couple years back, what were the signs that trouble was coming?

Were you guys surprised by, you know, a jump in turkey supply when it happened or can you give us, maybe shed a little bit more light on what we should be looking for?

Sure.

We certainly could see the signs in terms of there are a lot of companies back in 2002 that made a decision obviously in each case independently to ramp up production for various reasons.

That, you had a number of processors going up 4, 5, 8%, and a demand picture that's no better than 2 to 3% in terms of its absorption ability.

As with a lot of items, there's a pretty hefty leverage component there and we saw breast meat fall all the way down to $1.15 in the summer versus maybe $1.70 average.

As we sit here right now obviously we're in much more favorable condition but I would like to point out that in terms of the bottom line results for Jennie-O Turkey Store this quarter, commodity meat really didn't provide any of the gain.

We are about at the same markets last year as we are this year.

They are admittedly somewhat higher markets than a five or ten-year average would give you, but in terms of the year-over-year results, that wasn't part of the gain.

The other thing that's been obviously very beneficial to us versus an '02 environment is the export market.

One of the things that really hurt the turkey industry was when we had the Russian market close and other markets close back in 2002, 2003.

That backed up a lot of the dark meat supply, and that had a domino effect on a lot of the other components in the protein segment.

Again, that's something that we're not looking at right now.

We have a very good export environment right now.

Thanks.

I'm looking at the Refrigerated Food business for a second.

That's a big number, your growth in case-ready products.

And I guess overall, how much, you took Hormel last year, could you have any way of kind of quantifying what kind of positive, I assume all that's additive to margins, I mean, it has to be, given what you've said in the past.

Can you give out, was that the major reason your Refrigerated Foods was as good as it was?

No, I mean, it was a nice percentage increase, and as Joel pointed out, we're particularly encouraged by some changes that were made by us in our retail partner Super Target and with their franchise, but in the scheme of total numbers that's not a big percentage of what happened in Refrigerated Foods.

Obviously over time we would like to continue to see that business grow, and if we can land one or two other major accounts it can grow in big bursts, but as it sits today, no, that would not have been a big driver of the numbers.

All right.

Okay.

And then finally, I guess when you think about across your portfolio, in Grocery Products, Refrigerated Foods obviously, certainly at Jennie-O Turkey Store, I mean the big trend here is you guys have just pioneered is moving up the value chain.

This quarter, what's going on seems to be no exception.

What I'm a little bit worried about and you know is, you have a consumer right now that doesn't, has a little bit less money in their pocket, particularly the lower quartiles of household income, gasoline prices are hitting them hard.

Have you gotten any push-back from retailers or consumers that you can see on these kind of value-added higher priced products being rolled out at this time?

Would you characterize today as good a time as any to roll them out?

I wouldn't change any of our staging of new products to reflect the economy, John.

Our Foodservice business remains quite strong, and our value added initiatives at Grocery continue strong.

The consumer might have less discretionary money in their wallets due to gas prices, but they don't have any more discretionary time on their watches.

And so the convenience and the value-added, the things that we do in our plants and our factories versus what consumers do in their kitchens continues to be the driving force behind our initiatives.

That's great.

Well, thanks for all your help.

Your next question comes from John McMillan.

Good morning, everybody.

Just to let you know, I'm still here.

Great.

Did you say that your Grocery volumes excluding acquisitions were down 1%?

Yes.

Okay.

I missed it because a lot of people are using a higher number.

So did the pricing have anything to do with that?

Tonnage was down 1% excluding acquisitions and dollar sales were up 6% excluding acquisitions.

And obviously in that case the acquisition we're talking about is Manny's.

That's the one that would be within the Grocery segment.

Your second part of your question was on pricing?

Well, you're down one, you know, I don't know what the trend was before the pricing.

I'm just wondering if you're happy with that.

I guess more importantly, because the only thing that happens is that costs keep going up and up.

Hopefully that will change, but, you know, you might need more pricing to get to these margin targets that were mentioned before, and I just kind of wonder if you take more pricing, goes down one go down three or four?

Well, I mean, a simple economics I guess would say that there's got to be some of that but what we're comfortable with in terms of what we've seen in the business, that it really is more our dollar sales increase has been more mix related as we've added new types of products in, and although certainly looking at things like gas prices and freight have not been a breeze this year, they've been significant cost increases in a number of our businesses, we've been able to handle those, and hope to be able to handle those in the future, and our typical Grocery pricing pattern has been to look at pricing in that category every three to four years.

We took it last year, and we'd like to be able to stick to that, but we never say never.

It depends on what kind of pressures we see as to whether there might be a need to do something sooner than that.

Obviously after a quarter that, when all is said and done, still ended up 16% up bottom line, and have all three quarters this year, we're comfortable with the equilibrium we're at right now.

I have to say it's a tough one to compare apples to apples.

We took the price increase last year, you know, right in the middle of the quarter in terms of when it was reflected, so it's a hard apples to apples comparison.

Also, we have had quite a bit of pipeline sales in the third quarter year ago due to our national expansion of Stagg chili, and I think that would have to be factored in.

I think, John, the key point that Jeff made earlier is that we're managing this against the dollar top line because the mix of the business continues to shift toward these lighter, more value-added products, bacon bits, SPAM singles, microwave, ethnic.

I mean these are the real growth engines in the business and are the key things we look at.

I mean we're very pleased to see Grocery Products operating profits up 7.5% year-to-year on dollar sales increases of 6%.

We're really pleased with the Grocery Products quarter we had.

Just in terms of recent trends in hog prices, and I know your hog contracts now favor, you know, lower and lower hog prices, and some people have been surprised with some recent firmness in hog prices, is that one of the reasons you took a penny off the top end of the range?

In terms of the top end, John, you mean as far as the total year?

Yeah.

I mean your high end was 180, I know you took the low end up more than the high end, but you did take a penny off.

And I'm just trying to gauge --

You have always been very critical of the wide range that we've had in our year-over-year guidance, and so what we've attempted to do is to try to narrow that guidance in response to that.

Well, I'm glad somebody responds to my criticism.

If I could just patent that for my teenagers I'd be in good shape.

One last comment because Joel, you've been extremely acquisitive this year, and I know that followed a trend to be more acquisitive in recent years, but can you just kind of give us the big picture what went on?

Are you looking harder for acquisitions, or there just more around?

And what might we expect going forward?

Well, you know, we can't comment going forward, John.

But I would say that it's, it was, frankly, more coincidence than strategy that they all happened to come to fruition at the same time.

There are some acquisitions you pursue for a long time, and you finally get closure, and others that come in pretty quickly.

And the four that we've done within the last year, just coincidentally all came, and as Mike indicated, we were able to basically finance them through our cash flow is the bottom line of what Mike has said.

So we have been telling the analysts and the investment world for quite awhile that our first choice in the use of our discretionary cash flow was for acquisitions, and it just so happened that these came to pass.

We've had, it had been kind of an empty period, frankly, for Hormel since the Turkey Store acquisition, which was what, 2000, and so after that follow period we did have four come.

We are continuing to look.

We continue to look for acquisitions.

We have high confidence in our evaluation procedure.

We're pleased again that the Turkey Store, we haven't spent a lot of time on that, but that's worked out obviously extremely well for us, and the integration was very well managed, principally by Jeff here, and then these recent acquisitions have, are all on target, will all pay long-term benefits to the Company, and we are, as I said is earlier, looking at acquisitions not only for the obvious synergies, cost synergies, and the growth synergies, which we would agree with most analysts should be factored down a little bit in terms of how they're valued, but there's also a gross margin synergy that we think we can bring to play, especially within the Refrigerated segment, and we continue to demonstrate that.

So yeah, we want to continue to look at acquisitions.

There's nothing on our balance sheet or in our funding capability that's any different than it's been in the past as a result of these four acquisitions.

If anything it ought to be stronger going forward, and I think we have the management team that's now has even higher confidence that they can pull these off and integrate them.

Okay.

Well, thanks a lot.

All right, John.

Your next question comes from David Nelson.

Good morning.

Good morning.

Turkey exports were up, what, 40%, and it's mainly, you said before, a recovery in Russia so we should expect this current level of exports to be sustainable barring another ban?

And then what percentage of your turkey is exported, please?

Well, as we sit here today, absent some other kind of ban, we are favorable in terms of what the environment is, and don't see any reason why that should slow down.

In terms of percentage exports we're in about the 15% range.

On Refrigerated Foods, I guess I would have thought margins would have recovered a little more given the new hog contracts, Lloyd's, and 40% growth in case-ready.

Where do you expect those margins to trend longer term or at least over the next year?

I don't have a number.

Dave, this is Mike.

For 6%, 7%?

I think you're going to continue to see the margins trend upward.

I think that we'll continue to see at least now for the foreseeable future I think we're going to see hog prices trending down, and I think we've said in my comments that we think the next quarter will average about $48, which will be down year-over-year, and so with that, we should see the margin improvement in the range that you're talking about.

Okay.

Just to take hog prices there, like six weeks ago USDA and futures markets were implying about a 20% decline, and your projection is almost that much for the coming quarter but it's certainly a lot less than that today.

Would you say current markets are more reflective of your expectations or those of, for hog prices, or those of six weeks ago?

I think what you've seen in the last three or four days in hog markets is probably indicative of where we're going.

I think that we've hit the high point, and I think we're now going to trend lower for the rest of the quarter, and I, frankly, I think the futures market is pretty indicative of where we think the prices are going to be.

Then lastly, Dinty Moore, how did that do in the quarter and how might that be recovering?

Well, as I reported it was up for the quarter on both volume and dollar sales.

We don't have a major product formulation or ad campaign.

Obviously we're working on a number of things against that franchise but in the meantime we obviously have gone back into the trenches and worked more on blocking and tackling against that franchise and have done a lot of nice things within our sales organization.

I think that's been one of the real success stories of our consumer products sales organization which we put together during this past year and obviously we hope that momentum will continue.

Great.

Thank you very much.

You have a follow-up question from Tim Ramey.

I think John McMillan beat me to the punch, but that wouldn't be the first time.

I was going to ask about your acquisition strategy but I think it's been answered.

Thank you.

Thanks, Tim.

Your next question comes from Pen Jones.

Thank you.

Hi, there.

Question about the Foodservice channel.

You guys have historically done extremely well in that channel, and sales were up 3% which is still solid, but can you shed some more light on what's going on there?

Is it a macro slowdown in the Foodservice channel, or are you guys simply up against difficult comps?

Can you elaborate on that please?

Sure.

Yeah, 3% is certainly a little bit lower than what we've historically enjoyed and what probably, frankly, we expect within our business.

I think what's going on here, in a couple of the large tonnage areas, hams and bacon, I mean, you've heard from some of the other conference calls and processes that they've, there's been somewhat of a redoubled effort in those segments to push out their own products and Foodservice is probably one of the channels they're doing that in.

When we look under the surface at some of the more innovative items that we bring out, the bread-ready meats, the Austin Blues, the Cafe H, the premium bacons and so forth, we're still seeing very strong growth numbers there and so I'm confident over time we'll see that division return to higher growth rates than what we reported this quarter.

Okay.

And then just to follow-up on the turkey business, and, Jeff, you mentioned egg sets and poult placements have been flat to down, and so that the bird numbers have been very benign, and the only increase in production you've seen is in weight gain, up about 2%, how much weight can you actually put on a turkey?

I mean, assume we have kind of normalized feed costs this year, and we have, you know, flat number of birds over the next 12 months, can you see though, production up 3 or 4% given increased weight gains, or is 2% kind of maxing out how much you can put on a bird?

Well, it's varied.

If you look at genetic records, I think a typical gain is in the 1 to 1.5% a year that what genetics have been able to deliver, but that doesn't always come exactly lock-step each year.

There have been years, I think we had a year last year where we exceeded that where the right things came together in terms of growing conditions and some feed changes that we made, but I guess a rule of thumb in our industry would be, if you were to assume a 1% headcount increase and a 1% volume increase and that took you to 2, and you stayed there absent any demonstrable heightened new demand, you should be in decent shape at that level.

Okay.

Great.

Thank you very much.

You have a follow-up question from Leonard Teitelbaum.

Close enough.

I'm trying to get my notes and records straight here.

How much of your procurement of live hogs is covered by some kind of contract?

65, Leonard.

Okay.

Now, of the 35 that's, sorry, of the 35 that's open, those are open market purchases.

Of the 65, what percentage of that is covered by grain-based, and what percentage of that is covered by cut-out value contracts?

Did you say it was 35% was covered by cut-out value contracts?

That is correct.

So that's 30, so it's 30, 35 and 35 if you had to break it down between open market or grain-based and 35% on cut-out value?

Yeah, that's rough, but Fred could probably take you through some finer numbers on that.

Here's the point I was trying to get to earlier and I want to make sure that this is, I had the 65 right.

And that is, as hog prices are coming down, sorry, as grain prices are coming down, you're definitely helped on the majority of your contracts, there's no question about that, and on the cut-out value, we understand the cut-out value has increased.

Is that where you would be hurt, but it would be a net-net plus, is what I'm trying to get to here.

I'm trying to, obviously I want to work on my gross margin.

I would say that net-net it's a plus, but as hog prices, or as grain prices come down, and the cut-out contracts, I mean, get to our earlier point, we're reflecting on those contracts this year over last year a $4 million gain.

Right.

And that was the same as last year.

So we're pretty flat on that part of the equation.

All right.

Where I messed up is 35% of the 65 and that's where I got to 55.

Okay.

Very good.

Thank you very much.

At this time I'm showing no further questions.

Gentlemen, are there any closing remarks?

No, but thank you for your time.

If you have any questions, please feel free to give me a call today at 507-437-5007.

Thanks.

Ladies and gentlemen, thank you for participating in the Hormel Foods third quarter earnings conference call.

This concludes the conference.

You may now disconnect.