荷美爾 (HRL) 2006 Q3 法說會逐字稿

Good morning.

My name is Deborah, and I will be your conference operator 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 session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Halvin, you may begin your conference.

Good morning.

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

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

Central Time.

If you have not received 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 fourth quarter of 2006.

Then Mike will provide detailed financial results for the quarter.

We'll then open up the call for questions.

An audio replay of this call will be available beginning at 10:30 a.m.

Central Time today August 24, 2006.

The dial-in number is 800-642-1687.

The access code is 4580383.

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.

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 costs, 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 will turn the call over to Jeff.

Good morning, everyone.

We are pleased to report good results for the third quarter with earnings per share reaching $0.43, compared to $0.37 last year.

This represents a 16% increase.

Our strategy to build bigger, stronger brands, and grow our value-added portfolio continued to allow us to deliver solid results in the quarter.

Our growth in operating profit was driven this quarter by our Grocery Products, Specialty Foods, and All Other segments.

While we did achieve top line growth across all five segments, the Refrigerated Foods and Jennie-O Turkey Store operating profit results were less than last year.

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

First I want to take a moment to talk about our emphasis in bringing innovation to our Retail and Foodservice customers and consumers.

One of Hormel's key strategies over the years has been to convert commodity meat to value-added products.

We have been very successful at this with over 75% of our sales coming from value-added products.

More recently we have stepped up our activity in the area of new product development.

Indeed in fiscal 2006 we are on pace to generate over $750 million in sales from products we have introduced to the market since the beginning of the year 2000.

Our focus on innovation has led us to create products that have a clear point of difference, and have the ability to achieve a price premium in the market.

In order to develop products of this type, we must anticipate customer needs, and deliver products that fit their lifestyles.

Each of our segments has been challenged to develop products that meet these criteria, and I am pleased with our progress to date.

Now for the segment results.

The Grocery Product segment reported improved results across all three key measurements for the second quarter in a row.

Operating profit was up 19%.

Net sales up 10%, and volume up 8%.

Excluding acquisitions, sales for Grocery Products were up 3%, and volume was up 2%.

The HORMEL chili and HORMEL microwave line of products were the biggest contributors to top line growth, both up double digits.

In particular, our microwave tray line of products continues to deliver outstanding results.

Now that we have the additional production capacity for the microwave tray available at our Rochelle, Illinois plant, we will be able to more aggressively market this line of products.

We reached a record ACB distribution level of 85% for the tray line this quarter.

Other growth areas for Grocery Products in the quarter were HORMEL bacon bits and HORMEL hash.

Our operating profit margins for grocery products improved 110 basis points because of an improved product mix.

The integration of Valley Fresh into our operation is on plan and meeting expectations.

We are beginning to move production out of a third-party production facility, and into the Valley Fresh facility, and we should see the benefits from this acquisition accelerate, as we continue to move production into our facility.

Refrigerated Foods reported 15% lower operating profit.

Volatility in the pork market impacted margin performance, particularly in the fresh pork and sliced bacon areas.

Loin markets rose during the period when they traditionally are stable, or even trending down.

Due to these unexpected sharp increases, we were not able to move our pricing fast enough to preserve our margins.

Value-added growth in meat products, which is our retail business within Refrigerated Foods, and our Foodservice business unit were both up 4% during the quarter.

Double digit contributors in the retail area were convenience bacon, sliced pepperoni, party trays, flavored meats, and our DILUSSO deli products.

The national roll-out of HORMEL NATURAL CHOICE deli sandwich meats continues to be very successful.

We are planning to increase our marketing support behind this product, now that we've achieved the appropriate distribution levels.

Because of the strong acceptance of NATURAL CHOICE deli sandwich meats, we have introduced a line of products under the NATURAL CHOICE brand in the service deli and retail ham category.

Our beef and pork case-ready programs continue to do very well, reporting a 34% sales growth in the quarter.

We are expecting to gain new distribution with our case-ready products during the fourth quarter.

For our Foodservice unit, premium pork, pizza toppings, and our AUSTIN BLUES/CAFE H products all reported double-digit growth in Q3.

Jennie-O Turkey Store reported lower operating profits, primarily from higher energy costs and lower returns on thigh meat in the quarter compared to a year ago.

Volume was down 6% due to lower commodity sales, and the timing of some of our whole bird sales.

Value-added tonnage, however, grew 9% which drove net sales dollars up 1% for the quarter.

As we continue to grow our value-added portfolio, we have less commodity meat to sell.

Our objective is to get a higher return over the long-term for the products we produce.

In the third quarter, value-added convenience items reporting growth for Jennie-O Turkey Store included their oven-ready items, frozen turkey burgers, and deli and rotisserie products.

The Jennie-O Turkey Store tub luncheon meat products that were introduced during the second quarter continued to gain distribution, and we have also extended our NATURAL CHOICE technology to deli products under the Jennie-O Turkey Store brand.

Our earlier concerns about a possible oversupply of turkey, based on higher egg set and poult placement production numbers that were previously reported has not materialized.

The current production numbers still indicate that we will see more supply than a year ago coming to market over the next several quarters.

However, at this point the industry is in very solid shape.

The July freezer report indicated 2% fewer pounds in the freezer compared to last year.

We are seeing mixed markets with breast meat higher than a year ago, and thigh meat below a year ago.

Specialty Foods continued its impressive year-over-year performance improvement.

All three businesses within this segment Diamond Crystal Brands, HORMEL Specialty Products, and Century Foods International contributed to the improvement in sales and operating profit.

Gains were reported in core packet sales of sugar substitute, sugar, and liquid portions from the Diamond Crystal operating segment.

The Specialty Products operating segment also reported improved results in the canned meat and ingredients category.

Improved ready-to-drink nutritional pouches and nutritional blends helped drive Century Foods results over last year.

Our All Other segment operating profit was driven by solid results from both operating units that report within this segment, International and Dan's Prize.

Our International group reported an 18% improvement in the sale of the SPAM family of products.

They also saw improved margins on pork exports, and continued improvement in our China operations.

We continue to explore opportunities for growth in international with the focus on Asia.

Based on our expectations for the rest of the year, we are tightening our guidance for the full year from a previous range of $1.94 to $2.04, to our new range of $1.98 to $2.04.

Our GAAP earnings guidance for the fourth quarter of fiscal 2006 is in a range of $0.57 to $0.63 per share.

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 third quarter totaled $59.6 million, or $0.43 per share, compared to 51.8 million, or $0.37 per share a year ago.

Dollar sales for the third quarter totaled $1.41 billion, compared to 1.36 billion last year, a 4% increase.

Acquisitions added $12 million to the top line in the third quarter.

Volume for the third quarter was 1.06 billion pounds, up 2% from fiscal 2005.

Acquisitions added 7 million pounds to the quarter.

Selling and delivery expenses in the third quarter were 11.2% of sales this year, compared with 10.7% last year.

Higher freight costs were the biggest contributors to the increase.

We expect the full year to be 11.2%.

Our marketing investment in the third quarter was $29 million, or 2.1% 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 2.8% of sales for the quarter, compared with 3.1% last year.

The decrease in this quarter's expense is the continued result of our cost containment initiative.

We are analyzing all areas of the Company for cost savings, and in the third quarter we sold one of the Company's airplanes which created a gain.

We will continue to analyze our expenses, and take the appropriate steps to keep the Company as efficient as possible.

Interest expense for the quarter was 6.6 million this year, compared with 7.3 million last year.

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

Total debt at the end of the quarter was $361 million, compared with $372 million last year.

Depreciation and amortization for the quarter amounted to $30 million, compared to 31 million last year.

We expect depreciation and amortization to be around $120 million for the year.

Our effective tax rate in the third quarter was 32%, versus 36.9 in fiscal 2005.

The quarter was lower than the 35% earlier guidance provided last quarter, due to the prior year audit settlements, and an updated estimate for the initial Section 199 manufacturing domestic tax reduction for 2006.

We expect an effective tax rate for the full year to end between 33.35 and 33.6%.

Capital expenditures for the quarter totaled $44 million, compared to $28 million last year.

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

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

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

We purchased 3,000 shares of common stock during the quarter at an average price of $32.99.

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

During the quarter, we processed 2.3 million hogs, compared with 2.2 million last year.

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

This compared with an average live base price of $53 in the same period last year.

We expected live prices to be $48 per hundred weight in the third quarter.

We anticipate an average market of $47 per live hundred weight for the fourth quarter compared to $51 last year.

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

[OPERATOR INSTRUCTIONS] Your first question is from Pablo Zuanic.

This is actually [Akshay Jecda] I want to ask a question on Pablo's behalf.

I actually have a couple of questions.

First one is regarding hog prices and your outlook.

Yesterday on Smithfield's earnings call, they said that the above average hog prices that are currently prevailing, are due to the higher slaughter capacity in the industry.

However, you know, the way we think of it is as companies produce more pork cutout, that should drive the price of cutouts down, which in turn should drive the price of hogs down over the long-term, right?

Are we missing something, or how do you think of that?

We tend to share your outlook.

Our outlook for the fourth quarter would set live hogs averaging around $47 a hundred weight.

We recognize that they are at a higher level today, but we are seeing quite plentiful supplies going forward.

That's our outlook, it would mirror what you just commented.

Okay.

A couple more questions.

On that same point Smithfield also said very boldly that going forward they think that there will be almost no money in the fresh pork cutout business, if companies are not vertically integrated.

Now, is that a concern for Hormel, not being vertically integrated?

We don't view it as a concern.

It is a historical model for us.

We have always been based here in the upper Midwest, and for years we have lived with the environment that forbid companies from owning hogs on a corporate basis, and so we have established very longstanding relationships with family farms throughout our region.

We have long contract commitments with these different farmers, and don't see any risk to our procurement, and therefore we will have adequate numbers for our slaughter facilities, and we think we can be very competitive in the fresh pork business.

One more.

On the JOTS business with the latest Butterball and Carolina Turkey JV, do you expect to have more competition there?

How are you thinking of the competitive landscape, in terms of how it has changed?

The Butterball brand has been in the marketplace all along.

It is changing hands in terms of ownership.

It is going from one large company to a half interest from another large company.

We expect it to still be a formidable competitor in certain segments of the business, but we like what we are doing with our Jennie-O Turkey Store brand, and focusing on really moving up the value-added ladder with that brand, and we think we're in a comfortable position to compete against whoever owns that brand.

One last one.

With the recent announcement by PPC to put in a bid for Gold Kist, we're just wondering how you think of the chicken business, and why since you're in the turkey business, why you wouldn't be in chicken, or what your thoughts are about entering that market?

Well, our philosophy, we look at supply chain businesses, and we see the complexity involved, and we see the commitment to assets that are involved.

We have really staked our position in the pork and turkey segments.

To be a big player in chicken would be such a substantial change to our business model.

It is just not something that we have contemplated.

We're able to procure chicken items for our fully-cooked entree line, or our HORMEL microwave line if we have chicken products in it, but we don't see a need to be vertically integrated in chicken, or to be a major competitor in that segment.

Great.

Thank you very much.

Your next question comes from [inaudible-audio break]

Hello.

Hello.

Hi.

Sorry.

Good morning.

Who is this?

Dave Nelson.

We didn't hear the introduction.

I didn't hear her either.

I heard a void and stepped in.

Okay.

Turkey volumes down 6%.

I wasn't expecting that kind of number.

How do you see that recovering or not, and what all happened with turkey volumes being down 6?

First of all, I guess I don't see it as a big deal.

I will explain why.

The number we really focus on is the value-added number.

That was up 9%.

It was actually up higher than we expected, and it was an acceleration from what we had been seeing, 6, 7, 8% growth.

The biggest reasons why the overall volumes for the division were down twofold. #1, We have seen a shift in some of our whole bird orders.

Last year they went on an earlier basis.

Some of the retailers wanted to commit early.

So we transferred the sales at that time.

Those will roll through in the fourth quarter.

We have the same whole bird volumes going through that plant this year as we did last year.

Secondly, last year if you recall we had some opportunistic pounds.

There was a facility that had burned down in the area, and so some of those local farmers had brought turkeys into us.

They now since have gone back in business in a different facility.

We knew we weren't going to have those pounds this year, but on a year-over-year basis that is part of the decrease.

Okay.

And grocery products margins they're better, but still below historical levels.

One of the factors there has been energy, but another factor has been higher imported beef costs.

When do you start lapping those, and what is your outlook on potential for imported beef getting a little better?

We're hopeful to see that get better.

You point out what has definitely been somewhat of a drag on profitability in the division over the past several months on the beef side.

Third quarter is historically the lowest margin level for grocery products for us.

We will see better results in the fourth quarter as we typically do, and we expect this year's results to be better than Q4 of last year.

We obviously monitor costs in general.

We tend to make moves in pricing that segment on an every 3 or 4 year basis, and it has been just a couple years right now.

Clearly there have been challenges out there with higher energy costs and higher raw material costs that we will have to keep an eye on.

Right now we're very pleased with the Grocery Products for two quarters in a row now has delivered significant improvement on the top and bottom line.

No visible abatement on beef input costs?

Not that we've seen.

Okay.

I guess on the higher pork costs, not just for grocery but refrigerated, you have an outlook, other people Smithfield included, have outlooks as you talk about, but the futures are very strong.

Is there a lag effect and if they don't go down that grocery margins, I guess refrigerated too, are at some risk?

They would potentially be more impactful in the refrigerator area.

Even there it depends on do they spike versus do they just stay at a certain level.

We're in a pretty comfortable pricing situation right now on most of our forward business at today's market, so we anticipate the market to fall off somewhat, and if so, that will either widen margins, or there will have to be a pricing adjustment, but we don't really see, what really can hurt the business and what hurt it last quarter is that if it precipitously moves up, because it is difficult to get your pricing through on a fast basis.

Right.

Super.

Thank you.

Thanks, Dave.

Hello.

Hello.

Hello.

It is John Feeney.

How are you.

This is great.

No introduction.

Jump in when you feel like it.

We'll just wing it.

Speak up about who you are.

First question, you know, marketing expense being down a little bit, Mike mentioned in his script, it seems like a pretty good time for the Company right now.

Why not be making heavier investments in marketing?

Is there something about the timing in marketing that I am missing?

Well, they were actually flat on a dollar basis.

They were slightly down on a percentage basis.

We tend to move our marketing depending on what kind of news we have, as we talked about in the release here, we are going to be stepping up our investment on the NATURAL CHOICE line.

We have national distribution on that line, and it is gaining good acceptance, and then obviously we're in our brand planning session for what we will look at for fiscal year 2007, and my expectation would be, we would certainly increase our spending on marketing as we go forward in 2007, because we do have a lot of exciting brand initiatives to talk about.

And could you talk a little bit about this international growth here?

It looks like I am assuming that the text of the release accurately reflects the order of magnitude that export sales of SPAM were the biggest contributor to this, I guess pretty huge operating profit growth of 62%.

Is that true?

What's going on there that that keeps growing so quickly?

Without and maybe Mike could step in on magnitude, but without giving you magnitudes, the big 3 factors have been exports of value-added sales.

We've done well with exports of fresh pork items, and that's been a contributor, and we've seen improved results from our China operations.

They're all significant in terms of contributing to those results.

That's right, John.

Okay.

And then finally, just a detail question.

You mentioned this non-qualified plan settlements, and the credit for litigation in both that contributed to both refrigerated and Jennie-O Turkey Store.

Is it possible to allocate that a little bit more specifically?

I think Fred can come back off line and give you that information.

Okay.

That's fine.

Thank you very much.

Hello.

Your next question comes from Farha Aslam.

Good morning.

Hi, Farha.

Could you just delve into your statement about you're seeing ample quantities of hogs out there, and that's makes you comfortable anticipating lower hog costs going into your fourth quarter?

Can you point us to what you're seeing in terms of increases in the number of hogs, and are you seeing the [sirca] virus having an impact on hogs in your area?

We see at least as of this week kill levels at very high levels.

We see quite a bit of tightening in terms of finishing space within our area.

We do raise [wingling] hogs in our Mountain Prairie operation.

We look to place those hogs, and that keeps us active in that market.

Those will be two of the factors that we look at on a company basis, and then obviously the folks who are involved in procurement try to keep their antenna out there on a marginal basis, and they're seeing plentiful supplies going forward.

Can you talk about how your contracts are working, in terms of hog procurement right now, with them more on a cutout basis in this volatile pork market?

That's a pretty general question, Farha.

In terms of where we are, the percentage numbers that we've continued to talk about, you know, we're still in that 75% range on contracted hogs.

We're not having any problem with, to Jeff's point, filling our needs, and the people who are on those contracts being somewhat market-based in terms of the cutout values have been very happy with the performance of those contracts.

And do you see any issues going forward kind of over the next 12 to 24 months of renewing those contracts at all, having a tighter supply of hogs in your area, possibly due to new capacity coming online?

We have contracts on a number of different durations.

We don't ever have a lot of them coming up all at the same time, but I can just tell you in terms of the one that have come up over the past few months, we have not seen any issue in that regard.

Just some greater color on dark meat turkey pricing.

Do you anticipate it to go in the $0.90 per pound area going into the fall?

I guess our outlook is 80 to $0.90.

That's one of the factors that for us the higher the better definitely.

Most of the dark meat is still sold on a commodity export basis, so if that does go higher, that's a possible plus point for us against the guidance, but right now we're estimating more of a range there.

And so your guidance is really factoring in only about $0.80 per pound, or $0.85 per pound?

Yes. $0.83 would be the exact number we use.

Great.

Can you just give us some detail on the airplane sale?

About how much did it benefit you in the quarter?

After tax, probably less than $0.01.

Okay.

Great.

That's it for me.

Thank you.

Thanks, Farha.

Your next question comes from Eric Katzman.

Good morning, everybody.

Welcome back.

Mike, it has been awhile.

Yes, it has.

We both have a few more gray hairs.

I guess I don't really have too many questions, but one just more specifically, Mike, can you break out the item that you listed in the press release between the amount between Refrigerated versus Jennie-O, either on a pre- or post-tax basis?

You mean the settlement numbers?

Yes, exactly.

In terms of how it was spread?

Right.

We're getting here, there was a benefit in terms of to Refrigerated foods, the benefit would have been approximately 1.7 million.

1.7.

Okay.

The benefit to Jenny O would have been approximately 2.7.

Okay.

All right.

And then the second question, a little bit more general is in terms of the input cost pressures, I guess you mentioned freight, but it has been a while, but I used to remember the canned costs were fairly significant for you, and has that been an issue at all, and have you had to raise prices at all to deal with the higher can costs?

Cans have been on kind of a roller coaster.

They were up last year significantly.

During this fiscal year it hasn't been that bad of an increase, but the outlook going forward is for another increase, but even the tray items are petroleum-based, so we do see pressures on those costs on an across the board basis in packaging.

Okay.

All right.

Very good.

Thank you.

Your next question comes from Tim Ramey.

Good morning.

Hi, Tim.

A little more detail, please, on the Grocery Products, 19% increase.

Can you talk about what part of that might have been driven by price, and also what part might have been driven by acquisition?

You did give us the sales and volume numbers I think on the acquisition, but I would love to know if you know what that did to operating income.

We really don't have it on an operating income basis.

Most of these acquisitions we then pull them into the operating segment, and they're kind of lost therein, if you will.

Particularly in this case with Valley Fresh being in the chunk business, one of the great benefits of that acquisition is that we're able to now run our HORMEL brand chunk products through that plant.

Again, it would be pretty impossible to break out what's Valley Fresh specifically.

I can just tell you overall that we really didn't take any pricing, in terms of price increases during the quarter, and so it was really strong sales from items such as HORMEL chili, HORMEL microwave, and HORMEL bacon bits, which are all high margin items for us, that helped improve the mix and drive the results upward.

I assume there was some price year-over-year though, was there not?

Not on an item by item basis.

It may have averaged out to that by the time you looked at the mix and the dollars sale per pound.

The only item I can think of we took pricing on during the year was olive oil, and that happened actually twice, with the crops situation there, but in terms of any significant volume items, we really didn't take any pricing.

Okay.

Great.

I have got to circle back to that $47 forecast for the Q4, if I think Smithfield told us the current price is right around 57, and we're nearly done with August.

We would have to see a pretty significant, I mean, a precipitous decline to get to a $0.40 average.

$0.47 average, not $0.40.

I don't know from an averaging standpoint.

We may be off in terms of whether it will end up averaging 47.

That was our outlook for the quarter as we headed into planning and did our pricing.

We still see prices trending in that direction.

Yes.

And I would echo that, Tim, from the standpoint of what we see in terms of availability, what we see with numbers to Jeff's earlier point, the harvest numbers have increased this week.

We're up almost to 400,000 hogs.

Historically that would tell you that there are hogs coming to market that's going to have downward pressure, and based on what I see today, I am not changing the $47 projection.

Just one on the case-ready business.

I am always interested there.

Up 34%, and I think you said that was without a new customer, but you expect a new customer in Q4.

What's causing that rate of change?

Is it new stores within a given franchise, or is it just greater penetration of an existing store?

We've done very well with continuing customers.

They are seeing increases in their same-store sales.

We did bring on a new customer.

We've actually been ramping them up a test basis, a few stores and then a few more ever since second quarter, and that's indeed the customer that will expand it even further, and will give us added volume in the fourth quarter, and they've been very pleased with the results of the test, and hence their decision to continue the rollout.

Terrific.

Thanks.

Your next question comes from Diane Geissler.

Good morning.

Good morning.

Hi.

Just on the Jennie-O side and some previous comments on your last couple calls on what we can look for in terms of normalized.

I seem to remember you saying that that business should be looked at more in sort of the high single digits on an operating profit basis, but it sounds like from your comments today that things have not, you know, deteriorated, or that is not a good word, considering how exceptional the margins are, but just they have not pulled back as far as you thought they would.

Is that a fair assessment, and should we look for strengthening from here?

On a year-over-year basis, and that's part of our comparison issue, and that's why for the fourth quarter our guidance is only slightly over a year ago, is we have always known we've been looking at a significant comparison issue on Jennie-O Turkey Store.

In Q4 of 2005 they generated over 13% operating margin.

We think they will be over that historical norm, they'll be in the 10 to 11% range.

That still pulls it down several million dollars in terms of operating profit.

Moving it into the high single digits in terms of operating profit sounds like that would be too aggressive on the negative side.

Is that fair?

We don't see that in Q4.

As with a lot of the businesses, they don't deliver profits necessarily on a lock-step basis even each quarter.

Fourth quarter and the first quarter are usually better quarters, and second and third are usually a little lower.

We will give you updated guidance on that in our November call, when we have an outlook for the 2007 full year.

Okay.

That was the only question I had.

Thanks.

Your next question comes from Bill Chapelle.

This is actually [Shahsad] in for Bill Chapelle.

First question on the competitive environment on the Grocery side.

You talked about it last quarter, specifically chili and Campbell's and private label.

How is that going out there?

Can you give us some color?

In the chili area?

Based on the competitive environment in the grocery side.

I guess we can talk about chili now.

We had a very good quarter on chili, particularly on the HORMEL chili brand.

We have seen some retrenching on our Stagg chili item.

We're refocusing attention on that item in the western United States, where it is original hallmark markets, and therefore we are going to be able to focus our marketing attention in those areas.

But on a combined basis our share is up significantly.

We really seem to have emerged out of what we were calling the chili wars two years ago, and are in a very strong position.

All right.

Glad to hear that.

Last quarter there was a lot of interest on your natural products among retailers.

Is the buzz still there?

I know you said you guys have more distribution now, but are you using new products to make sure that retailers are still interested in it?

Yes.

We're continuing to gain acceptance of that core sliced luncheon meat line, and that's the line we're advertising right now, and we will continue to step up the advertising in the fourth quarter.

We also rolled out a line of NATURAL CHOICE deli meats for behind the glass, both under the HORMEL and Jennie-O Turkey Store brands, we announced that at the June Deli Show, and those are being rolled in right now.

We're also coming out with a NATURAL CHOICE ham product for the holidays.

We are looking to expand the NATURAL CHOICE line.

It seems to be gaining very good consumer acceptance.

That's good to hear.

The buzz is still there.

I guess an update on the macro story in the Foodservice segment, maybe a forecast of where you guys see things going, as there is more pressure in consumer discretionary spending.

Our hallmark in Foodservice has been product innovation, and really bringing service to the customers by, through our preslicing, premarinating, preweighing, et cetera.

We have been able to achieve superior results to the foodservice trends for a long time.

I think even today, this quarter was 4%.

That's not been as high as some of our quarters in the past.

It is still tracking above what you're seeing for the industry.

The industry pressures will pull it down somewhat.

We're not immune to that.

We still see good growth going forward out of foodservice.

The more we can create value-added items such as AUSTIN BLUES and CAFE H, and those types of items, the better off we will be in that regard as well.

Good to hear.

Last question.

You mentioned Jennie-O rotisserie as a $1 billion category during last quarter's call.

Are retailers mouths still watering on this?

Are they still interested in this product?

Are they still bringing that in?

What's the mix in value-added, and where that's going for Jennie-O?

On the rotisserie side, I think what the reference must be, is that the rotisserie chicken category is over a billion dollar category in the retail and club environment, and we've been trying to carve out a turkey niche, have another offering within that segment.

It is growing at a very nice clip for us.

It seems to be a very complimentary item for the retailers.

Most of the retailers that have added a Jennie-O Turkey Store rotisserie item, find that their chicken sales actually grow, that consumers will come to the counter more often because there is more offerings there.

We're high on it, but it is not a billion dollar item for us.

Turkey is still a small player in rotisserie compared to chicken, in terms of value-added overall, Jennie-O Turkey Store dollar sales are very similar to the total company.

We're probably at the 75 to 80% of our dollar sales go out in a value-added form from Jennie-O Turkey Store.

That's perfect.

Thank you so much.

Your next question comes from Oliver Wood.

Great.

Thanks a lot.

Good morning, Oliver.

Good morning.

Looking at Specialty Foods and All Other, it has been an area of real nice growth for you all, in terms of the top line and in terms of margin expansion.

Now that we've lapped some of the acquisitions there, can you give us a sense going forward of what we should expect, as far as growth rates in the top line for this business and then are these higher margin levels sustainable?

Oh, we'll take them one at a time.

Specialty we think has now rounded into an area where the reporting margins are about what we would expect from that unit.

We had had some drag on earnings in the past, particularly from the Century operation, and that's rebounding right now.

And in terms of top line growth, our total company-wide growth targets are 5 to 6%.

We expect Specialty to pull their oar, and they've been able to do that.

In the All Other segment, you are talking about Hormel Foods International and Dan's Prize, both have been good growing businesses for us, probably growing at an even faster clip.

Our expectation would be Prize at 8, would grow at an even faster clip than 5 to 6%.

We do see continued opportunities in those segments to grow both the top and bottom line.

Great.

Thanks.

A follow-up, that's probably your fourth question on Grocery Product margins, but the cut backing that was done for Valley Fresh, I don't know if you can get this granular.

Can you talk a little bit about compared to how margins will trend once that production is brought in-house, can you give us a sense of the impact there?

No, I really can't.

I really don't have that available.

I do want to clarify, though, the Valley Fresh part was not co-packed.

The Hormel part, when we were in the chunk chicken business, we did chunk ham and chunk turkey in our own facilities, but because we didn't have either the supply or the dedicated line, we had the chunk chicken piece co-packed.

It is the Hormel chicken line that will now be integrated into the Valley Fresh plant, and will allow us to achieve some cost efficiencies in doing that.

Okay.

Got you.

That's helpful.

And then just two other questions on that business.

Can you give us a sense of, if there is seasonality and what that would be to the Valley Fresh business?

I guess to the canned chicken business altogether, and then also how susceptible are those margins to changes in chicken prices, and how do we track those different costs, whether it is whole bird prices or parts prices?

Thanks.

The business is not highly seasonal.

Secondly in terms of raw material differences, I would treat it like our other grocery items.

Yes, it is possible that there can be swings in inputs that would be significant enough that it would impact the margins, just as when we have swings in picnics, that impacts our stand margins.

It is not the same as a meat business.

It is a grocery business.

We price it as a certain level out to the consumer, have adequate marketing support against it at that level, and then we can ride the waves underneath it in terms of what the costs are at any given time.

Okay.

Great.

And is it fair to say the numbers Mike gave us regarding volume and sales from acquisition, that was only Valley Fresh?

Only Valley Fresh, Oliver.

Okay.

Everything else is turned over.

Perfect.

Appreciate it.

Thank you.

Your next question comes from Eric Larson.

Hey, guys, how are you?

Good morning.

Good morning, Eric.

A lot of my questions have been answered.

I just have a couple remaining.

Back to the NATURAL CHOICE product line, I see distribution, and frankly I was in a grocery store in another part of the Midwest earlier this week, and you actually have to look for it, and it is kind of hard to find, and there might only be a couple SKUs.

Is your distribution or your SKU distribution spotty as well, and how many SKUs do you have in that product line?

Our average distribution is 5 to 6 SKUs.

The line has 6 available right now, and then we're about to roll out roast beef items to compliment it as well.

That will give it a stronger shelf presence as well.

Most retailers have the broader array.

You might have seen one that just chose to go with a couple of them apparently, or you still do have issues within the meat business, unfortunately when things are out of stock, they just slide things over, and put other things in them on any given day.

We work with our sales representative network to try to avoid that as often as possible, but that happens far more often in the meat case, than it does in the grocery aisles.

Sure.

Definitely.

Just to ask a question, you have purchased your corn yet for your turkey business, and if you look at corn prices in southern Minnesota, the basis has virtually disappeared.

I am seeing farmers grow corn on their driveways.

You're seeing it spring up all over the place.

Does that have an impact on the outyears on '07, for your corn costs to feed your turkeys?

It has been kind of a gradual effect.

We have seen that impact.

We've seen the impact of more and more ethanol plants coming up in our backyard here, and it is just something we've lived with over the past really two or three years, and the outlook going forward is probably a little more of the same.

But I wouldn't view that as a precipitous challenge going forward.

It is something that we have to factor into the likely cost.

Okay.

Good.

Finally, Jeff, you've had a very good acquisition pipeline over the last three years.

You've been able to pick up some great assets, which clearly are now starting to contribute to your bottom line.

Are you able to see as many types of acquisitions today?

How would you look at the ability to pick up some more brands, with good assets at reasonable prices going forward here?

We don't see the current environment as any better or any worse than the environment we've been in.

I mean you have talks all the time.

You look at things in your business units strategically, ways to grow your business, either through innovation or growing your own products, or through acquisitions, all the time, and so we don't see any diminishing of our ability to continue to be active in that area.

Okay, guys.

Thanks.

[OPERATOR INSTRUCTIONS] Gentlemen, there are no further questions.

Do you have any closing remarks?

Just briefly.

This is Jeff Ettinger.

Just wanted to comment that fiscal 2006 is shaping up to be another very good year for us, off of two very solid years prior to this, and a long history of solid results for our Company.

We are executing on our strategies, and we feel we've built a solid platform for growth going forward.

I am pleased with the direction and momentum of our business, and feel comfortable that our earnings power will allow us to meet our targeted growth objectives in the future.

Thank you all for your time this morning.

Thank you for joining on today's conference call.

At this time, you may disconnect.