荷美爾 (HRL) 2007 Q1 法說會逐字稿

Good morning.

My name is [Shandra] and I will be your conference operator today.

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

I would now like to turn the call over to your host, Mr. Halvin.

You may begin, sir.

Good morning, and welcome to the Hormel Foods conference call for the first quarter of fiscal 2007.

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 web site at www.Hormel.Com under the investor section.

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

As you know, this is Jody's first conference call with us as CFO And we're really excited to have her as leadership in this position.

Jody was previously serving as Treasurer and Vice President of Finance.

Jeff will provide a review of the operating results and an outlook for the remainder of fiscal 2007, and then Jody will provide detailed financial results for the quarter.

The line will be open for questions following Jody's remarks.

An audio replay of this call will be available beginning at 11:30 a.m.

Central Time today, February 16th.

The dial in number is 800-642-1687 and the access code is 8264168.

It will also be posted on our web site and archived for one year.

I'd also like to remind everyone that we will be presenting at the CAGNY Conference next Tuesday, February 20th at 4:30 p.m.

Mountain Time.

If you're not attending our conference our presentation will be Webcast live and you can access it through our website.

An archived version will also be available on the website for 90 days following the presentation.

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 and or implied by the statements we will be making.

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

Refer to page 33 through 37 in the 2006 Annual Report to Shareholders.

Now I'll turn the call over to Jeff.

Good morning, everyone.

We posted decent results for the first quarter given the considerable headwinds we faced with corn prices.

Sales in the quarter reached $1.5 billion up 6% from the prior year and up 5% excluding acquisitions.

Our earnings per share for the quarter were $0.54 compared to $0.50 last year an increase of 8%.

Our Specialty Foods segment was again the clear stand out reporting a 75% increase in operating profit for the quarter.

Diamond Crystal Brands, our Specialty Products division and Century Foods International each contributed significant sales and profit growth to the overall segment results.

In the All Other segment, our international business unit posted excellent results for the quarter with sales up 33% and operating profits up 65% compared to last year.

These results were achieved through strong export sales across both our retail and foodservice channels.

In particular, Stagg Chili and Value-added Fresh Pork are driving our retail export numbers.

While we continue to be excited about the growth opportunities within both Specialty and All Other, we do not expect to maintain this level of extraordinary growth within these segments.

Our Refrigerated Food segments posted a 5% increase in sales and an 8% increase in profits.

Within this segment both the retail meat products and our Foodservice businesses delivered solid results for the quarter.

In the Meat Products business unit, our recently launched Natural Choice line of pre-sliced lunch meats continues to gain distribution and contributed nicely to the results for the quarter.

Because of the strong acceptance of our Natural Choice sliced lunch meats we have added sliced roast beef, chicken strips, bacon and pork filets to the Natural Choice line of products.

The integration of the two small acquisitions that were announced last quarter, Saag's and Provena are both on schedule.

Both businesses are good strategic fits to our overall value-added portfolio, and they are a good geographic fit as well, in that they are able to use our Farmer John facility as a raw material source.

Our Grocery Product segment reported lower than expected top and bottom line results.

Areas within Grocery Products that reported reduced sales were the Spam family of products, Dinty Moore family of products and Chi-Chi sauces.

We have higher promotional and marketing programs behind these categories for the rest of the year in order reverse these trends.

The recent repositioning of Stagg Chili from a national brand to a regional brand also caused some difficult short-term volume comparisons within the segment for the first quarter.

However, long term it was definitely the right move for the brand.

We will now be able to allocate the appropriate marketing support against Stagg with it's highest marketing share region.

On the positive side for Grocery Products, our Hormel microwave tray products and our recently reformulated Hormel Bacon Bits both had terrific quarters.

We have finalized our branding and repackaging work for the microwave trays and we'll introduce a new subbrand for the line under the Completes name in March.

For those attending our presentation at CAGNY, you will receive a sample with the new package design.

The integration of the Valley Fresh business was completed during the quarter and we are expecting synergy contributions from this acquisition to accelerate going forward.

Jennie-O Turkey Store reported significantly lower operating profit because of the higher grain Markets.

Feed costs were up by $10 million compared to last year during the first quarter.

We are hard at work to offset this increase through price advances and cost saving efforts.

I would also like to note that while we are directly affected by the higher grain costs in our turkey operation, we fully expect to see higher costs in pork and beef raw materials over time as well.

We plan to make similar pricing adjustments to our pork and beef products in order to pass on these higher costs.

While the overall volume that Jennie-O Turkey Store was up just 1%, value-added volume was up 12%, commodity volume was down 15% representing a very positive mix shift.

All three of the Jennie-O Turkey Store value-added channels, retail, deli, and foodservice, generated double digit increases in sales growth.

Products that delivered strong results in the quarter included turkey burgers, rotisserie turkey, tray pack items and our oven-ready line of products.

Looking ahead we are expecting turkey production to increase modestly for the year and believe this will be absorbed with higher demand.

The last USDA freezer report continues to show turkey meat inventories significantly below the five year average.

In summary, I'm excited by our continued success in the growth of branded value-added products throughout our various business segments.

This momentum, coupled with strategic price advances and a continued focus on controlling other costs, provides the basis for Hormel Foods to overcome the steep run up in grain costs that is likely to confront us for the rest of fiscal 2007.

Based on our current expectations for Markets and our business plan for the rest of 2007, we are maintaining our guidance range of $2.15 to $2.25 per share for the full year.

Our guidance range for the second quarter is $0.47 to $0.53 per share.

At this time I will turn the call over to Jody Feragen to discuss the financial information.

Thank you, Jeff.

Good morning, everyone.

I look forward to meeting many of you in person over this next year.

Now, for some of the numbers.

Earnings for the fiscal 2007 first quarter totaled $75.3 million or $0.54 per share compared to $69.3 million or $0.50 per share a year ago.

Dollar sales, as Jeff mentioned, for the quarter totaled $1.5 billion compared to $1.42 billion last year, a 6% increase.

Acquisitions added about $20 million to the top line in the first quarter.

Volume for the first quarter was 1.1 billion pounds up 6% from fiscal 2006.

Acquisitions added about 12 million pounds to the quarter.

Selling and delivery expenses in the first quarter were 10.9% of sales this year compared with 11.2% last year.

Lower freight costs benefited our bottom line during the quarter.

Our marketing investment in the first quarter was $34 million or 2.3% of sales compared with 33.7 million or 2.4% of sales last year.

Administrative and general expense was 2.8% of sales for the quarter compared with 4.1% last year.

Pension and stock option expenses were lower this quarter because last year included the catch up, 123 R Stock Option Expense, and pension plan settlement charges due to our executive retirement.

Interest expense for the quarter was $6.4 million compared to $6.2 million last year.

We expect the full year interest expense to be about $24 million.

Total debt at the end of the quarter was 356 million compared with $361 million last year.

No significant change in debt is expected during 2007.

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

We expect full year depreciation and amortization expense to be about $125 million.

Our effective tax rate in the first quarter was 34.8% versus 30.9% in fiscal 2006.

The effective tax rate was lower last year because of a $3.4 million discrete tax benefit.

We expect our effective tax rate range to be 35.25% to 35.75% in 2007.

Capital expenditures for the quarter totaled $36 million compared to $25 million last year.

For 2007, we expect capital expenditures to be around 145 million.

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

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

We did not repurchase any shares of common stock during the quarter.

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

We processed 2.4 million hogs in the quarter compared with 2.3 million last year.

The actual live hog cost in the first quarter was $46 per live 100 weight, in line with our forecasted market of $45 as provided in our fourth quarter conference call.

This compared with an average live base price of $45 in the same period last year.

We anticipate an average market of $48 per live 100 weight for the second quarter compared to $43 last year.

We expect the hog supply to increase slightly over the remainder of 2007 and expect the live market to average about $51 per 100 weight for the rest of the fiscal year.

At this time, I'd like to turn the call over to the operator for questions and answers.

Operator?

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

Hi, good morning.

Good morning.

Could you share with us what were the positives of the weaknesses in Spam in the quarter?

A number of the grocery items really are swinging a great deal with what kind of promotional activity we had put against them.

We had had a fairly strong finish last year against Spam.

The retailers sometimes only have so much appetite to feature the same item on a consecutive basis, and so, indeed it was a down quarter, and that's a good margin contributor for us, but we do have good things in place for the second quarter and should see that snap back.

Okay.

And so as you look at margins in the grocery division, could you just kind of share with us how you expect it to progress as the year goes on?

We look for grocery overall to be in that 16 to 17% range.

We will be, we're expecting better returns from our higher margin items going forward.

At the same time, we are stepping up our marketing committment against a number of our grocery items, particularly the ones under the Hormel brand, and those are all factored then to an expectation that grocery should have a good rest of the year.

Great.

And when you look at refrigerated products and you look at pork processing margins and particularly in line with the Triumph Plant coming online, could you comment on where you see those margins and how that's going to effect your business?

Because it does tend to be more value-added than everyone else's.

Farha, I mean, we do see an up swing occurring right at the moment in terms of pork prices.

It's nothing that's not manageable within our system and indeed as we sit here today, processing margins are really excellent.

We're not banking on that lasting through the whole quarter and so we look at the Triumph Plant as something that would not have a great deal of significance against our guidance for the remainder of this year.

And when you look at your turkey division, and what kind of grain prices are you factoring in now in your guidance?

We're really, for the remainder of this year, we're settling in at this $4 range is what we've based it on.

I mean, really, clearly, there's always a possibility that this run up that's occurred could recede back but we're treating the run up as more of of a systemic change in response to ethanol expansion.

We really don't see anything coming either from the political world or from any of these new technologies that have been discussed that are going to change the reality of what's going on in that market in the short run, and so, therefore, since it is systemic, we recognize the need to raise prices against -- on a going forward basis.

And have you locked in that $4, or are you still on the market because there is a possibility that it could go down.

Farha, we've been really watching the markets and have been buying in or opportunistic dips.

I would say that we're not going as extensive as we may have in the past, kind of hoping to see where the market finally settles for the year.

And my final question, then I'll pass it on.

Jody, this is our first call with you, and you noted that you're not planning to use your cash to reduce debt and you haven't repurchased shares in any meaningful way during the quarter.

Can you kind of share with us your priorities for using cash going forward?

Well, the priorities are pretty much the same as they were when I was Treasurer.

We are continuing to look for strategic acquisitions and opportunities in that light.

The debt repayment, Farha, really is tied to the fact that that's a fixed rate bond that's out there until 2011, and the penalties for repaying it probably aren't worth it.

It does keep us a toe in the capital markets as well, and then we look at growing our businesses.

We're making some additional marketing investments this year and we'll look at share repurchase if the acquisitions don't seem to come to fruition.

Thank you very much.

Your next question comes from the line of of Pablo Zuanic.

Good afternoon.

This is actually Akshay Jagdale on Pablo's behalf.

Good morning.

Just based on your comments you made earlier about Jennie-O Turkey and just the turkey market in general, we're seeing signs of a pass through of grain prices on the hog side.

Can you just share your thoughts on what you're seeing there in terms of the commodity turkey market and pass through of grain costs?

Well the commodity turkey market remains fairly strong.

It's not at the levels that we saw during this time of year last year.

Indeed that was why Jennie-O Turkey had a 15% operating margin a year ago during this time was a major run up in breast meat values late in the year.

But the values are still historically quite solid, and we think the fundamentals of the supply in demand in that area are in decent shape.

We're really not looking to the commodity area of the portfolio to absorb the cost increases.

I mean, the market will be what they will be in that area.

In terms of our total dollar sales at our Jennie-O Turkey Store, I mean, 80% of our sales are in the value-added areas and that's where with our customers we need to settle upon the right pricing strategies to continue to cover these costs but also to drive our franchises going forward.

That makes sense.

Just another question as a follow-up to one of the comments you made earlier is, you say you are expecting hog prices to be about average about $0.51 per 100 weight.

How does that compare to what you had last year?

I'm assuming it's up, and how do you expect to adjust pricing related to that?

I mean, we're worried that margins may suffer in Refrigerated Foods because of higher hog prices.

Can you comment on that?

It's higher on a year-over-year basis, but we also are coming off a quarter where the average is 46, and we're expecting 48 for this quarter, and Refrigerated had a decent quarter at those kind of levels, so we're really not looking at that in the short run as being a major pressure on our ability to generate margins in that area.

Okay, great.

Thank you.

Your next question comes from the line of Tim Ramey.

Good morning.

Hi, Tim.

Jody, just a couple of clarifications.

Jeff I think just said 48 for this quarter.

Did you say 45?

Did I misunderstood one or the other for your outlook for the 2Q in hogs?

For second quarter?

Yes.

We expect it to be about 48.

Okay I'm sorry.

I misunderstood earlier.

And then you said 51 for the rest of the year.

Does that not include the 1Q or is that an average of 4Q?

That would be like second quarter going forward.

Second quarter going forward.

Good.

Okay.

Am I right to think of the sort of necessary price increase in Jennie-O Turkey Store to be somewhere around 3.5% to compensate for the price of corn?

Is that roughly the right amount?

My sense would be that that's not a bad ballpark, but the reality of how it executes out is, there's some prices that are on long term contracts, there are some areas of the business where the competition is more fierce and we have to watch those accordingly, and then there's some where we have enough strengthen in the market wherein those cases we probably need to push them harder than that.

And we're in the middle of implementing a strategy based on all of those considerations.

But you're relatively confident that that's in the range of what you can do?

It is, but it's going to be on a timing basis, it will continue to be more difficult in the second quarter to see that realized through to the bottom line.

The run up went from the low 2s to the low 3s to the mid 3s to $4 over a fairly rapid period of time, typically taking pricing doesn't work quite at that rate in most of the value-added areas.

And so, our anticipation, in terms of catching up and getting at a more normalized level, is really in the second half then for Jennie-O Turkey Store.

Not that some of them aren't already in place, but our best shot right now for second quarter for Jennie-O Turkey Store is a lot like the first quarter in terms of the year-over-year loss.

And, Jeff, when you talked about the increase in corn prices, is that what you actually paid, even taking into account some hedges, or is that just kind of looking at spot versus spot year-over-year?

Well, I definitely don't want to characterize that as what we've paid, because, not only would you have to factor in some hedge activity, but you'd also have to factor in basis difference, but directionally, that is the kind of run up that we've experienced.

What we did have some grain hedges in place, frankly, they were more significant in the soy meal side than they were on the corn side, but that's all -- an all in part of the equation in terms of what our total feed costs are.

And then just to wrap up, the pricing in Grocery Products, with volume down a little bit there, it makes me wonder if there was some hesitancy on price, or is this just about promotion and marketing, are you seeing pushback on price?

Do you need to take more pricing, what?

Can you update us there?

Yes, sure.

First of all, we actually are going to take more pricing.

We have communicated to the field price increases on certain items within the Grocery Products portfolio, those would be effective April 30th, so again, not a second quarter effect but a later in the year effect.

The Grocery Products had such an up and down quarter.

There was some franchises that did fantastic and others that really struggled, that I looked to the team there, and looked more at the marketing mix, the advertising we have going forward, they have some excellent programs in place with major retailers heading into quarter 2 and beyond, and so I just expect more consistency among the brands than to allow that division to shine.

Terrific.

We'll see you soon.

Thanks.

Your next question comes from the line of Bill Chappell.

Good morning, Bill.

Hi.

Just, I know with the new contract with your growers, its certainly taken some of the grain pressure off of you, but can you give us kind of an idea of what, if any, pinch they might be feeling, and do you need to help them out as if grain prices go a lot higher or is everybody in pretty good shape?

Well they're coming off of some pretty good years, for starters.

And secondly, I mean, in an arms length negotiation, that was one of the factors in weighing which contract to go with,and many of them have integrated operations and really felt that they were more effective at hedging their own positions on grain.

And if we were to stay at these levels two, three, four, five years would we have to revisit some of the contracts?

Potentially.

But it's not something that we see raising its head here in the next 12 to 18 months.

Okay, and then can you talk a little bit more on the acquisition pipeline?

I mean, kind of areas you're looking at ,and also where we are in terms of synergies from the recent acquisitions?

Are we third, fourth inning or even earlier?

Well, on areas, I mean, it's really the kind of same platforms that we've talked about.

We tend to like to add-on to areas of business that we have a familiarity with.

We've done some deals, obviously, in the canned goods area, and we look -- foodservice is a good area for us, deli is a good area for us. [inaudible] and we've had good luck within our specialty segment.

So, it would be the type of things we would look at would be not entirely new legs to the stool but additions to areas where we already have some presence.

In terms of synergies, it's a mixed bag both on timing and on just the deals themselves.

I mean, obviously, the very new ones, the Saag's and Provena's were very early into it, Valley Fresh.

To me, we have the fundamentals in place now, but those numbers have not flown through until we were in a position that we were producing all the product in the plant , until the salesforce fully understood our marketing plans to market the two different brands together.

And so, I don't know what inning that is, but Valley Fresh we would expect, starting now, should be in a good position to contribute to Grocery Products.

And then some of the other deals, they varied.

I know Lloyd's has been fantastic, Mark-Lynn has been fantastic, Farmer John has been more of a struggle, and some of the markets have broken against us there and we have work to do there.

Great.

Well actually with the question on the synergies, I mean, is that part of the reason why you're still comfortable with the earnings range despite some of the adverse commodity trends?

That's certainly one of the factors that should be helping in a number of the different units.

We're in the last two years, we've got 7 deals that we've made and most of them should be contributing on them.

And we fully expect the pricing increases through our sales area to come into effect in the second half of the year.

Okay, great.

Well thanks a lot.

Goodbye.

Your next question comes from the line of Christina McGlone.

Good morning.

Good morning.

I guess trying to reconcile some of the previous answers.

If corn, your original expectation was 340 and now you're using 4, and I think before you were talking about kind of benign soybean meal prices and those are have -- are probably stronger than expected.

I guess, have you already gone and are you obtaining pricing?

Is that how you're able to be confident about keeping guidance for the year?

Well we were just up at Jennie-O yesterday, as a matter of fact, and reviewing with a couple of divisions there what they've been accomplishing in the pricing area.

And now, to be honest, though, what's ending up happening is we're having to take a two stage advance.

Stage one, we were comfortable that they had a lot of things in place and a lot of that pricing was already going to be rolling through, but as you point out, that got us to the low $3 range and now we're confronted with a higher level, but we had enough success in round one.

We have enough strengthen our brand and leadership position enough of those markets, and obviously, we're not only not the only meat company facing this, we're not the only food company facing this, and most of the retailers and foodservice operators understand that this is is the environment.

It's kind of a national decision that's been made to subsidize domestic production of ethanol, somewhat at the expense of what the consumers are going to pay for food.

So that's -- we have to do our part, and then to making sure that that goes forward.

Okay, and then in grocery, you say you -- you have already taken pricing in grocery and then you're taking additional in April?

I was wasn't clear if any has been taken already.

I'm sorry.

We announced a price increase and are communicating that to our customers just within the last couple of weeks and it will be effective at the end of April.

This will be the first price advance on a general basis in grocery in three years.

There were a couple of items, Carpelli, we know went up last year, but by and large on a franchise basis the last time was in 2004.

Okay, and then, in terms of marketing, you had talked about spending, focusing your marketing on Hormel, and I think some of those funds were being diverted from different other products, but now you're talking about maybe supporting like say, Dinty Moore more, substantially, so is total marketing going up or is this all in line with what you originally forecasted?

We should see an increase in total marketing during the second half of the year, that's when most of those programs are kicking in.

And of the total marketing spend, we definitely are going to dedicate a larger share to the Hormel brand and the relaunch of that brand and our new labeling and so fourth.

And, I don't know if you'll be at CAGNY, but we'll be covering that quite a bit during that presentation on Tuesday.

Okay.

But, so, it's still, marketing is kind of still in line with your expectations that you gave us last quarter?

Yes.

Right.

Okay.

And then just last question, what is the ACD of Natural Choice right now?

On the sliced items it's in the high 70% range, and then I mentioned a number of new items.

I really don't have those numbers, but I -- my guess is they are still quite low.

They are really quite new introductions.

Okay, thank you very much.

Your next question comes from the line of John McMillin

Hello, everybody.

Good morning, John.

I think we might be in the afternoon here in the east, but it's probably the only number I'm getting right lately.

The weather, does that have anything to do with your business, which is sometimes, it's just so warm, November, December, January.

Did that hurt some of your canned products?

Did that have anything to do with just the, the modest 1 gain, or I guess, 3 volume drop?

It may have.

One element I can tell you in support of that is, the first two periods were particularly weak and the third period was quite good.

And so, as it got colder and interest kicked in on the canned items, that could well be going on, and if that's the case, we should be in good shape at least for another period or two based on what we've been experiencing.

Now, is there a buy-in associated with this price increase?

Because I know how retailers like the buy-in cans.

It would be pretty limited.

We've kind of, I think we learned that lesson a couple price increases ago, and the old days of really [inaudible] loading, we really try to look at what a normal deal flow would be and we would allow a minor buy-in against it, but it should not be significant enough to distort the numbers.

But it's obviously a ending February kind of time?

It's something that might benefit February shipments, not the -- obviously not January, or it was no --

Yes, we hadn't even told the field the numbers, during when Q1 was still open.

If anything, it would probably --

Well I hope so with the free volume dropping, I mean, I'm just trying to assess, obviously, know [retail].

What do you think, if shipments fell 3 in grocery, what do you think takeaways were?

I mean, was there some, and Campbell talked today about how retailers worked on inventory.

I mean, was there some of that?

I mean your takeaways weren't as bad as that, were they?

John, again, it was such a mixed bag.

I don't have an aggregate.

We really aren't able to pull together a roll up of all items in grocery on Nielsen.

We had some items that don't hit the universe.

We have some items that [inaudible] only 45% of the volume sells from Nielsen stores.

So, we did not, I heard some of the commentary earlier in the year from people saying, gee, some of the major retailers are changing their inventory patterns.

We really didn't see that affecting shipments.

The bottom line for Grocery is it was an incredible mixed bag.

We had some franchises that did fantastic, well into double digits, and others that really floundered during the quarter.

And so that would tend to tell me that really wasn't something the retailers are doing.

And do you know of any of your turkey competitors that have, that were successful in hedging or buying corn and feed earlier?

I mean, just to the extent you're at a -- do you believe you're in any disadvantage relative to your turkey competitors?

I guess would be my question.

All I would know are kind of third hand anecdotes.

But, obviously --

Yes, but I like those.

[LAUGHTER] -- kind of things.

My understanding from that would be, I heard of one smaller operator that was clever enough to hedge well in advance, but most of the other bigger operators that we work with sound like they're in the same boat we are.

Okay, thanks a lot.

The run up really hit at a time when most people were just putting their looks at their programs for the year in place, so.

Okay, see you in a couple days.

Thanks, John.

Your next question comes from the line of Diane Geissler.

Good morning.

Hi, Diane.

Can you hear me?

Yes.

Okay, you may have given this number and I may have missed it, so I apologize in advance, but did you quantify any benefit you might have had from hedge contracts in the quarter?

No.

No, we don't -- we don't typically do that, Diane.

I'm sorry?

We typically don't segregate the cost of hedges to our program.

But you did say that you were actually better positioned on soybean rather than corn.

I mean, was it something material?

In terms of -- I guess what I was referencing was in terms of quantity of coverage.

We had more coverage in soy meal, but even with that, I couldn't tell you what dollar difference that made during the quarter.

It was not significant.

Not significant.

Okay.

And I guess the other question I have, is just kind of getting back in the Grocery products, and thinking about sort of where that business, you look back five years in terms of what its margin structure was and sort of where it is today.

Obviously, you've made acquisitions, etc, so it may not be comparable.

But is there any reason why it couldn't get back into that kind of high teen, low 20 operating margin range?

And sort of, if that is achievable, what do you have to do to kind of get it there?

Well, I mean, given the track record over the last few years, we view those high teen numbers as to what we're really striving toward.

And I think it's -- it is a matter of getting -- continuing to accelerate the mix of items.

We have some items like these microwave trays that are good margin contributors that keep growing at a very nice pace and that over time should shine through like that.

We've had a number of quarters, though, where we've had negative results as some of the more mature items that have not allowed that to happen.

Well, I just -- I appreciate the fact on these new products, and I think they're terrific, and I'm sure the margins on them are fairly substantial in comparison to some of the other things you have in your portfolio, but, do you run into a situation where it's just your base -- your base franchise business is just so large that if you can't get it moving, or it moves slower than you want it to, even if you have fairly substantial growth on these new business lines that you have, it's just hard to make it up?

My assessment of the -- of kind of a model would say, that if we could stabilize some of the more traditional items and the others continue to grow at the rates they've been growing, we would be able to achieve what you're talking about.

What keeps happening is we're not at stability.

We're at declines in some of those, and they seem to -- different ones seem to pop-up during different quarters or different sets of quarters.

So we need to come up with the right recipe to stabilize those, the more traditional franchises and allow the -- the microwave business is getting close to 20% of our sales in the portfolio.

The ethnic items are close to 20% of sales.

Those are items that ought to be able to grow at a faster rate, so if we can stabilize the others we would be able to achieve the kind of -- our long term guidance is 3 to 4% in total volume in Grocery but we should be able to see that kind of basis point increase back toward where we used to be.

And it really was the Spam, the Dinty Moore, the Chi-Chi 's, that you cited in the Press Release?

Those were the areas of significant --

Yes, for this quarter, and other quarters there were Mary Kitchen.

We struggled pretty mightally with Stagg there for awhile, and that was the reason we pulled back to a regional marketing approach and not spend all of the slotting in the supporting areas where we weren't obtaining [inaudible] and so we should have a benefit going forward that should be a much more comfortable [frame].

How much of the weakness versus kind of where you want that business to be, is sort of self-inflicted?

Like you don't have the marketing plan that you need, and how much of it is kind of externally driven, your competition executes better against what you're doing?

Well, for a lot of these franchises, we have very large shares, so as driving the category is our responsibility, and I don't see, I can't hang blame on the competition or point to that as being, geez, that's what's causing it.

It's up to us to find a recipe to continue connecting with consumers with these items.

I think I've cited in prior calls that even as the Dinty Moore canned franchise has struggled quite a bit over the last few years, within the microwave tray segment, the number one selling item is Dinty Moore beef stew, so it's not the consumers don't like Dinty Moore beef stew anymore, we're just not coming up with the right recipe of either packaging offerings, price, promotion, whatever, within the core franchise, and we need to keep striving until we do.

Okay.

Well, I appreciate your candor on that, and I look forward to seeing you next week.

Thank you.

Your next question comes from the line of Christine McCracken.

Good morning.

Good morning, Christine.

Just wanted to follow-up on the hog price outlook that you put out there.

It does appear to be below what futures would indicate, and I'm curious where you differ from that outlook.

We've taken a look at it, and that's what our group feels like the market is going to do.

The futures don't necessarily always line up with exactly happens, and I think we've been pretty successful with our estimation.

We'll see on this one.

Sure.

Hog prices have rallied recently.

It seems like that's been somewhat weather related.

Has the weather affected your ability to secure hogs in any way or run your plants?

We had a -- in the scheme of things, a minor issue earlier but in the holiday season with our Mountain Prairie operation out in Colorado, and within that mass of snows there, but in the scheme of running the plant there really hasn't been a big deal.

The other factor is our understanding, in terms of tightness of hogs, has been a little bit of disease issue on a national level and we've seen some of that.

And is that affecting your ability to secure hogs?

There have been some disease issues in the Minnesota area, for example.

It's been pretty minor here.

If anything, we had a little more affect in the Farmer John operation, but it hasn't been overly substantial.

All right.

And just in terms of your view on turkey, it sounded like you were expecting a little bit more production, and I'm curious with the run up that we've seen in feed costs, is it your expectation that the industry is just looking ahead and expecting to see prices adjust?

Or how do you expect, I guess, the industry to react to the higher feed cost environment?

My general expectation would be they would react more as we ought to expect, which that would make everybody a little more cautious about run ups.

I do think there has been a little bit of delayed supply going on.

I mean, last year we cited that there was a new plant in the Dakotas, that [Starbus] had expanded, that a Virginia plant had expanded, and remember, we were kind of concerned when we saw the egg numbers and so fourth, that last year we were going to have supply problems.

There ended up being a number of visibility issues, a number of weather related issues for weights and so fourth, and so the big bubble never occurred.

I think to the extent we are still seeing somewhat increases in numbers for 2007.

There's an element of the pent up supply going into those facilities, but we're comfortable now that given that demand was quite good last year and seems to continue to be good, that the industry got by last year without having a major bubble and a problem then on the commodity side, and should be able to stay in balance.

I was surprised, I guess, with how early corn started to hit your operations, given the lag I would have thought on turkey realizing some of that increase.

Would you expect it to get worse as they start to consume more high cost grain as we move through the year?

It will get worse during the second quarter on the cost side, but we're anticipating offsetting at least the worst part, in terms of what the pricing would be for the second quarter.

And that was kind of to my earlier -- the earlier question, my -- our overall best assessment of where Jennie-O Turkey Store should end up is in about the same boat in Q2 as they were in Q1, and then things should start moderating as the pricing more fully goes through on the sales side.

And then just on -- in terms of the commodity cost environment, generally I'd say that it appears to be more volatile than it has been in the past, there's certainly a lot of new drivers.

Have you looked at your risk management strategy, and how you manage your exposure?

Have you thought about any changes you might want to put into place that will give you more flexibility in terms of managing that, or is it kind of the same strategy going forward?

That's a valid question.

I think we have become more open to these types of strategies, even in the last two to three to four years.

We do look at it in grain, we've looked at it in some of the energy areas, and there could be, in terms of some supply, raw materials, other things we could look at.

The other thing we have really tried to make more advantage of, and is a little less to your point, but it's to really make sure our multiple units are leveraging each other on the purchasing side, that we have a consolidation of focus against some of the major raw materials, that the different subsidiaries and new entities that we purchase also then benefit from.

All right.

Have you fully integrated that kind of purchasing power or is that something that we might see as we move forward -- like, where are we in that process?

Realistically, we really only have four or five of the subsidiaries that truly run on an independent basis, the rest of them would be coordinated on a central basis.

And of those four or five, we've really gotten to the point on the big ticket items that are common across food businesses, they are effectively coordinating those purchases.

We do them on an aggregate.

We still have, in essence, purchasing managers then on site who do the larger number of items but not as much the big volume items.

Great.

I'll leave it there.

Thanks.

Okay.

Your next question comes from the line of Oliver Wood.

Great.

Thanks a lot.

Hi, Oliver.

Hi, Jeff.

As a follow-up to those questions earlier, just curious if the run up in grain prices has had any impact on your acquisition pipeline, either for better or for worse?

And kind of as a follow-up to that, would you consider moving more toward the commodity end of the spectrum if opportunities presented themselves?

To your first question, I guess my best answer would be, no.

I mean, most acquisition activity, at least our experience, has been, it goes over months or even years, and so in a short-term run up like that, it doesn't seem to have really any effect on what we've been looking at.

Other -- on, to your second question, I mean, we're always trying to study what level of verticality is ideal for our businesses, and we recognize particularly in our principle meat businesses of pork and turkey that we need to at least have a confidence that we have a control of supply.

Now, whether we have to own all of those assets ourselves, or whether we can have partners at different stages of the supply chain, I think we can use either model.

But we recognize that we don't ever want to be in a position on those two raw materials that we're very dependent on buying meat from someone else.

We have much smaller franchises that utilizes -- that utilize beef or chicken based items, and in those cases, we are willing buyers of raw materials.

And we do, we look at -- if we were to look at anything, it would be the level -- the level and depth of verticality within those two major supply chains.

I think I said before, we're really not interested in getting any kind of verticality in either chicken or beef and trying to suddenly compete in those big marketplaces.

Sure, that's fair.

And then just kind of revisiting the topic of hog prices.

It sounds like you all have a pretty detailed model use.

If I could just kind of drill into that for a second as far as assumptions for just a few metrics, hog weights, impact of disease and then pork exports, which seem to be kind of the, some of the hinges for how the market is going to go this year.

I could take a couple of wild swipes at it, but I think if you're really looking at it for modeling purposes, I think we would probably benefit better from maybe having you visit with Fred after the call and then he could get you the details.

Sounds good.

Thanks.

All right, thank you.

Your next question comes from the line of Jonathan Feeney.

Hi, John?

Hi, Jeff, how are you?

Hi, guys.

Pretty good.

Just a big picture question about the Grocery Products business.

When I look at the 15%ish margin that, even this quarter that business carried, I mean, is there a longer term thought in your mind, Jeff, as to, you think of how that compares with other packaged food companies.

It's a little south right on top of where sort of Campbell is right now, and I guess, it would seem to me that these would tend to be higher margin businesses than that, just in terms of what the growth trajectory has been recently.

Do you have any sort of long term target in your mind?

Yes, we really [inaudible], we do feel that we should be able to get back into that 18, 19% range, and it should be able to do it, we need to do it by stabilizing some of the items that have been pulling us down, and by letting the ones with have both better growth prospects, and in some cases better margins going forward.

And I guess via that, let me just, again, long term big picture, getting back to that 18, 19, I that just by -- would you think that would just come mostly by sort of stabilizing those things that are costing you right now, or do you think you need to maybe increase marketing support for a period to get that sort of virtuous cycle going, if you will, of better traction and utilization?

I think there's something to that.

We do intend to increase margin support this year.

And within Grocery this year, the focus will be on the Hormel branded items, and then to a secondary extent, on the Spam brand we have activities against that brand later in the year.

But over time, in general we would like to keep our costs growing at a level that's lower than our revenues are growing, obviously.

But we've really identified marketing as the exception to that, that we would like to see our marketing going up 10 to 12% a year and being able to support more of our brands.

And I can't help being impressed by what Campbells has done over the last few years, and they have had that strategy that seems to be, yet, another example that, if you talk to consumers about your brands that, and if you have the right items that that will pay off, so we definitely look to make more efforts in that regard.

And I guess if I could just ask a strategy question.

High corn prices are putting pressure in a lot of parts of the protein industry right now, the food industry generally, and I think, an earlier question, you sort of dug into, asked you if you'd consider getting more involved in the commodity side, and failing that, are there other areas, do you think, of businesses that are under a lot of pressure right now that, given your pretty rock solid balance sheet, and pretty good experience buying things where you could see an actual, some potential opportunity here?

Yes and no.

I mean, it's something we always should be looking at, and if one of the best acquisitions we made over the last year was on a -- last years is on an opportunistic basis, that was Diamond Crystal.

We basically pulled it out of bankruptcy and its been fabulous for us.

Overall, we would have to confess though, that our expertise is not been being a turnaround artist.

It's been taking businesses that were, maybe a limited marketing geography, or were a one up product, and complimenting an overall portfolio with those and then putting some of our production capabilities against them.

But we're certainly hoping to do things that can enhance value to shareholders, and if we can get some in this environment that become attractive we'll look at those.

And yes we do want to leverage our balance sheet.

[laughter] Thanks for adding that.

Well, thanks very much.

I appreciate it.

Thanks, John.

[OPERATOR INSTRUCTIONS] And we're showing no further questions at this time, sir.

Well, thank you all for joining us today and I hope you can join us for our CAGN Y presentation on Tuesday at 4:30 out in Arizona or live through the internet.

Thank you.

This concludes today's conference call.

You may disconnect at this time.