荷美爾 (HRL) 2006 Q1 法說會逐字稿

Good morning, my name is Andrew, I will be your conference operator today.

At this time, I'd like to welcome everyone to the Hormel Foods first quarter earnings call. [OPERATOR INSTRUCTIONS].

Thank you.

I would now like to turn the call over to Mr. Fred Halvin, Director of Investor Relations.

Sir, you may begin your conference.

Good morning and welcome to the Hormel Foods conference call for the first quarter of fiscal 2006.

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.

Under the investor section.

On our call today is Jeff Ettinger, President and Chief Executive Officer and Mike McCoy, Executive Vice President and Chief Financial Officer.

Jeff will provide a review of the operating results and an outlook for the second quarter and full year of 2006.

Then Mike will provide detailed financial results for the quarter, we will then open the call up for questions.

An audio replay of this call will be available beginning at 10:30 a.m. central time today, February 27, 2006.

The dial-in number is 1-800-642-1687 and the access code is 5540639.

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

Before we get started with the results of the quarter, I first need to reference 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.

Expectations may differ materially from those expressed in or implied by the statements we will be making.

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

Please refer to pages 31 through 34 of the 2005 annual report for a complete listing.

Now I will turn the call over to Jeff.

Good morning, everyone.

We're off to a good start in fiscal 2006.

The balanced strength of our business allowed us to deliver top and bottom line growth for the quarter, even though we face considerably higher energy and freight costs.

Continued strong performance from Jennie-O Turkey Store and significant improvement from the specialty food segment were the key drivers behind our solid first quarter results.

Earnings per share of $0.50 were a 9% increase compared to last year's earnings of $0.46.

As mentioned in the press release, there were three items affecting comparability in this year's results.

Expenses relating to SFAS 123-R, expenses relating to nonqualified planned settlements due to executive retirements and the benefit from a discreet tax event that lowered our effective tax rate.

The combined effect of these items reduced earnings per share in the quarter by $0.05.

In the quarter, our top line grew 11% to $1.4 billion, inclusive of acquisitions.

Refrigerated and specialty foods were the biggest contributors to the top line increase.

Operating profit was up 11%, driven by the results from Jennie-O Turkey store and specialty foods.

The four acquisitions that we made in 2005, Farmer John, Mexican Accent, Mark-Lynn and Lloyd's, continued to meet our expectations and each made nice contributions to our top and bottom line.

We continue to look for acquisitions that will strengthen our overall business.

Now for the segment results.

Jennie-O Turkey Store benefited from high Turkey meat markets, lower feed costs and strong value-added sales growth.

Operating profit was up 17% to $40 million and the operating profit margin was 14.9%, up from 13% last year.

As indicated in last quarter's conference call, we do not expect to maintain this level of operating profit margin.

A normalized margin for this segment is around 8 to 9%, although the first quarter is traditionally the strongest quarter.

Volume was down 6%, due to planned reductions in harvest.

However, sales volumes were up 2% from higher turkey markets and our value-added volume at Jennie-O Turkey Store was up 9% for the quarter.

As we mentioned in the fourth quarter conference call, we do not expect turkey markets to be as high in the second half of 2006 compared to '05 because of higher anticipated turkey supplies.

As expected, turkey egg sets and pole placements are beginning to increase, which will bring more turkeys to market in late summer, early fall of this year.

Current supplies, however, continue to be tight.

The latest USDA freezer report shows turkey inventory down 21% compared to last year.

Regardless of the market environment, our priority continues to be growing our value-added portfolio.

Refrigerated foods delivered 3% higher operating profit, driven by the contributions of last year's acquisitions and growth in key categories like Hormel refrigerated entrees, flavored meats and party trays.

The operating margin was 4.9% compared to 5.5% last year.

Higher energy and distribution costs caused the margin to be lower.

Case-ready products sold through the Precept joint venture also reported exceptional results in the quarter.

We expect the growth of case-ready to continue as we are just rolling out a new test program with a new case-ready customer.

Food service volume was up 6% in the segment, led by the bacon and sliced meats categories.

We also experienced growth from our pizza topping category, from Austin Blues and from our Cafe H line of ethnic products.

We continue to innovate within our foodservice business by offering new products such as Cure 81 applewood smoked ham.

Last quarter, we mentioned that we were in a test market with our Hormel natural choice deli sandwich meats.

Based on the success of these test markets, we launched the product on a national basis beginning in January.

The customer response to the national rollout has been outstanding and shipments of product began in February.

Natural choice uses our high pressure water-based technology, resulting in luncheon meat that is 100% natural with no preservatives.

A growing number of consumers are looking for these attributes and we believe our Hormel natural choice deli sandwich meats is a perfect fit for these consumers.

We will keep you upstated on the progress of this exciting new product.

Supporting our brands with the appropriate level of marketing is essential for our company.

To help raise consumer brand awareness of Hormel products, we have launched a new multimedia national campaign entitled "Create Something Great."

This campaign is designed to educate consumers on how to elevate their everyday meal experiences by using refrigerated and shelf stable Hormel-branded products.

Our grocery product segment reported mixed results in Q1 with higher sales but lower operating profits.

Higher costs of our beef-based products and increases in freight and distribution costs more than offset the benefit of lower pork input costs.

The microwave category continues to deliver double-digit growth for grocery products.

In March, we will start up a new production line in our Rochelle, Illinois facility in order to keep up with demand.

We were able to convert space that was previously used for primary processing for this new microwaved production line.

We constantly review our assets and look for opportunities to convert low return areas into higher returning value-added production space.

Our ethnic line of products also performed well in the quarter.

Brands that reported improved sales included Herdez, Carapelli, House of Tsang, Patak's and Peloponnese.

Chili sales were down in the quarter due to difficult year-ago comparisons.

The chili category had a sharp increase last year due to new entries in the category, and from our national rollout of Stagg chili.

Specialty foods reported greatly-improved results in all business units, Diamond Crystal Brands, Century Foods and specialty products.

Products contributing to these results included packet sales of sugar substitutes, sugar packs, wet packets, other ingredients and nutritional products.

We believe that this level of operating profit is sustainable within this unit.

The across the board improvement is coming from a combination of improved sales with current customers as well as gaining new customers and the Mark-Lynn foods acquisition was an important contributor and added key items to our portfolio.

The all-other segment operating profit was driven by the international operating segment, with fresh pork export sales providing the largest contribution.

The SPAM family of products also contributed to profitability improvement as well as our China operations.

Sales and volumes were down from discontinuing unprofitable fresh pork export sales within international.

Looking ahead, we believe that lower pork markets will benefit our value-added process items and refrigerated foods and certain items in grocery products.

However, cost factors that could pressure profitability are higher beef distribution and energy costs.

After assessing these factors, and our expectation of continued success in growing our value-added portfolio, our GAAP earnings guidance for the second quarter of fiscal 2006 is in a range of $0.42 to $0.48 per share, up from $0.40 per share in Q2 of fiscal 2005.

For the full year of fiscal 2006, we are increasing our GAAP earnings per share guidance from a range of $1.86 to $1.96 to a new range of $1.90 to $2.

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

Thank you, Jeff and good morning, everyone.

Earnings for fiscal 2006 first quarter totaled $69.3 million or $0.50 per share versus $64.6 million or $0.46 per share a year ago.

Dollar sales for the first quarter totaled $1.42 billion, compared to $1.27 billion last year, an 11% increase.

Acquisitions added $130 million to the top line in the first quarter.

Volume for the first quarter was 1.06 billion pounds, up 12% from fiscal 2005.

Acquisitions added 14 million pounds to the quarter.

Selling and delivery expenses were 11.1% of sales this year compared with 10.8% last year.

Higher freight costs caused the increase.

We expect the full year to be 11% our marketing investment in the first quarter was $34 million or 2.4% of sales compared with $32 million or 2.5% of sales last year.

We expect the full year rate to be 2.4% of sales.

Administrative and general expense was 4.1% of sales for the quarter, compared with 3.2% last year.

This year's increase was driven by expenses for SFAS 123-R and the unqualified plan settlements due to executive retirements.

We expect the full year to be 3%.

Interest expense for the quarter was $6.2 million this year and $6.8 million last year.

We expect interest expense to be $25 million for the full year.

Total debt at the end of the quarter was $361 million compared with $377 million last year.

Depreciation and amortization for the quarter amounted to $30 million versus $26 million last year.

We expect depreciation and amortization to be around $125 million for the full year.

Our effective tax rate in the first quarter was 30.9% versus 37.1% in fiscal 2005.

The lower tax rate was caused by a discrete tax event that occurred in the first quarter of 2006, relating to the tax treatment of the Medicare subsidy.

We expect the remaining quarters of 2006 to be 34.5% and the full year effective tax rate to be 33.5%.

Capital expenditures for the quarter totaled $25 million, which is the same as last year.

We expect 2006 capital expenditures to be around $125 million.

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

The diluted average number of shares outstanding for the quarter was 139 million.

We purchased 258,000 shares of common stock during the first quarter, at an average price of $32.67.

We have three -- 7.4 million shares remaining to be purchased under the 10 million share authorization.

During the quarter, we processed 2.3 million hogs, compared to 1.9 million last year.

Farmer John caused this year to be higher.

They were part of the entire first quarter this year processing 468,000 heads and only part of last year's result for one month, January, processing 167,000 heads.

The actualized hog cost in the first quarter was $45 per live 100 weight.

This compared with an average live base price of $55 in the same period last year.

We expected live prices to be $43 per live 100 weight in the first quarter.

We anticipate an average market of $44 per live 100 weight for the second quarter compared to $52 last year.

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

Operator?

[ OPERATOR INSTRUCTIONS ] Your first question comes from Farha Aslam.

Hi, good morning.

Hi, Farha.

Congratulations on a great quarter.

Thank you.

But this is still very early in the year and given the commodity costs, the freight costs, the tough turkey environment in the back half and the possibility of just a lot of protein hitting the market this summer, you've raised your guidance for the year by $0.04.

Could you just share with us what are the factors in your business that gives you confidence to do that so early in the year?

Our guidance increase for the year really reflected our performance during the first quarter.

I think our outlook for the remainder of the year really hasn't changed since the Q4 conference call.

We're still anticipating double-digit growth through the second quarter and then a potential slowdown of that more in the single digit range for the remainder of the year, for the reasons that you pointed out.

As we get to the latter part of the year, the comparisons for Jennie-O Turkey store become more difficult and while we certainly expect to cover down at least a good portion of that business and still grow, covering that down and growing it double digits is something we don't have as clear of visibility on at this time for the second half.

Okay, and then just -- could you help me understand how pork works in your business?

Do you think lower hog costs and then pork will benefit grocery products more going into the rest of the year versus how much it hurts refrigerated foods?

I'm just trying to get comfortable with that trade-off.

Can you provide us any guidance with that?

Yes, I guess -- our position would be particularly with -- in position of the new hog contracts, is that there isn't -- there isn't any one set of market conditions, it is for sure highly favorable or for sure highly unfavorable.

It depends on the spread of the primal values versus the live market, it depends on what we're experiencing in terms of the value-added pricing.

Clearly -- it should benefit grocery products.

The transfer in: Whether it's a bacon bit item or Spam luncheon meat, it's favorable to them to have lower input costs, but when it comes out in the wash, if that's a net benefit to the Company that depends on a wider variety of circumstances.

Okay, great.

That's very helpful.

Thank you very much.

Sure.

Your next question comes from Jonathan Feeney.

Good morning, guys.

Congratulations again.

Hi, Jon.

Thanks.

I wanted to dig in a little bit, if I could, about, -- I was surprised to see how well you guys did given, how much supply is building up at retail and -- I guess, can you refresh my memory as to how, a lot of these value-added items performed back when we had a real protein glut back in 2002, was there a lot of pricing pressure on your value-added products?

You had to cut the prices and kind of descale the marketing back then?

And if so, do you think if we saw, probably not ants an environment that bad, but a comparable situation throughout the course of the year here with a lot of chicken and beef around, has anything changed about your value-added portfolio that makes it safer today than it was back then?

This is Mike.

I will take a stab at answering that question and then Jeff can jump in here, too.

I think with the model we have in place, in terms of comparability, in terms of being able to offset a poor-performing division with better performance out of other -- other parts of our business I think will lend great credibility to what we're doing.

I think you've seen that -- you've seen that in this quarter, with the performance -- with the performance out of Jennie-O and the performance out of our specialty division, but the other thing you have to remember, and it gets back to Jeff's earlier answer to Farha, is that we will not be faced with significant hog contract losses that we had in those earlier years.

So, I think that we're better positioned to -- to pick up the negative impact that might be coming out of the pork complex and offset it with higher value-added products and greater contributions out of some of our other divisions.

Okay.

And just, Mike, if I could just follow up -- so, I guess what -- could I summarize what you're saying as not too much has really changed about the nature of value-add versus more commoditized needs and the price gaps that happen, when prices are up and down, but that you have basically the absence of the loss in hog contract is enough that we shouldn't see any kind of profitability move anything like back in '02?

I think that's right.

But, you know, we always have -- I mean, Jon, nothing's changed.

We always have tough competition in our categories.

And I think what we have continued to do, and frankly I think we do a pretty good job of it, we make sure that we have differentiated products that add to our competitive advantage.

Whether that's in food service or whatever, that's what we really strive to do.

I guess all I'd add, John, to the extent that in any protein-based business, you have a certain amount of commodity meat you need to sell, clearly it's going to make a big difference just using turkey numbers, whether that breast meat is moving at $1.15 a pound, or $1.65 or $2 or $3 a pound.

And so we have some susceptibility to those moves.

I will say, though, with our strategy of moving more and more to value-added over time, that the percentage that we're selling commodity has shrunk since 2002 and that's part of our mission going forward, is to continue to make that a smaller and smaller portion of our portfolio.

Okay.

Thank you very much.

Thanks, Jon.

Your next question comes from Bill Chappell.

Good morning.

Congratulations.

Just looking at the grocery margins, I guess I was a little surprised that they were still down on the year-over-year basis.

Is there a time or a -- or a cost out there that we should be focused on where you think that will start to improve on a year-over-year basis?

Well, we -- we had been trending well toward the latter part of last year and absent any other pressures, would have expected continued improvement.

We really -- that's one of the divisions that really bore the brunt of a lot of the freight and energy cost increases and time's going to tell as to whether those are going to be costed or with us over the long haul or whether those are spikes that we just needed to weather for that timeframe and hopefully will go away.

Is it more freight or is it more energy?

It's both.

They were both very significant.

And energy particularly within the plants and freight and warehousing costs were significantly higher.

Are you seeing any signs over the next say six months of some of that easing?

Well, we've seen -- you know, clearly gasoline prices are down.

Diesel hasn't followed them down quite as fast as we'd like to have seen, but they're lower level as than we started the first quarter with.

And then on the energy side, energy is so affected by world events it's harder to tell where that's going to -- where that's going right now.

Okay.

And just making sure -- on the one-time issues, with regards to your original guidance, is the tax benefit the only thing that was different or were there other things that were -- of those three components that were not expected when you originally gave guidance for the quarter.

They were all -- We did not have the final determination two of the items, Bill, so, we weren't -- weren't in a position to quantify exact numbers at the fourth quarter but they were in line where we thought they'd end up being.

So, the FAS 123, that kind of $0.05 is what we should use on a go-forward basis per quarter?

No, no, that's only in the first quarter.

That was really the catch-up in terms of the requirements under the new 123-R requirements which were effective in our first quarter.

Got it.

So, what should we be looking for the next few quarters, it's much lower then?

We've been expensed in options since 2003.

So, the impact on a quarter by quarter basis just flows through the normal results.

Got it.

Got it.

Okay, thanks a lot.

Okay?

Your next question comes from David Nelson.

Good morning.

Hi, David.

Just back to refrigerated, is -- energy and freight were a lot bigger issue than higher beef costs?

Is that the issue in refrigerated, in terms of magnitude?

Oh, definitely.

Okay.

The beef impact in refrigerated is pretty small.

We sell some through Precept.

That's why I was thrown off by that.

Any new news on case-ready?

As we mentioned in our release, we do have a new test customer going forward and we're -- we're anticipating that those results within those tests are going to be as favorable as they've been with our Super Target customer and we're excited about our ability to scale up in that business.

Okay.

Any -- anything -- Farmer John obviously contributed to higher hog slaughter numbers.

Any update on being able to lever that geographic market area with some of your Hispanic products?

Farmer John, the -- the main -- that is certainly one of the market segments we're going to look at, but the main mission at Farmer John is to take an entity, as we bought it with only 50% value-added sales, probably about where Hormel was 10 years ago and start converting that portfolio to the 70 and 80% numbers that we enjoy in our Hormel refrigerated group.

We're looking at all Avenues to be able to grow the product line.

Part of the Hispanic focus, part of it is we have a greater else in Northern California and a couple of pac-northwest accounts and we anticipate using our new R&D expansion here in Austin to help leverage some new product development for that group, as well as to enable them to grow that value-added business.

Okay.

And then lastly, specialty, I guess the magnitude of the impact of Mark-Lynn that was a pleasant surprise.

Just thinking about that picture in longer term.

How much more is that that you can layer into that business to synergize your distribution?

We look at that as an opportunity area as we would our other operating segments.

We were pleased to see operating profits in the mid-6% range and we got want to get that hitting on every quarter cycle, frankly before we look that on in that segment, but we do believe this wasn't just a one-time blip in terms of this quarter's results.

And Mark-Lynn contributed and that unit now reports under our kind of Diamond Crystal sub unit.

All three components of specialty foods registered, $1 million-plus operating profit gains during the quarter, so, it's not just a Mark-Lynn effect.

Great.

Thank you very much.

Yep.

Your next question comes from Tim Ramey.

Good morning, congratulations again.

Jeff, that -- almost 15% margin in turkeys, did you ever think you would see that?

Even on a one quarter basis?

Up from whatever it was, 3 or 4% a couple of years ago?

I'm -- that's a pretty extraordinary quarter.

Though really in Turkey numbers you do have to watch the quarters.

I mean Q4 for us -- I mean Q1 for us is November, December, January.

November is Thanksgiving month, you have your fresh whole bird sales, which are usually, you know, good contributors to operating margins during the quarter.

The 3% number if I remember correctly was a third quarter number and that's our worst quarter typically.

So, no question, they're in the range of results, nearly 15% numbers are very high, but we always expect Q1 to be a pretty solid contributor, the highest for Jennie-O on the year.

I would guess you wouldn't want to comment specifically on -- on butterball or the availability thereof, but can you comment on whether you feel like you can do acquisitions in the turkey area?

Or are you getting to the point where you're getting so big that you might have anti-trust issues?

I don't want to comment specifically on any deal.

I do believe in all of our operating segments, we want to be a major competitor, one or two share in any of the segments and we look to grow them all through innovation, through acquisitions and through organic growth.

I don't know that there's any that we've conceded we can't grow through acquisitions.

That's about the best I can give you.

Okay.

Thanks much.

Your next question comes from John McMillin.

Good morning, Jeff, Mike.

Good morning.

Hi, John.

Well done.

Just to kind of get into the turkey a little bit -- I guess thigh meat is held up much better than these leg quarter chicken prices that everybody watched.

I know there are two distinct businesses, but most of thigh meat is exported, right?

That's correct.

Why would you guess that that price has held up so much better?

And I guess it's only 10% from its highs, is that right?

I think that about right.

Our understanding would be that they're really -- although clearly they're impacted in the long run by protein supplies, the thigh meat items are not as interchangeable, where we have more over lap between the items would be mechanically-separated turkey versus mechanically-separated chicken.

We've seen that mark market pull back significantly from a year ago, and those are interchangeable usages.

But thigh meat -- demand continues to be strong.

We haven't had any blockages of our export markets and at least at today's production levels, we seem to be able to support this price.

And what kind of -- as you build your rest-of-the-year model, what kind of turkey prices are you building into the model?

I don't think we got much north, if at all of, $2 breast meat in the model this year.

Last year had it spiking up to $3.

And the same for thigh meat, you just have that around $0.90 --

Yeah -- $0.90 might even be a little higher than what we anticipate at this point.

So, $0.80 to $0.90.

And -- and just, Mike, I guess as I kind of worked it out, you did about a 3% in total volume gains.

Is that right?

Yes, that's right.

And -- and the bulk of that, obviously, came in your -- away from your grocery -- did you give an internal volume number for your grocery business?

We did.

Grocery was up 5%, which was really the same as last year.

And there's no pricing acquisitions, nothing? 5 is the volume, as well?

5 is the volume.

Correct.

Including the acquisitions.

What are the acquisitions?

Well, acquisitions would bring you back to about flat with last year.

That was Manny's -- the ethnic -- the tortilla items.

Right.

I think it was plus 2% without Manny's, right?

Great, okay, thanks a lot.

Yep.

Your next question comes from George Askew.

Yes, good morning.

Nice quarter.

Hi, George, thank you.

A couple of questions here, Jennie-O Turkey store, volume was down as you planned reductions in the harvest there.

From a competitive standpoint, have you seen similar behavior from your competitors?

Well, two things on that, George.

First of all, they were down on a comparability basis.

Last year -- there had been a plant fire in the industry in late '04 that knocked the plant that was within our geographic region out of the market and they looked for a solution -- we took on a number of the birds that were then available from growers within the region.

We saw markets as being fairly favorable last year and we had processing availability so we did that.

That group has now re-opened the plant in Marshall, Minnesota, so, they're up and operating.

We knew we wouldn't have the birds on a pure slaughter basis for this year so, that really explains our numbers more.

Then I point you to the 9% growth in value-added volume in Jennie-O, which is the key number we look at in that segment.

As for everyone else, we are, as we called out in the release, we have seen up numbers lately in excess and pole placements.

There are a couple of entities out there looking to ramp up.

We're not really one of them, but we will just have to monitor what it does to the marketplace over time.

Okay.

Good.

Can you quantify for us what the overall impact from higher energy and freight costs were for the Company in the quarter?

It was about $15 million in Q1.

Okay.

And when we look at the grocery products margins, do you think they could be up fiscal '06 versus '05?

For the year?

Yes, for the full year.

Certainly, that's what we had anticipated going into the year.

A lot does depend on the continuing trends of the costs we just talked about, but if we can get some moderation there and can continue to grow the top line as we anticipate and have good success with items like microwave and ethnic, yeah, that would be our expectation.

And lastly, Mike, the -- I know you have been expensing stock options for several years now.

What was the year-ago quarterly stock option expense, recognizing that, I guess FAS 123 rolls in this quarter, but you had some expense a year ago.

$0.01, George.

Okay, perfect, thank you.

Thanks, George.

Your next question comes from Eric Larson.

Congratulations.

Thanks, Eric, good morning.

A couple of questions.

First one is for Mike.

Mike, last year you had a $5 million benefit in your hog contracts.

What is -- do you have the number for the current quarter?

$1 million.

$1 million.

Okay.

So, not great.

And then -- I know that we're hammering turkeys to death here, but you alluded to the increases in pulp numbers, et cetera, in turkeys and we sea some of the USDA data.

What would be some of the numbers that you're kind of seeing poles and excess?

Well, we've been seeing in the past couple of weeks, there were weeks that were up double-digits.

That could be related to the opening of the plant I mentioned to you.

There is a second plant -- Dakota turkeys that opened here early this year.

What our best guess and what we're hearing out of USDA for numbers is more in the 4 to 5% range.

Okay.

All right.

And then, again, back to -- just a follow-up on the stock option expense question.

Mike, do you expect similar EPS impact for the remaining -- per quarter for the remaining nine months for the current fiscal year?

The impact in the first quarter is higher but the rest of the year will be comparable to last year.

So, no year-over-year negative impact necessarily?

Not for the second, third and fourth quarters.

Got you.

Okay, thank you, everyone.

Your next question comes from Leonard Teitelbaum.

Good morning.

Good morning.

Just to make sure I'm interpreting this right, Mike.

You said you'd been looking for $43 in the quarter, sorry, let me get back to the transcript, you'd been looking for hog prices, $2 less in the quarter than they actually turned out to be?

That's correct.

Okay.

Now, to get to that -- was that a market guess?

Or was that -- and what are you looking forward for this quarter?

What is your anticipation for this quarter?

Let me start with that.

We think it's going to be $44 for this quarter.

Now, remind me again, are you 50% or so on the new contract basis?

What's the percentage of hogs you're buying on the new contract versus the old?

About 60%.

60?

So, it's been fairly flat, has it, for the last few quarters?

Yes, that is correct.

All right.

Now, I would have thought now -- given the fact that the spreads are starting to get jockeyed all over the place as we look at the slaughters.

Given your new contracts, that's immaterial to you, correct?

You're looking at it freezing a percentage of costs to protect your gross margin.

Is that -- is that pretty much how we should look at this?

Well, it's based off of the USDA cut-out values for the hogs.

Now, have you been selling at or above the USDA values?

That's a tough question because, yes we have and no we haven't.

That seems to cover it.

And it depends on the -- on what you're doing, Lenny, because if you're selling -- if you're selling excess raw materials out the door, you're probably going to be at or slightly less.

It just depends on what happens.

Well, obviously what I was trying to do is trying to figure out if we just -- if we project through our cost of hogs and for our cost of goods sold, there's got to be some advantage it would seem to me.

Under your new contract basis.

And I think, if I can judge from the tenor of the calls on here, not too many of us were off on the hog side of the business.

We felt pretty good about it.

I just want to know that we can keep that streak going.

So, from a methodology point of view, I guess we have to take your 44 and see how it stacks up to actual prices paid.

That's correct.

Is that the best way to do it?

That is the best way to do it.

And remember, and remember, with this -- now with 60% under the new contracts, we don't have the exposure to these significant contract losses that we've had in -- in 2003/2004.

Right.

It's basically to the point where this quarter -- it's $1 million positive, which in my estimation is basically rounding.

No question.

I think it's a great move and I understand some of the difficulties in trying to get it even larger than 60%, because I think it gives you a significant advantage over your competition.

I'm in complete agreement with that, but it's hard to shift my focus from pork to turkey.

I think it's all experience.

We will work hard on it.

Diane, do you have any questions?

No, I think I'm all set.

Okay.

Thank you very much, Mike.

Appreciate it.

Your next question comes from Tim Ramey.

Just a follow-up, on -- Mike, if you can give us a moment on the change in the accounting methodology.

What was the rationale there?

The accounting methodology -- on 123R?

No, FIFO to LIFO.

Oh.

That was basically just really a change to get to where we were better able to compare ourselves to our competition.

We were one of the last people that were still on LIFO and -- and we made a convincing argument for an accounting firm that it really was in our best interest to move off of LIFO onto FIFO.

And we were kind a hybrid situation.

We were -- in some parts of our businesses, we were on FIFO and in odd other parts on LIFO.

We now have everything under that method of inventory.

Okay, thank you.

Okay?

We have no further questions at this time.

Okay.

Thank you, this is Jeff again.

I just wanted to thank you all for participating on the call and conclude by reinforcing that we obviously believe that we had a solid first quarter that gets us off to a good start in 2006.

As we pointed out in the call, for the rest of the year, we do anticipate challenges from higher distribution and energy costs and we are mindful of the difficult comparisons for our turkey segment in the second half of the year.

Nonetheless, Hormel Foods is executing on its strategies and we continue to see opportunities to continue to grow our business.

Thanks very much for your time this morning.

This concludes today's conference call.

You may now disconnect.