荷美爾 (HRL) 2006 Q4 法說會逐字稿

Good morning.

My name is Amy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hormel Foods fourth 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, and Happy Thanksgiving!

Welcome to the Hormel Foods conference call for the fourth 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 our website at www.hormel.com under the Investors section.

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

This will be Mike's last conference call as he is retiring December 31st.

Mike has been a great asset to the Company, and Hormel Foods will miss his leadership.

The good news is we have a deep bench, and Mike's replacement, Jody Feragen, currently our Vice President of Finance and Treasurer will do an outstanding job.

Jody is with us today, and will be available to comment in the question and answer section.

Jeff will provide a review of the operating results and an outlook for the first quarter and full-year of 2007.

Then Mike will provide detailed financial results for the quarter.

We will then open up the call for questions.

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

Central Time today, November 22, 2006.

The dial in number is 800-642-1687, and the access code is 2294617.

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

Before we get started with the results for 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 this expressed in or applied by the statements we will be making.

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

Please refer to pages 26 and 29 to 31 in the Company's Form 10-Q for the third fiscal quarter of 2006.

Now I will turn the call over to Jeff.

Good morning, everyone.

Before I begin with the results of the fourth quarter, I wanted to express my appreciation for the contributions Mike McCoy has made during his career at Hormel Foods.

Mike was instrumental in completing over $1.2 billion worth of acquisitions over the last 5 years.

These deals have built a solid foundation for the future growth of our Company.

Mike also pioneered the use of EVA principles here at Hormel Foods, and I think our results speak for themselves since the implementation of EVA in late 1999.

While Mike is retiring from his responsibilities as CFO, he will be staying on the Board of Directors for one year during the transition.

I would like to take this opportunity to wish Mike and his wife Marge all the best in their retirement.

Also at our Board meeting on Monday, Joel Johnson announced his retirement as Chairman of the Board for the Company's Board of Directors, ending 11 years of service in this capacity.

Joel's legacy as Chairman of the Board is a significant impact on the Company's product portfolio.

The emphasis on value-added products, the expansion into China, the growth of our turkey business, and the advancement of the ethnic foods category were all key initiatives during his tenure.

Under Joel's leadership, Company sales more than doubled, earnings per share more than tripled, and the stock price nearly quadrupled.

We send Joel and his family our appreciation and best wishes in retirement.

Now for the results.

Our better than expected finish in the fourth quarter was a great way to end an excellent year.

The combination of solid execution by our team members, and the strength of our product portfolio, not only delivered a strong finish to the year, but also put us in a position for future profitable growth.

Our earnings per share for the quarter were $0.64, compared to $0.59 last year.

On a year-to-date basis, we are reporting GAAP earnings per share of $2.05, a 13% increase over 2005.

Our strategy to create a faster-growing, better balanced, and more diversified business continues to deliver results.

Our specialty foods segment was the clear stand-out, reporting an 81% increase in operating profit for the quarter.

Within this segment, all three business units reported outstanding results, including Diamond Crystal Brands, our Specialty Products division, and Century Foods International.

Our progress in this segment over the last three years is a great example of our commitment to create long-term shareholder value.

This segment has not been an overnight success.

However, we recognized the long-term opportunities if the appropriate adjustments were made to the product portfolio, and efficiencies were added to the manufacturing processes.

The Specialty Foods segment provides diversification and balance within our business, to help buffer the effects of the protein cycle.

I am excited about the growth prospects of this segment going forward, though they will be at levels more consistent with our company-wide growth guidance, rather than the levels we saw this year.

The Grocery Products segment reported modest year-over-year improvements in operating profit, dollar sales, and tonnage.

The microwave line of products, HORMEL Bacon Bits, and the addition of VALLEY FRESH products were the key drivers behind the growth.

We do recognize, however, that excluding the VALLEY FRESH acquisition, sales were down 1%, and volume was down 3%, for grocery products during the quarter.

Our microwave tray line of products continues to deliver outstanding results, with another year of double digit growth behind us.

We are seeing increased household penetration, and are making solid gains in distributions on this line.

We are always looking for ways to improve our products, and from time to time we make formula modifications to meet the changing preferences of consumers.

Our latest change is to our HORMEL bacon bits products.

Our new formula, which delivers a more home-style texture and appearance, began shipping in the fourth quarter, and we expect this change to accelerate the growth of this product line.

We also repositioned our STAGG chili line of products as a regional brand, focusing on the western half of the United States, and we have moved it back into the can from the Tetra Pak.

Prior to the national rollout about two years ago,STAGG was positioned as a West coast brand.

We believe we can more effectively market STAGG in the geographies where it has the highest market share.

This will allow us to strengthen our support behind the HORMEL chili brand in areas where STAGG no longer competes.

The Grocery Products segment incurred incremental expenses during Q4 in making this conversion to STAGG.

Refrigerated Foods reported a 1% higher operating profit.

A strong performance from our Foodservice and Meat Products business units were partially offset by a $4 million charge for the write-down of our Houston Texas plant.

We have closed this plant and plan to sell it.

Because of its geographic location, it was not a good fit within our overall manufacturing system.

Value-added growth was reported in both our Meat Products (retail), and Foodservice business units under Refrigerated Foods.

They were up 7% and 3% respectively.

Items reporting growth in the retail channel included HORMEL sliced pepperoni, party trays, refrigerated entrees, ALWAYS TENDER flavored meats, and DILUSSO DELI COMPANY products We also continue to make excellent progress with NATURAL CHOICE line of presliced meats.

Our beef and pork case ready programs through our Precept joint venture continue to report strong growth, and were up 45% in the quarter.

In our Foodservice unit, pizza toppings, premium bacon, and our AUSTIN BLUES and CAFE H lines of products, all reported double digit growth.

We believe these successful results are driven by the competitive advantage provided by our direct sales force.

Two of the acquisitions that were recently announced, Provena Foods and Saag's, will report under the Refrigerated Foods segment.

Provena which we expect to close in December, adds capacity to grow our dry sausage business, and Saag's is a great addition to our value-added portfolio with premium quality gourmet sausages and specialty smoked meats.

Farmer John out in California will be a strategic raw materials supplier to both locations because of their geographic proximity.

Jennie-O Turkey Store reported lower operating profits primarily from higher input costs.

During the quarter, our value-added sales demand exceeded our available raw material supply of breast meat.

As a result, we had to buy breast meat on the outside during the period when breast meat was very expensive.

Nonetheless, operating margins at Jennie-O Turkey Store were still above average at 11.6% for the quarter, although not as high as last year's 13.3%.

Overall volume in the Jennie-O Turkey Store segment was up 1%, and the value-added volume was up 7%.

Within the value-added category, Foodservice and Deli reported continued success, with such items as turkey burgers and rotisserie turkey.

Turkey egg sets and poult placements indicate we will see an increase in supply in 2007 compared to last year.

And the cost to produce turkey meat will clearly increase in 2007, in light of the recent run-up in the corn market.

The October freezer report that was released yesterday, shows current freezer stocks for turkey down 1% compared to last year, and 11% below last month.

The All Other segment reported another outstanding quarter with operating profit up 35%.

Both operating units within this segment, International and Dan's Prize delivered excellent results.

Export sales of the SPAM family of products, and improved results from our China operations, led the way for International.

And Dan's Prize enjoyed strong Foodservice sales of cooked beef items during the fourth quarter.

In the earnings release, we announced that we have just entered into a joint venture with our partnering the Philippines, San Miguel, for a hog production and meat processing business in Vietnam.

Vietnam's economy is growing at a very fast rate, and we believe this provides a great opportunity for Hormel Foods in the long-term.

Asia continues to be our focus for international growth.

There has been a lot of attention focused on the recent run-up of the corn market, due to the ethanol plants have placed on the corn supply.

Our biggest exposure from higher grain markets is in our turkey operation.

Conversely, we do not have as much exposure on the pork side of our business, because we converted the majority of our hog contracts a couple of years ago, from a cost-based formula to a market-base formula.

We fully expect higher grain markets in 2007 compared to 2006, and we have factored these into our earnings guidance for the year.

The protein industry cannot absorb these higher costs long-term, and this will require companies to pass these costs along in the form of higher pricing, which we plan to do.

As we look forward to 2007, we remain optimistic, while we anticipate higher grain costs to be a burden on our turkey operation, we believe that our value-added initiatives will more than offset this extra expense.

As previously mentioned, we plan to implement price increases over time to the items affected by higher grain costs.

Based on our current expectations for markets and our business plan for 2007, our guidance range is $2.15 to $2.25 per share for the full-year, and $0.52 to $0.58 per share for the first quarter.

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 the fiscal 2006 fourth quarter totalled $90 million, or $0.64 per share, compared to $82.2 million, or $0.59 a share a year ago.

The full-year's earnings totalled $286.1 million, or $2.05 per share, compared to 254.6 million, or $1.82 per share a year ago.

Included in the full-year's earnings, are several items that need to be considered for comparability purposes.

While the net EPS impact is zero, we thought it would be helpful to identify the details.

First, there was an $11.3 million charge or $0.05 per share, for expenses related to nonqualified plan settlements, due to executive retirements that occurred earlier in this year.

Second, there was a $9.2 million charge, or $0.04 per share, for expenses related to the adoption of FAS-123(R).

Third, a $6.2 million, or $0.03 per share benefit, from a litigation settlement.

And finally an $8.2 million, or $0.06 per share of of after tax discrete benefits.

Dollar sales for the fourth quarter totalled $1.6 billion, compared to $1.5 billion last year, a 5% increase.

Acquisitions added $13.6 million to the top line in the fourth quarter.

For the year, the dollar sales totalled $5.7 billion, compared to $5.4 billion last year, a 6% increase.

Acquisitions incrementally added $180.3 million to the top line in the current fiscal year.

Volume for the fourth quarter was 1.2 billion pounds, up 5% from fiscal 2005.

Acquisitions added 9 million pounds to the quarter.

Volume for the year was 4.3 billion pounds, up 6% from fiscal 2005.

Acquisitions added 153.6 million pounds to the year.

Selling and delivery expenses in the fourth quarter were 10.7% of sales this year, compared with 10.6 last year.

For the year, the expenses were 11.1% of sales, compared with 10.7% last year.

Higher freight costs were the principal contributors to the increase.

Our marketing and investment in the fourth quarter was $20.6 million, or 1.3% of sales, compared with $24.2 million, or 1.6% of sales last year.

The full-year rate was 2% of sales, compared with 2.1% of sales last year.

Administrative and General expense was 2.9% of sales for the quarter, compared with 3.3% last year.

The full-year was even with 2005 at 3.2%. 2007 is expected to be 2.8%.

Interest expense for the quarter was $6.4 million, compared to 6.9 last year.

For the fiscal year, interest expense was $25.6 million, compared with 27.7 million last year.

We expect interest expense to be $24 million during fiscal 2007.

Total debt at the end of the year was $350 million, compared with $361 million last year, and we expect no change in debt for 2007.

Depreciation and amortization for the quarter was $31 million, compared to $29 million last year.

For the year, depreciation and amortization was $121 million, compared with 115 million last year.

We expect 2007 to be $125 million.

Our effective tax rate in the fourth quarter was 36.2%, versus 38.1% in fiscal 2005.

The effective tax rate for the full-year was 33.5, compared to 37.7 last year.

The effective tax rate was lower for the year because of the $6.2 million of discrete tax benefits after tax that we saw during fiscal 2006.

We expect the effective tax rate to be in the range of 35.25 to 35.75 in 2007.

Capital expenditures for the quarter totalled $34 million, compared to $29 million last year.

For the year, capital expenditures totalled $142 million, compared with 107 last year.

We expect CapEx to be around $145 million in fiscal 2007.

The basic weighted average number of shares outstanding for the fourth quarter and year was 138 million shares.

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

During the fourth quarter, we purchased 667,000 shares of common stock, at an average price of $36.22.

For the year, we purchased 1.1 million shares at an average price of $34.95.

We currently have 6.6 million shares remaining to be purchased from the 10 million share authorization.

During the quarter, we processed 2.4 million hogs, compared with 2.3 million last year.

For the year, we processed 9.2 million, compared with 8.6 million during fiscal 2005.

The actual live hog cost in the fourth quarter was $49 per live hundredweight, which was in-line with our forecasted market of $47 that we provided in our third quarter conference call.

This compared with an average live base price of $51 in the same period last year.

We anticipate an average market of $45 per live hundredweight for the first quarter, which is approximately the same as last year, and we expect the hog supply to increase 1.5% in 2005.

It has been a great run for me at Hormel Foods.

I will miss the day-to-day activity, but leave knowing that the Company is in extremely good hands, and the future is bright.

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

Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question is from David Nelson.

Congratulations, good morning.

And best wishes, Mike.

Thank you, David.

Another successful year.

I guess what we do as analysts though is try to poke holes around there.

On Grocery Products, margins were down again for the year, some of that may have been reinvestment.

But as I recall in the past you talked about high hog prices affecting that, was there still a big effect on hog prices on grocery products?

When can we move beyond that?

This is Jeff.

There really was less significant effect on the hog side, but we did still experience high input costs on the beef products within the division, both HORMEL chili, and Mary Kitchen Hash, and Dinty Moore beef stew.

And we are hopeful as we head into '07 that some of those are going to go down.

We also bore some additional costs as we mentioned on that whole STAGG repositioning during the quarter.

The hopefulness in beef costs, what's that based on?

Well, I'm just looking at it from a, we don't see any current trend to that, and we have not built anything current into the numbers.

But the hog prices have mitigated somewhat, and we are hopeful in the long-term that beef prices will, as well.

Okay.

On the Refrigerated side, obviously having the revision of the contracts is helpful, in terms of mitigating a potential negative there, and I hear your hog price forecast for the coming year.

We are looking at, I guess, the peak contracts looking out over the next year in June, which implies about a 56 live price.

I guess the, and you talked about supplies growing 1.5%.

Demand has been very strong.

Could you comment on demand you see that seems to be keeping hog prices a little bit higher than you would, given the supplies that are out there?

Well, demand has remained very strong, both on a domestic and international basis.

We did see obviously record processing levels all during the fall here.

And if you had seen those kind of processing numbers two of three years ago, I think you would seen quite a different picture, in terms of what prices would have been.

That clearly does support the notion that demand is strong.

But it's, you know, at this point, we don't see it as anything significantly out of the ordinary for our operations.

Because turkey is mainly a Deli and Foodservice item, do you think you have greater pricing power there?

Than someone maybe in the chicken or more on the fresh pork side of things might have?

Well, there's less, there's certainly is less feature activity related to turkey outside of the Thanksgiving holiday.

Right.

There are some elements of the Foodservice and Deli world that are on a formula pricing basis, that actually does move with cost.

So there will be some ability to make cost changes on those contracts on the basis of the inputs being higher.

Beyond that, we are certainly going to make our effort to recapture our costs with our customers going forward, and we will have to play that on the marketplace, and see what others in the competitive sphere do.

Great.

Thank you very much.

Thanks, David.

Your next question is from Eric Larson.

Hey, good morning, everyone.

Morning, Eric.

Congratulations, Mike, and congratulations Mr. Ettinger.

Both of you.

And congratulations to a good year!

We are going to miss you, Mike.

Thank you, Eric.

Just a couple questions.

You know, again, you referred to, obviously you have got the corn issue with your turkey business, Jeff.

Obviously you probably, you always did relatively short on your corn contracts, you haven't really hedged forward.

So it will be a negative next year.

Would you mind sharing a little bit more flavor on that piece of your business?

Well, I mean, I guess our outlook at corn is this way.

We have, obviously it's going to be an input cost that's going to be felt by everyone in the protein industry.

We have chosen as a country to subsidize ethanol as a sustainable domestic energy source at the cost, in some cases on the food side.

And that is going to mean the consumers will have to pay a little bit more for food.

Within our business model, the only significant effect we are looking at is on our turkey business.

Due to the changes in the hog contract, we have much less exposure there.

And while the corn price run-up is fairly daunting, we do look that soy meal is not nearly as significant a bad picture.

And we have also been a pioneer in the use of DDG's and turkey diets, and we have a lot of ethanol plants within our region, and supplies of this raw material should be plentiful, in terms of the blend of the overall diet.

What percent of blend can you use in turkey feed with DDGs?

Well, I don't want to give you the specific number, but it's south of 20%.

Okay.

Okay.

And then, Mike, I am not sure if you mentioned it in your comments.

What was the contract hog contract gain or loss in the quarter?

We had a $1 million benefit this year, Eric.

We had a $2 million benefit last year.

And for the year, we had a $4 million benefit, against a $14 million benefit a year ago.

Okay, good.

And I would assume that you are continuing more and more of those contracts toward the cutout value side of the equation?

Yes, we are pretty much to the point now where you are not even going to hear us talk about it.

Because it is a nominal amount at this point, and going forward, it will be even smaller.

Okay.

Good.

I'll try to catch, I will catch you guys offline.

I will turn it over, thanks.

Good luck, Mike!

Okay.

Thank you.

Your next question is from Diane Geissler.

Good morning.

Good morning.

Congratulations, best of luck to you, Mike.

Thank you, Diane.

All the best.

Hey, just a question, wanted to go back to the grocery products, and I appreciate your comments about the STAGG repositioning, but could you just a little bit more detail there, on what you had done and sort of its impact on the quarter?

Well with STAGG, approximately 2 to 2.5 years ago, we made the decision to roll STAGG on a national basis.

The timing of this rollout happened to coincide with the entry into the marketplace of two fairly significant new competitors, Campbell's and Busch.

So had two major brands in that competitive set, there were those 2 plus several regional brands.

And after a lot of activity within the category both from a media side, a slotting side, a promotional spending side, as the dust has cleared we have emerged with still very strong share positions with two solid thriving businesses.

But the more we looked at that expansion territory for STAGG, which has long been a Hormel brand stronghold as it was, we decided that we were best off placing our emphasis in STAGG back on its core western United States markets, and use Hormel chili as our main brand, or as our only chili brand on the eastern United States.

So there were some costs in terms of pulling those products out of those markets, and then the other costs we incurred as we did convert back to the can from the Tetra Pak.

Do you have a value for that in terms of what the impact was on either an annual basis or quarterly?

It'd be a couple million dollars. 1 to $2 million.

And then, I guess --

Within the fourth quarter.

Okay.

Was it fourth quarter only, then?

Yes.

Yes.

All right.

Just trying to get an idea about what the base is.

I guess my other question, then is the JV you announced today with your Philippine partner.

Can you talk a little bit about some more details on that, in terms of volume of production, and maybe some of your plans sort of around that announcement?

We have had a, well, we have had a very long-term partnership in general in the Philippines.

It has grown nicely over the years.

We actually, the partner itself actually changed early in the early part of this decade to the San Miguel company.

And the company has continued to grow on a very nice basis in that market since then.

San Miguel has a strong regional strategy.

Obviously being based in a smaller country in the Philippines, they look at other neighboring countries as potential market sources for their processed meat items.

And they had set their sites a couple of years back on Vietnam.

They had actually already made the investment, they have the business up and running in the feed mill, and the pig farm area of the business.

And we have been looking at other opportunities with them, to potentially grow within the region.

We like them as a partner, they are very skilled operators within those kind of economies.

And so we made the decision here very recently to go ahead and make an investment in this existing business.

Our investment will be at under a 50% share, so it will not appear on the revenue side of the calculation.

And in year one, given that our interest is in obviously branded value meat.

That is our philosophy in the U.S., it's our philosophy abroad.

And so that's what we are going to intend to bring to the party with San Miguel going forward.

We are going to make some other investments in that business in the upcoming year.

We don't look for any significant contribution on an earnings side in this upcoming year.

But in future years, the pro forma would indicate we should see some very solid contributions to Hormel Foods International coming out of the Vietnam operation.

Will it be a fresh meat business?

Or is it more focused on supplying raw material to some of your stuff that you export from the U.S. now?

I guess --

Well, the aim will be more the further processed products.

We have kind of learned a lesson maybe from our China experience, that our expertise in Foodservice gives us a particular advantage, and we have customers already who are entering the market in Vietnam, who are going to be very excited about having the opportunity to buy from a company that they know and trust within that market, so that will be one area of focus.

And we will also intend to create a retail grocery based items on a branded basis.

Okay.

All right.

Well thank you very much.

Have a Happy Thanksgiving!

You too.

You too.

Your next question comes from Farha Aslam.

Hi, good morning.

Morning.

Congratulations, Mike.

Enjoy the sun.

Thank you.

Thank you.

Thanks.

I would just like to focus on Specialty Foods.

The sales growth of 20% this year has been incredible.

Can you just share with us what has fueled that growth, and what gives you confidence that those levels can continue growing into the future?

Okay.

Well, I will answer your second question first, I don't expect a 20% increase in the upcoming year.

Specialty did have the benefit of Mark-Lynn for a significant portion of this year, and that business has grown as we had hoped it would, combining the wet pack products with the dry goods.

But really all three of the subcomponents of Specialty enjoyed very nice years.

Century Foods has landed some new contract packaging customers.

Indeed, that's one of the things I am very optimistic about heading into '07.

They really only had some of those customers online for the last 4 to 5 months of '06, and so we expect to have them for the full year in '07.

And same would be true, the Specialty Products subcomponent.

They had landed a couple significant new customers during '06 that we hope we would continue to enjoy good business from.

So our expectation going forward, we expect that unit to grow at rates consistent with our overall growth guidance.

It was a phenomenal year, particularly if you are looking at profit growth or sales growth, but you look at operating margin, okay, that took them to a 7.8% operating margin.

And that's about what we expected them to earn.

So we don't expect it to be a roller coaster that they had a big up year in '06, and then down they are going to go in '07.

We do think they can sustain and grow from that level.

Okay.

And then just going back into your Grocery Products area, could you share with us the issues you had with SPAM luncheon meats, and why sales were down there?

Well the SPAM, and frankly some other canned items have been somewhat up and down, not just this quarter, but for a number of quarters.

We seem to sometimes hit on the right recipe, in terms of our trade promotion and our consumer activity, and for a time it will drive some incremental growth, and then they sometimes seem to settle back down.

SPAM over the long haul is actually a franchise I don't have major concerns over.

It seems to have held its own domestically.

I think we have some interesting new initiatives on the marketing side for '07 that hopefully will continue to spur growth.

And if you look at SPAM on a global basis, it was up double digits this year on an international basis.

It is still a very vibrant franchise overall, but realistically it's probably not one we will look to be generating in the high single digit or double digit growth.

And looking at marketing expenditures, they were down year-over-year, could you just highlight what it was in the quarter, and going into next year, would you expect marketing to be down or up?

Marketing on a total, you know, that line item on the P&L basis indeed was down slightly for the quarter, and was fairly flat for the year.

We have made a fairly significant change, in terms of the mix of marketing underneath that calculation.

We are trying to put more and more of our marketing dollars out in the form of true consumer media, versus research or in-store or some of the other type of activities, and our media expenditures for the year were actually up $6 million year-over-year.

So we are really trying to focus on higher order activity, if you will.

Our budget for next year is a step-up from current levels, and it also will be the year we really come out of the gate in a big way against the Hormel brand.

We have a coordinated advertising and new labeling campaign against the Hormel brand, between both the Meat products and Grocery product division.

You will see quite a bit of activity against the brand and other brands during the year.

Great.

That is helpful.

And final question.

When you look at Refrigerated Foods going forward, are you concerned about hog prices?

Or is it competition, which was really tough last year, with Smithfield and Tyson forward integrating?

Which do you think is going to be the greatest challenge going into next year?

Well, when I look at Refrigerated Foods results for this year, and feel that our senior manager, Gary Ray, who operates that division really did a fantastic job generating an increase in profits in the year, in a year when almost anyone else you look at fell significantly, or went all the way down to loss positions.

Going into 2007, I think that unit has great momentum in its value-added areas, both in Foodservice and in Retail, on products such as NATURAL CHOICE and AUSTIN BLUES and CAFE H.

I think we will see better results out of the Farmer John component.

Their results trended more like other meat companies that are, you know, less value-added than Hormel is, and that is part of our mission at Farmer John, it to convert that over time to a greater percentage of value-added products.

And the Refrigerator Foods group also will benefit in 2007 from some costs benefits.

Those are some of the core reasons behind some of the small acquisitions, such as Provena and Saag's, and the closure of the Houston facility.

So we are optimistic that 2007 will be a very strong year for Refrigerated Foods.

Great.

Thank you.

Thanks.

Your next question is from Eric Katzman.

Hi, good morning.

Morning, Eric.

I guess my first question has to do with, following up on Farha's questions about the Hormel brand advertising campaign.

How big is the Hormel brand now, out of the roughly 6 billion in sales you have?

It would be definitely over a billion, but I guess I don't have that exact number handy for you.

And it would depend, fresh pork would be a, Hormel ALWAYS TENDER is a big number within that.

But it is a wide variety items.

Under grocery, you've got Hormel bacon bits, Hormel microwave trays, Hormel chili.

And on the meat side, it is Hormel pepperoni, Hormel entrees, Hormel bacon, Hormel ham, and so forth.

So it's the leading, it's the most well known brand, or it's probably tied with SPAM, in terms of it's notoriety.

And it clearly has the broadest portfolio within the company.

Yes, so in terms of the spending level, is that as you stepped up the spending behind the Hormel brand, is that, are you let's say if a typical company in the industry in packaged foods spends, let's say 6 or 7% of sales on a major brand like that, are you kind of, are we at that level of spending?

No, but we are hopeful that, we're going to head more aggressively in the direction of increased consumer spending, but no, that would, our total levels at 120 million on 5 billion, obviously don't take us to that kind of percentage.

But of our advertising and media expenditures a greater percentage is going to be focused on Hormel.

Some of that is new funding all together, and some of that is trying to, we will be backing away from some of the more diffused programs against the multiplicity of brands, and focusing it against three or four of the major brands.

Okay.

And then a different question.

In terms of your need to raise pricing, what kind of levels are you talking about if we assume that let's say that corn settles at, I don't know, low $3 per bushel levels?

What are you thinking like 5 to 6% kind of average pricing?

And as a follow-up to that, at what level do you get concern that the consumer starts to trade away from your value-add branded strategy, and starts looking at more private label product?

Well, your second question is the main reason why I probably can't give you a very good answer to your first question.

We really are going to have to weigh all those factors.

It depends on how unique are the products, what is the competitor set within that category, which channel are we selling it in?

What are the pricing notification requirements within those segments, in terms of making changes?

But, I think it's fair to say that it's generally understood within the trade that these grain costs are going to affect all raw materials for all sorts of products.

And it is going to be up to us to find that right balance point.

To keep the momentum of growth going in our items, but to sustain margins as best we can.

I guess, at what level do you think pricing becomes an issue for based on your modeling and price elasticity tests?

At what point, maybe you've done this in the past in other brands, where you have put through a high single digit price increasing, you start to see a shift, is there any past history you can give us?

I guess the best guidance I can give you on past history is there is greater visibility to the Grocery products changes.

And we typically adjust pricing on those items in the 3 to 5% range.

Right.

Okay.

And then last question, on the Specialty division, how, if you break that up into the three kind of main parts of the business, are you taking share, or are we talking category growth?

And if we're talking kind of category growth, how big are those, how big are the categories now, for let's say the Century, or versus the Diamond Cystal?

The best way I am going to be able to answer that for you, Eric, is to give you one illustration.

It really does vary across the board within the category.

If you look at our Diamond Crystal business, within some of their core dry franchises, they have fairly high shares, and that's fairly stable business.

They do an excellent job servicing the customers and producing products.

And that's sort of the 'steady as you go' part of the business.

They have been responsible for the Splenda brand, in terms of the Foodservice trade, and they have done an excellent job of permeating that trade, and that has created great growth for both us and the owner of the Splenda brand.

And that kind of growth we expect to maybe not continue at the levels it has the last couple of years, but there's still good growth there.

And I will point you again to say a Mark-Lynn, as an area where, one of the reasons we bought into that area of the wet pack business, one part was it was an excellent complement to the line we already had, and it was something we could offer our sales force to go into existing customers.

But the other element is we have a very low share in that category, and so there is all sorts of opportunity in term of becoming a bigger player within that segment.

That would be one example.

And that's the biggest piece of the Specialty Foods segment.

Okay.

Thank you, Mike.

Best of luck, you have done just a fantastic job, probably one of the best in the industry over the last decade.

And I don't know how well that's recognized in the world at large.

But it has really been a fantastic run, congratulations!

Thank you very much, Eric for those comments.

Okay.

Your next question is from Bill Chappell.

Hi, this is [inaudible] for Bill Chappell.

I had a quick question about the corn prices.

I was wanting to know if you could give an average guidance for the price to start using for next year?

All right.

It's my last call, so I will jump off here.

We would expect corn prices to be in the 3.40 range for the full-year.

Currently they are higher than that, but I think the near-term is higher, but then it comes to back to more normal, not normal, but it will bring it down to where the average is expected to be at 3.40.

Okay.

And I had, I was also curious about the competition landscape in the chili market, I want to know if that was going to be improving at all?

I'm sorry, your question related to the chili market, was it?

Yes.

Okay.

We are in year three of the new entries into the category, and I think it's now stabilized into a competitive set.

Chili's always been somewhat of a regional business. 10 years ago I was the chili brand manager, so I guess I got to know it pretty well.

There has been strong players out west, there is a strong player in Texas.

Campbell's and Busch are now in that mix.

They have certain markets where they have some strength, and other markets where they have shares that are not as strong.

We kind of treat them among the group within each market, in terms of the competitive set.

We do expect, you know, more normalcy out of chili.

It had a huge run-up 2 years ago as a category, actually on a category basis, it was down slightly this year.

But if you look over a two-year basis, it's still significantly up, and penetration is up, and so that is very good.

It's more back to normal, and just being able to promote our brands, and move our business within the regions that make sense.

Okay.

Thanks.

Thank you.

Your next question is from Oliver Wood.

Great, thanks a lot, good morning.

Hi Oliver.

Most of my questions have been answered.

Just a couple left.

Jeff, you had mentioned that the turkey cold storage was down 1% year-over-year.

Looking at the pork cold storage numbers, earlier this year they were trending down nicely.

The last couple of months they have been up.

This last month they were up 5% year-over-year.

I guess I am just wondering, is there any reason for concern at this point about some sort of oversupply situation?

And then if that does become an issue, does that negatively impact Refrigerated Foods given the recent shift in contracting?

I mean, looking at the proteins where we have significant investments in capital, turkey and pork, we are not particularly concerned about the storage levels of either of those proteins, but we recognize that we live in a world where they all matter ultimately.

The aggregate protein number is getting up there somewhat.

So it is something that we keep an eye on.

It seems to make that difference if you reach a critical point, and I don't think we're there now.

And our outlook is that we are not necessarily going to get there, but it's something we'll keep an eye on.

It was interesting to see the chicken down somewhat during this last period, that is somewhat helpful, as well on the aggregate.

And just kind of a follow on to the DDG question.

When we are looking at turkey feed, what does DDG's offset in terms of corn versus soybean meal?

What are the offset, in terms of what?

When you are looking at the feed composition, to the extent it's kind of the energy versus protein, you know, tradeoff.

Is it offsetting corn more or soybean meal, when looking at the turkey feed?

I guess the best guidance I can give you is to the earlier comment that clearly there is a limit, at least what we have been able to study, in terms of how much can go in the aggregate diet, and accomplish what you want, both in terms of cost and performance out of your diet.

But I don't know that I can give you what specifically out of the corn share versus out of the soy share.

There is other fat and other ingredients as well in the feed mix.

Okay.

Well, great, thank you very much, I will add my congratulations to Mike, and I'll pass it on.

Next question is from Mike Hamilton.

Good morning, everyone.

Hi, Mike.

Jeff was wondering if you could comment a little bit on your views of what you see as sustainable margins in Specialty Foods, and the Other category?

Well in Specialty Foods, we are now, to me we kind of have ramped up fairly aggressively to the levels that we had hoped they would achieve.

And so now they are kind of in the overall 25 to 50 basis point improvement a year guidance, that we try to push all of our businesses to achieve.

And I think they have enough good things going forward into '07, that it should be a doable number.

The All Other segment.

That one's a little bit harder to give you a read on.

Hormel International has components to it that are, I will just give you examples.

We have the partnerships we mentioned, for instance, our Philippine business of San Miguel, where that comes through equity and earnings, because we are only a 40% partner, so that's not in sales.

Same would be true in Korea, our sales of SPAM are on a royalty basis.

Those sales, although significant, don't show up in the sales number.

And so that makes that All Other segment's operating profit percentage higher than it probably otherwise would be.

That being said, it's still a very solid contributing entity.

It has a lot of grocery based items within the entity that we enjoy high margins on within the grocery business, and would expect to on an international basis, as well.

So the All Other, we should be able to stay in a low-double digit range for that, given that mix of royalty arrangements and partnerships, and so forth.

Could you comment a little bit on what you would like to achieve tactically in Farmer John over the next couple of years.

In other words, where you're putting your focus that is worth commenting on?

Well, Farmer John, I look back at what Joel Johnson was looking at at Hormel Foods back in the early to mid-'90s, where only about 50% of our products were sold on a branded value-added basis.

A lot of the fresh pork was still sold out on a non-branded basis, so the key emphasis was the creation of Hormel ALWAYS TENDER, and the continued emphasis of creating new innovative items.

That's what Farmer John needs to do.

It's a very well known, well regarded brand.

They tend to be, they are in categories that have been around for a long time.

The hams and bacons and hot dogs.

So we need to push innovation within that area, and we need to get that percentage up.

On a company-wide basis, we really have had excellent results in driving innovation.

We track that each year and our sales, during the most recent year our products introduced during the decade reached $850 million, so that's up significantly.

Kind of ahead of our goal, our billion dollar challenge we have internally.

Farmer John being fairly new to the family is lagging somewhat in that regard, but some good new things they are working on.

And that is going to be part of what it takes to get that business going.

On the cost side, these new acquisitions are really going to be beneficial.

Any meat business is a raw material utilization business, being somewhat isolated out there in the West.

They had fewer avenues for some of their raw materials, but having both Saag's and Provena now within the family are going to be excellent benefits to Farmer John going forward.

And I take it on a relative basis, you are looking more new product to drive what goes on at Farmer John, as opposed to needing to supplement marketing with brand building?

Well, the other element for Farmer John is there are some market opportunities there.

Farmer John is extremely well known and well penetrated within southern California and Arizona.

Has room that it can grow within Las Vegas, northern California, we have had some new items in the Pac Northwest.

Our plan for that product line, is it is going to be a regional brand, that is where it is known.

But is has room to do better within the region where it operates.

Thanks and congratulations.

Thanks.

Your next question is from Jonathan Feeney.

Good morning.

Hi, John.

Michael, congratulations!

Thank you, sir.

In the past, Jeff, you have talked about a sustainable margin in turkey in the high-single digit range, just from your history and experience in that segment.

You have been beating that number for an extended period of time, and I guess I'm just wondering given the market growth, and I guess, what we'll call a lack of competitive vigor from some others, has that thought changed for you over the long run?

Well, I mean, I think the range of performance within Jennie-O Turkey Store, we clearly do believe that range has moved up fairly significantly.

The acquisition of The Turkey Store has turned out excellently for us.

It was a great fit of brands, it was a great fit of supply chains and raw materials and plant operations.

We were able to focus operations within certain plants, and so yes, that would raise the expectation.

In terms of the number, I mean, even for this year, I think realistically our guidance for Jennie-O Turkey Store for the year, probably still will be that high single digit number.

But that clearly is the higher number than it would have been a couple years ago.

Okay.

Thanks.

And I have to say over the past 5 years, I guess I haven't been around for too long.

I have never seen such a big disconnect between your margin performance in Refrigerated Foods, and that comparable number at leading public and private competitors.

You know, is it just branding that has changed the marketplace, that you are able to keep margins higher?

Is there a mix factor I am missing in there?

What would you say is the biggest driver that is keeping Refrigerated Foods margins high, despite a tough supply environment?

Well, I do think it really does get down to the branded value-added products.

Our expectations for that group, in terms of operating margins going forward is higher than what they did this year even.

If you look at how many marquee branded items, how many leading share items that we have, what kind of growth we were able to get out of new things such NATURAL CHOICE and CAFE H and AUSTIN BLUES, and so forth.

You have a certain wash effect of the macro elements that are going on, the tide that makes it go up and down somewhat.

But the thing that really does carry the day in both our protein businesses and throughout our businesses, is that it's about branded value added products that should have decent margins.

But I guess going back to Eric's question, which I think you weren't, to ask that in sort of a different way, just looking at history.

I mean, you've had strong brands in the portfolio for a long time.

And I guess is there something about, different about the way you are going to market?

Is it that you are doing more Foodservice business?

Why is it this time around, as opposed to 2002 where consumers did buy the cheap private label meats, and you saw some tougher trends?

I guess what is it you think that is the driver in the company that is improving that?

Or is it just a greater share from brand?

Well, I do think there's leverage in the number I cited a little earlier on the new product development.

That's $850 million worth of sales in this last year alone of all branded value-added items throughout the company.

Items that didn't exist in the year 2000.

Were a few of them around in '02?

Yes, but it's been a nice acceleration on a year-over-year basis, even compared to last year's number.

I think we're up 20 plus percent.

There is good momentum on a lot of fronts, both within Refrigerated Foods, and in our other divisions, in terms of creating items that meet the convenience needs of consumers, and meet their flavor hurdles, as well.

And just a final question for Mike, actually.

And it's the best kind of question, because you won't actually be here when it plays out.

Oh, I love that.

[laughter] I mean on the conference calls, of course.

You will be on the golf course.

Corporate expense guidance, that's been kind of volatile, more volatile than usual, that line of the segments operating profit.

Can you give us any sense what that might be for '07?

How to think about it?

Well, in terms of general administrative, I think I referred in the notes, that we were going to be, we think that's going to be about 2.8% of sales.

And that's down from what we have seen in the past, Jonathan.

But we don't expect, we are not going to have the big retirement benefits that we had in the first quarter of this year going forward, and we are not going to have and don't expect to have some of the other 123(R) expenses that we had.

So when you put all those things together, I think we are going to get down more in that 2.8 or 2.9% of sales on a ongoing basis.

And if you guys don't look at it this way, that's fine.

But comparing that 2.9 to say the general corporate income expense line in the segment operating profit, what is that, how do those two numbers compare?

Oh.

Well it gets a little difficult because, because in terms of our total numbers, some of that gets allocated back to the segments.

Right.

And I guess I might prefer to have Fred go through that maybe offline with you.

Okay.

Thank you very much.

You're welcome.

Congratulations, again, Mike.

Thank you.

Your next question is from John McMillin.

Good morning, everybody.

Morning, John.

Unlike Jonathan, I think I have been around too long.

But Mike, I have been around long enough to watch you and Joel kind of hit it down the middle of the fairway, and congratulations and best wishes for a happy retirement!

Thank you, sir.

I do note that both you and Joel leave exactly when corn goes up to $4.

You can't say you weren't smart.

As soon as the wind starts blowing.

There you go.

Nobody's talked about this first quarter guidance, which if you take the midpoint of your guidance, which is conservative, usually conservative, it's basically a flat operating quarter $0.55 versus the year ago period of 55, if you add back the charges.

Is that conservative?

And what's in that number?

Well, first of all, obviously our GAAP number for last year was $0.50, so a 9% increase over the year before, if you back it out, back out those adjustments and say okay you are going to look at it from a 55 standpoint.

Then you're looking at a 20 plus percent increase year-over-year.

It was a strong quarter on that basis.

The other factor we are looking at for this year as we've talked about, the grain headwinds are hitting now, and have been for a couple of months.

So those are rolling through turkey costs as we speak.

Yet the ability to price is instantaneous.

And so there is going to be some lag effect, in terms of our ability to get those margins up to where we would like them to be.

Otherwise I guess the best we can say is we've looked at everything.

Think that our 2.15 to 2.25 range is the right range for the full-year, and at this point our best outlook for the quarter.

Yes.

The full-year guidance is obviously okay.

I just, I didn't know if there was some marketing expenses kind of built into that first quarter, for any kind of timing of marketing?

Can I go back to Eric Larson's comment.

When Eric said historically you have not locked in corn for very long.

I notice you didn't really say anything to that comment.

Do you care to?

Is that correct, and can you kind of help us here?

Well, historically, I mean if you go back a ways, we wouldn't, we really didn't hedge at all.

I think we made it fairly clear 2 to 3 years ago that we were looking at that, and that has become part of the mix of strategies here at Hormel.

We have still under the last 2 to 3 years, we have not gotten deeply into hedging, but we have had, and there is obviously, it's not just grains, there's opportunities within some of your energy costs, and on a total company basis, we have some hedges in place, if you count all of those things, but we have never really wanted to get into the specifics.

Okay, we have this position on this commodity at this time.

It gives Mike something to do between now and the end of the year.

Just in the turkey number in this 2.15 to $2.25 guidance.

Did you kind of suggest what kind of turkey operating profit number you are kind of hoping for, building in?

I do think we are going to be looking at an operating profit number that is probably going to probably be under 10%.

You know, if we had looked just back in August and September, our expectation for Jennie-O Turkey Store would have been, that it would have been growing its earnings just like the rest of the units in the Company.

With corn north of $3.50 currently, and with our long-term guidance thinking it's going to end up in the 3s, our guidance now assumes that Jennie-O Turkey Store probably will not have a year-over-year growth picture.

But they do have some offsets, they have had great growth in their value-added products, and new products in particular, such as oven ready and rotisserie turkey, and turkey burgers within Foodservice and Retail, they should have a somewhat better year, in terms of some growing conditions.

There were visibility issues during the middle part of the year, and heat issues that caused some of their operational efficiencies to be down.

And we don't expect that they would be burdened with buying meat at high prices as they were in the second half of the year.

So, you know, in total, best guess will be it would be a down year, but it will still be a pretty strong year in the overall scheme of things.

You know, you pre-announced 63 to 65, and you didn't make any comments to any charges being into that.

Obviously if you add back the $0.02, which is obvious you get to a $0.66 operating number with this quarter.

I didn't really understand the, was it the STAGG comments that you were making, in terms of the cost entailed in repositioning that brand, and so forth.

Did you quantify that?

Or can you quantify that?

The STAGG?

There was something within grocery products where you talked about a quarterly expense.

Yes, that was an earlier question.

That would be about 1 to $2 million during the quarter that were sort of write-off expenses, related to that conversion back on STAGG.

Okay.

Thanks, have fun, Mike!

Thanks.

Your next question is from Pablo Zuanic.

Hi, this is actually [Akshay] on Pablo's behalf.

Most of our questions are answered.

But just one thing I'll follow-up to all the questions on grain prices as it relates to Jennie-O Turkey Store.

Can you talk a little bit about the pass through, I know you mentioned there could be a lag there, but we consider the turkey industry in more of an expansion stage, than the other meats, so we think the pass through may take longer in terms of passing through prices.

Can you just comment on how your conversations are going with, in terms of pricing and how your value-added strategy would offset some of those cost pressures?

Well, it really is going to depend, I mean it's kind of segment by segment, Jennie-O has strong businesses within the Foodservice trade, within Deli, within the Retail fresh meat case, within the Frozen case.

The share positions are very different in those different areas.

So there really isn't any one answer I can give you.

Clearly we are looking at egg sets in those numbers, as well.

And we will be interested to see where supplies sort out.

I will say about this time last year, we were looking at big number increases in egg sets as well.

When all is said and done, the industry ended up, ran out of meat.

So it's a dynamic picture in terms of supply and demand, and we will have those dialogues with each of the customers, and hopefully settle at the right level.

It is hard to really give you one recipe for how that is going to work.

Okay.

Thank you.

There are no further questions at this time, sir.

Thank you for all joining us.

We know it's somewhat of a burden the day before Thanksgiving for everyone to do this.

We work as fast as we can to get our numbers out at the end of our fiscal year, which ends at the end of October.

I want to applaud all of our accounting group and all of our business groups for getting it done, and for the excellent year they were able to generate.

And we want to wish you all of you a Happy Thanksgiving!

Be sure to go buy an Oven Ready turkey, or a Cure 81 ham.

Thank you.

Thank you for participating in today's teleconference.

At this time, you may all disconnect.