荷美爾 (HRL) 2006 Q2 法說會逐字稿

Good morning, my name is Regina and I will be your conference Operator today.

At this time, I would like to welcome everyone to the Hormel Foods second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question-and-answer session. [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.

Welcome to the Hormel Foods conference call for the second quarter of fiscal 2006.

We released our results this morning before the market opened around 6:30 a.m.

Central time.

If you did not receive a copy of the release you can find it on the Web site 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 was on CNBC's Squawk Box this morning and made a few comments about our outstanding results in the quarter.

I hope many of you had a chance to see him.

Jeff will provide a review of the operating results and an outlook for the full-year and third quarter 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, May 25, 2006.

The dial-in number is 800-642-1687 and the access code is 9267274.

It will be posted to our Web site 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.

Actual results may differ materially from those 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 Pages 31 through 34 of the 2005 Annual Report for a complete listing.

Now I'll turn the call over to Jeff.

Good morning, everyone.

We feel that we delivered excellent results in the second quarter reporting earnings per share of $0.48 compared to $0.40 last year, despite the headwinds of a difficult protein environment and significantly higher energy costs.

Our ability to deliver a 20% increase in earnings in light of these conditions was accomplished by our continued focus on growing our value-added product lines and by achieving improved operating efficiencies in our plants and supply chain areas.

Also, our strategy to create a better balance and more diversified business has strengthened our business model as well.

The improved results were balanced across our business.

Top line increases were reported in all five segments, and operating profit improvement was reported in four out of five segments.

I will talk about the results of each segment in more detail in a few minutes.

First, I would like to talk about the Value Fresh acquisition that was completed in the second quarter.

The purchase price was approximately $78 million and annual sales of this entity are $68 million.

Value Fresh has the leading market share position in the canned ready-to-eat chicken category.

This business will complement our existing canned ready-to-eat line of chicken, ham and turkey products sold under the Hormel brand by generating synergies in sales, marketing, logistics, purchasing and manufacturing.

We are very excited about the growth opportunities in this healthy, convenient and on trend category.

Our early integration activity is going well and we expect the synergies to accelerate over the next several quarters.

Now for the segment results.

Our Grocery Product segment reported improved results across all three key measures.

Operating profit was up 8%, net sales were up 5% and volume was up 12%.

Excluding acquisition, sales were still up 4% and volume was up 3%.

Our microwave tray line of products continues to deliver impressive growth.

The new production line that was installed in our Rochelle, Illinois plant is now operational and is helping to meet our demand.

We are optimistic that this item has a lot of room for growth since household penetration is only 10%.

We have added four new varieties to the line and now have a total of 19.

Other growth areas in the quarter were Hormel bacon bits, Hormel chili, the SPAM family of products and the Herdez line of authentic Mexican products.

Raw material costs were mixed for Grocery Products.

While the segment benefits from lower pork costs for items like SPAM and bacon bits, higher imported beef costs offset a portion of that gain.

Refrigerated Foods reported 25% higher operating profit.

A combination of lower pork input costs and growth in value-added items were the key drivers.

Meat products, which is our retail business unit within Refrigerated Foods reported an 8% increase in value-added volume growth, net of acquisitions, and our food service group also reported 6% growth.

Our higher-level value-added items benefited from lower pork input costs because of their pricing structure does not change with these input costs.

Key retail categories that helped improve operating profit included Lloyd's barbecued meats, Hormel hams, sliced meat and deli items.

Food service pizza toppings and premium bacon items, including Applewood smoked and honey cured bacon, also contributed to profitability.

Our case-ready products sold through the Precept joint venture were up 75% during the quarter.

This growth was driven by a combination of improved business from existing customers and new business.

The national rollout of Hormel Natural Choice deli sandwich meat is going extremely well.

Our advertising support just started now that we have distribution throughout the United States and we see several future applications of the Natural Choice brand going forward.

We continue to work on new product development that focuses on the consumer's two most important criteria: Taste and convenience.

We are excited about projects that are in the pipeline that deliver against these two very important attributes.

As the lower tier value-added categories become more competitive, it is our strategy to continue pioneering innovative products that offer points of difference.

Jenny-O Turkey Store reported low operating profits primarily from higher feed and energy cost in the live production area.

Last year benefited from lower than normal feed costs.

We expect feed costs to be higher than last year for the second half as well.

Although overall, volume for the segment was down 4%, Jenny-O Turkey stores value-added volume grew 12% which drove net sales dollars up 2%, and although our operating profit margins weren't as high as last year they were still very good at 10.5%.

As we grow our value-added portfolio, our profitability will become more consistent.

We are supporting our value-added strategy through the launch of new products like the four flavor varieties of our sliced smoked turkey breast products and also by growing existing value-added products like own oven-ready items, turkey burgers and rotisserie products.

We continue to expect a higher supply of turkey coming to the market over the next few quarters compared to last year.

Overall, currently the industry is in very good shape from a macro level.

The April freezer report indicated 2% fewer pounds in the freezer compared to last year for turkey.

Turkey breast meat and whole bird markets are currently higher than a year ago but thigh meat and some of the other commodity turkey components are lower.

Specialty Foods has delivered impressive top and bottom line results in the first half of 2006 and we expect this level of performance to continue.

The key drivers have been core packet sales of sugar substitutes, sugar, and liquid portions from the Diamond Crystal brand operating segment, and also canned meat and ingredient items sold through our specialty products operating segment have contributed to growth.

Last year's Mark-Lynn Foods acquisition strengthened our portfolio in Specialty Foods and provided us with opportunities to gain new business.

The all other segment operating profit was driven by our international group with the SPAM family of products providing the greatest contribution to profitability and sales growth.

Our China operations continue to report improved results in the quarter as well.

Given our expectations of continued success in growing our value-added portfolio and an anticipated benefit from the Value Fresh acquisition, we are increasing our GAAP diluted earnings per share guidance for the full-year from a range of $1.90 to $2 to a new range of $1.94 to $2.04.

Our GAAP diluted earnings guidance for the third quarter is in a range of $0.39 to $0.45 per share up from $0.37 per share in the third quarter of fiscal 2005.

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

Thank you, Jeff, and good morning everyone.

Earnings for the fiscal 2006 second quarter totaled $67.3 million, or $0.48 per share compared to $56 million, or $0.40 per share a year ago, up 40%.

Dollar sales for the second quarter totaled 1.37 billion compared to 1.31 billion last year, a 4% increase.

Acquisitions added $27 million to the top line in the second quarter.

Volume for the second quarter was 1.04 billion pounds, up 4% from fiscal 2005.

Acquisitions added 27 million pounds to the quarter.

Selling and delivery expenses in the second quarter were 11.4 % of sales this year compared with 10.6% last year.

Higher freight costs were the biggest contributors to this increase.

We expect the full-year to be 11%.

Our marketing investment in the second quarter was $32 million, or 2.4% of sales compared with $29 million, or 2.2% of sales last year.

We expect the full-year rate to be 2.2% of sales.

Administrative and general expense was 3% of sales for the quarter compared with 3.1% last year.

We expect the full-year to be 3.1%.

Interest expense for quarter was $6.4 million this year compared to 6.7 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 $337 million last year.

Depreciation and amortization for the quarter amounted to $30 million which was the same as last year.

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

Our effective tax rate in the second quarter was 33.75% versus 37.25% in fiscal 2005.

The 2006 quarter was lower than the 34.5% guidance we provided last quarter primarily because of the benefit received from a prior year audit adjustment.

We expect the remaining quarters of 2006 to be 35% and the full-year effective rate to be 34%.

Capital expenditures for the quarter totaled $38 million compared to $25 million last year.

We expect 2006 capital expenditures to be around $130 million.

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

The diluted weighted average number of shares for the quarter was 140 million shares.

We purchased 130,000 shares of common stock during the second quarter at an average price of $32.99.

We have 7.2 million shares remaining to be purchased from the 10 million share authorization.

We processed 2.3 million hogs in the quarter compared with 2.2 last year.

The actual live cost in the second quarter for our hogs was $43 per live hundredweight.

This compared with an average live base price of $52 in the same period last year.

We expected live prices to be $44 per live hundredweight in the second quarter.

We anticipate an average $49 for live hundredweight for the third quarter compared to $53 last year.

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

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

Your first question comes from Pablo Zuanic.

Hi, Good morning.

This is actually [inaudible] and I'm going to ask a question on Pablo's behalf.

Good morning.

Regarding turkey, what are normalized margins for that business and as a follow-up, also, should we expect margins to continue to fall in that for the remainder of the year?

We look at normalized margins of Jenny-O Turkey Store being in the 8 to 9% range so obviously we're still a little bit above those at this time frame.

The business is somewhat seasonal as well so you can't necessarily look at any given quarter against that but on an annualized basis 8 to 9 is correct.

We're still in a fairly cautionary mode in terms of turkey going forward.

We had outstanding year last year and on a year-over-year basis just as we did in the second quarter, we would expect to see earnings decline in the quarters three and four, but still, very good operating results from, against what our long-term expectations are against that segment.

Great.

Another question just on the Grocery side, especially for Hormel chili.

We just wondered if you could comment on the competitive environment there in terms of what you're seeing from, say, companies like Campbell's or also private label in terms of pricing and market share trends?

Well, both Campbell's and Bush entered the category.

It's been about two years ago by now.

They're both formidable competitors and they engage in a lot of activity both from the advertising standpoint and trade promotions standpoint.

That has stimulated category growth and so in some ways that's been very positive.

After an initial hit on our market shares, we're back at our market share level that we were before they entered the category and so to the extent they've carved out a niche within the category, they've carved out the expense of someone else.

Great.

And in terms of pricing, is private label being aggressive in lowering pricing or can you comment on that?

Private label in general I guess is a general trend I would say that the grocery trade seems to be upgrading their private label offerings and not necessarily being as price oriented with those offerings, but, you know, we see private label at kind of levels of five to ten, maybe as high as 15% shares within our Grocery category so it's significant but in no case is it a dominant force against us.

Great.

Thank you.

Yes.

Your next question comes from Jonathan Feeney.

Good morning, guys.

Hi, John.

Good job in a tough environment.

First question, Jeff, you mentioned specifically the lower end of value-added within refrigerated foods getting more competitive.

Can you give us some examples and maybe just give us a general sense of how that's affecting, you know, the price mix in that business?

Sure.

I guess by lower end, I'm referring to categories that have been around a while, items that there are a lot of different processors competing against a typical ham mid-tier product, raw bacon is probably in that realm, and then that would effect both our retail and food service side of the business.

What we try to do then is just continue to leap fog and innovate so it becomes pre-cooked bacon, it becomes flavored bacon, it becomes ham as part of a fully-cooked entree under the Hormel brand so that's really where our focus is and an ability to continue to maintain margins in those areas.

You used to publish and forgive me, maybe you still do publish this nice pyramid that shows, you know, four times, two times, one-time and that's the operating margin as you go up that value-added ladder.

Yes.

Are there any tweaks to that as kind of fat middle part of the pyramid, lower value-added I guess as operating margin, do you think that's when, you know, new competitive entry kind of shakes out, you know?

Is that going to settle in lower than it is today do you think?

Well the value-added that we published in the past really focused on fresh pork itself.

I mean it took it from a primal pork to value adding in terms of boning it out to adding some sort of flavoring to it and on up the ladder, and indeed, there are some great leverages as you move up in those categories.

The same kind of philosophy holds true in terms of what we're calling an upper tier or lower tier value-added product and, clearly, as we innovate an item, we're very cognizant of what we feel the consumer, how they're going to value this item.

What can we price it at, does that build in an adequate margin for the retailer, does that build in an adequate margin for us?

And at all times we're looking to ultimately move up our overall operating margins with our innovative new products.

We have an expectation of improving that operating margin with anything we introduce.

Would you include the microwave tray bacon products?

You're showing such nice growth there but on the other hand that's the area where it seems competitors are most active.

Is that one of the areas you're referring to that's getting more difficult to, you know, hold margin and more competitive?

It's kind of a hybrid.

I mean I think it's still fairly early in it's growth cycle and so clearly a lot of players are putting a lot of capital against pre-cooked bacon.

From a consumer standpoint, that is a great enhancement in many cases over raw bacon and we think more and more of the category will migrate over to pre-cooked, but it's an area where we can attain better margins than raw but not as high of a margin differential as we can in a category that we have a stronger point of difference.

Thanks.

And finally, you know, you mentioned higher imported beef costs.

I mean this can't surprise me a little bit given, you know, what beef trends are.

Can you just walk us through, you know, if you expect any kind of relief from that, you know, higher costs and why it needs to be imported beef, you know, that you're working with?

Well, the use of imported beef is something we've done over a long period of time and our modeling would show that it's been beneficial over a long period of time.

They've had some unique challenges in South America which is our main source for beef, kind of on the animal husbandry front, and we don't have a very good outlook right now as to when those will ease.

We faced the same issues last quarter and we seem to be confronting them still right now, but we're still comfortable that in the long run that's a better place to rely on it for supply of those items.

Okay.

Thank you very much.

Thanks, John.

Your next question comes from John McMillin.

Good morning, everybody.

Good morning, John.

Jeff, I don't think you're paid too much!

Maybe everyone else in the food industry is, but I don't think you guys have [inaudible] real value and you handled the question well!

Thank you.

See how you do with this one.

Just in terms of the higher guidance that you gave, am I kind of right to say a lot of it is just that the, you know, the Jenny-O downturn versus the year ago ordinary numbers, it's not going to be down as much as maybe you feared going into the year?

Is it that simple?

I'd say no.

I think our best guess right now is that the Jenny-O trend is about what we expected.

I think what we have enjoyed is even better sales in our value-added areas throughout the Company.

We've had some of our more unsung divisions really deliver some outstanding results which is Specialty Foods and Hormel international and we will have the benefit of Value Fresh going forward and I think probably we've had even greater benefits from last year's acquisitions than we might have baked in the numbers when we first looked at the year back in November.

So the 192 breast meat or whatever it is now was basically in your plan?

That's probably a little higher than what we would have said when we first set the plan up but thigh meat is lower.

Right now frozen thigh meat is $0.70.

They're kind of a balance.

Just in terms of the answer to the last question, I know Campbell came into chili and, you know, the category is expanded and you've done pretty well holding your share but it's wound up hurting some other canned meat areas like Dinty Moore and I think what was noticeable in this quarter was just how the overall business improved for the first time in a while and Dinty Moore came back.

Is that a correct statement and is it sustainable?

I think the added SKUs within chili did hurt some of the canned meat areas, particularly in the East where the segments are particularly large on the shelf.

Dinty Moore, clearly, we were suffering a year ago or a year and a half ago through major declines in that category.

Dinty Moore actually was down about 2% for the quarter, a couple of quarters before that it's been up slightly.

So we do feel like we stabilized it.

The other thing we're seeing is consumers migrating towards more convenient items.

The Dinty Moore beef stew item is the leading selling item in the Hormel microwave tray line and so it's not that consumers don't like stew anymore, but I think some of them are now looking to this more convenient form.

Good.

Okay.

Thanks a lot.

Thanks, John.

Your next question comes from David Nelson.

Good morning and congratulations.

Well thank you, David.

First of all, an accounting question maybe for Mike.

Net interest in investment income was lower by 2.4 million, higher returns on the Rabbi Trust.

Is that expected to continue?

Well, if you look to what's happened with the market the last month, I would say the answer to that, Dave, is no.

Okay.

But, you know, and that fluctuates clearly with how the market performs.

You know, last quarter, last quarter we took a hit of $2.5 million.

This quarter we had a benefit.

Next quarter, as I sit here today it's probably going to be a negative for the third quarter.

Got you.

Thank you.

How are you managing Lloyd's differently than previous owners might have?

Lloyd's is really, we were just up there actually on Monday.

Lloyd's has been a wonderful story for us.

We're growing the business on the top side.

It's an excellent complement to the refrigerated entree line that Hormel already has to offer so when we go into the buyer and when we set features with the retailer, it's just a natural fit in that regard and then there's just been tremendous cost side advantages.

We have nowhere near the G&A and sales costs that General Mills had against that unit as a standalone entity, we've been able to fold those into our parent Company.

All of the, General Mills had to buy all of the meat items on the outside and we've been able to, those contracts have spun off, replaced that with our own supply and that's improved our operating margin significantly in that business.

Makes sense.

Talk about new business at Precept.

Can you talk about what you have in terms of new customers and whether the base for case-ready is broadening?

Well, we're still taking it slow.

I mean our major customer that we've had over the past couple of years has been Super Target and their year-over-year sales are really excellent, they're very happy with our program there.

The new customer that we eluded to last quarter and that we continue to be in test market with is Hy-Vee in the upper Midwest area and they're very happy with it and our indications right now is that we would eventually look to expand that program throughout their chain as well.

So they're very labor intensive, they're of significant importance to the retailer, their meat section and so we will always be looking at kind of incrementally growing that as opposed to all of a sudden announcing say 12 new customers in one fell swoop.

I guess lastly on your new Natural product you were asked about that on Squawk Box this morning about, you know, whether it's going to Whole Foods or not, but isn't the whole point that natural and organic products are going mainstream?

I guess my question is have you had a lot of interest from someone like Wal-Mart who's pushing organic pretty hard on these type of products?

Absolutely.

I mean we're up to a little over 75% distribution throughout the country and it's most of the mainstream retailers are the ones really excited about the product.

And a lot of these entities, Wal-Mart included, I mean they have a special organic program they're looking at well now, natural program that we fit into well, there's a lot of other retailers that these days have a special page in their fliers just for natural-based items and we've gotten a lot of calls from consumers that are just thankful that a major manufacturer that they know and trust is introducing this type of item and they no longer have to go to a health food store to get this kind of a natural-based product.

Great.

Thank you very much.

Thanks, David.

Your next question comes from Bill Chappell.

Good morning.

Congratulations.

I guess first on the, you commented that the food service sales were up about 6% year-over-year.

That seems to have maybe moderated from past the quarters.

Are we back to kind of normal levels?

Is that due to just timing of new products or we have large numbers?

How do you look at that business on a go forward basis?

Well, food service was up 7% in the quarter, it would have been 6% not counting, they have a little bit of Lloyd's business that came in through that acquisition.

We're very happy with food service still moving between a 5 and 10% growth range so that's very good numbers.

The macro story within food service kind of seems to depend.

They've had a pretty good run lately though there's a little bit of nervousness out there in terms of what fuel costs may do to restaurant patronage this Summer, but our model in food service has been very direct to the operator, take labor out of the system and we've had a very sustained record of being able to generate growth that's at least double what the industry has been able to grow at.

Do you see any major, I guess, product launches in the back half of this year that could drive it higher?

Within food service?

Yeah.

Food service, you know, there's nothing of major significance new coming out with the exception of that there's a food service version of the Natural Choice line and that was introduced at the National Restaurant show here just this last weekend.

The food service build on new products, though, is a lot slower than retail and we, you look to build an item over three, four, five years as opposed to expecting a real big splash out the gate.

We're still enjoying great growth out of Austin Blues and our Cafe H line of ethnic items and so that's ultimately what contributes to growth in food service.

Great.

And just looking to the margins in both Specialty food and all others continue to confound my modeling abilities because the margins just keep going higher and higher.

I mean are we at a level that's sustainable for those businesses or can we even go higher from these levels?

We're comfortable with where specialty is at this point, near the 8%, and that would probably be our best guess long-term and then once we settle into a range, you know, absent major maco condition effects then we look for the units to kind of deliver maybe 25 to 30 basis point improvement each year.

All other Hormel international has a fairly major impact both from fresh pork sales and from SPAM luncheon meat and those were both very positive during the quarter, so the 15.5 there is probably something that's not a sustainable level but we don't see an immediate downturn against that number, but we would expect that segment to be more at the 8 to 10% range in the long-term.

And that business, is there any swing factor from currency?

Very little.

Okay.

Great.

Thanks a lot.

You bet.

Your next question comes from Tim Ramey.

Good morning.

Congratulations.

Thank you, Tim.

Where would we find your case-ready products now?

The 75% growth implies, you know, significant new customer development [inaudible].

Thanks.

Well, the base is still quite low and really there are two major drivers.

The Hy-Vee test is one driver and then Super Target sales within their own chain.

We've made some modifications to both the packaging and the brand.

They stepped up the advertising in store to support that product line and they've enjoyed very significant sales growth year-over-year in that area as well.

So really, it's not so much new customers as well as much as new penetration?

Correct.

Okay.

That sounds good.

And you talked briefly about food service and gas prices, but, you know, if you had to think about food service versus retail for the next six months, which is going to be the driver of growth, you know, I know you have a lot of innovation in the food service area.

Both.

I mean, it's really that's going to be true at Hormel within the Refrigerated Foods group and it's true at Jenny-O Turkey Store as well.

I look at the value-added area up in the turkey business and they were all up 8 to 12% during the quarter so each unit has the strategy that depends on bringing innovative new products and penetrating further with the products we have and they seem to be having good momentum at succeeding at those quests.

Great.

Thanks, Jeff.

Thanks.

Your next question comes from Farha Aslam.

Hi, good morning.

Hello, Farha.

Could you just, congratulations on a great quarter.

Could you segment what you would classify in your Grocery Products in your Refrigerated Foods division as basic what you'd say mid-tier value-added and what you'd put as what percentage would be high value-added items?

Well, I'll do the best I can.

Within Grocery I'd say they're all higher.

I mean it's really differentiated branded product that can hold a price proposition that you don't have, a lot of different competitors bringing the same type of item and proposition to the consumer, so it's really more on the meat side and there, I guess, the best example that I can give you that are big scale examples in both retail and food service would be ham and bacon.

Those categories are large and there are a lot of different competitors that have different items in those segments.

And you've got a lot of success in adding value to turkey.

Could you give us examples of how you improved that mix over this last quarter?

Sure.

A couple of the items that are really doing well for Jenny-O Turkey Store, one is rotisserie turkey, rotisserie chicken is a gigantic category, over $1 billion and Jenny-O set out three or four years ago to carve out a niche in that regard and we continue to get major retailers taking on that program and it seems to be doing very well for them.

In many cases, what it creates is actually incremental sales for the retailer.

It's another offering for that consumer who's looking for a quick dinner idea to, they come to that case and now they see there's turkey as well as chicken and so instead of stealing it from chicken, it actually adds sales.

Another area that's doing well for Jenny-O Turkey Store is the oven- ready line of products.

Obviously, the hallmark product in that area is the whole bird item that's more seasonal, but we did add bone-in and boneless breast items and there are a number of retailers that have taken those on and those are doing quite well, too.

Great.

Thank you very much.

Thanks, Farha.

Your next question comes from Oliver Wood.

Great.

Thanks a lot.

Can you tell me a little bit about your pipeline for acquisitions and also help us understand whether the current fiscal protein environment has any sort of impact on the flow of potential deals?

Well, I mean, we've been, I can better answer the question I guess looking backwards than looking forward.

We've really have kind of had a policy of not wanting to talk about what we're looking at in any given moment going forward.

We've been quite active, I guess, from our perspective going backwards.

We've made ten deals over the past five years totaling over $1 billion including five just within maybe the last 14 months.

We look for deals within food categories that we know something about that we have some experience and we can bring some expertise to the party.

We've tended to do deals in what a lot of folks would look at as maybe the smaller range but 50 million to $350 million in size.

We generated $350 million of positive cash flow at this point each year and so that's very comfortable range for us and so that's probably about the best guidance I can give you in terms of our acquisition philosophy and we continue to look at things as they come our way.

Okay.

My second question is regarding Jenny-O market share.

Sounds like Jenny-O processed fewer birds in the quarter but at the same time more supplies coming to market.

If you could just kind of reconcile that and give us a sense of what your strategy is there?

Well, there are a couple things going on there.

In terms of market share, we really are looking at growing the aggregate tonnage through Jenny-O Turkey Store at only a 1 or 2% clip a year and our expectation would be what's value-added growing 5 to 10% that we're going to continue to eat into the commodity meat supplies that we have within that system.

Now, there's kind of a one-time phenomenon going on right now in terms of the comparative numbers.

Last year at this time there was a turkey processor in our region that had burned down in kind of late 2004 and so we took on a lot of those birds during 2005.

We knew the markets were looking decent and so we could afford to do that, and those now have gone back and they've reopened the plant in another region so we don't have those in our system.

So, you'll continue to see this year the total volume at Jenny-O Turkey Store being somewhat down but the number we really focus on is that value-added growth number.

Going back to the previous question, when you gave the 8 to 9% operating margin range for Jenny-O, is that kind of based on the current mix of business or is it looking forward?

Well, it's an 8 to 9% kind of normalized to mid-markets of grain and mid-markets commodity and then when we test the group to grow that 25 to 30 basis points a year in terms of improving by creating innovative value-added items.

Great.

Thanks a lot.

Your next question comes from Homer [inaudible].

Good morning and congratulations.

Thank you, Homer.

Just one quick question.

Could you tell us how your hog contracts did in the quarter?

Our hog contracts for the quarter generated a positive benefit of $1 million and last year for the same quarter they generated a positive benefit of $4 million.

Okay.

Thank you.

There are no further questions at this time.

Okay.

I have a brief statement to make before we conclude the call.

Hormel Foods delivered very strong first half results with sales up 8% and earnings up 13%.

Since the beginning of the year, we have increased our full-year guidance by $0.08 per share, or 4% due to the solid performance from all our segments.

In an environment where many of our peers have struggled, the strength of our business model has separated us from the group.

Hormel Foods will continue to execute on its strategies and we are very optimistic about the long-term opportunities within our business.

Thank you all for your time this morning.

Thank you for participating in today's Hormel Foods second quarter earnings conference call.

You may now disconnect.