荷美爾 (HRL) 2007 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hormel Foods Second Quarter Earnings Conference Call.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Halvin, you may begin your conference.

Good morning.

Welcome to the Hormel Foods Conference Call For the Second 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.

Jeff will provide a review of the operating results and an outlook for the remainder of the fiscal year.

Then Jody will provide detailed financial results for the quarter.

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

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

central time today May 24, 2007.

The dial-in number is 800-642-1687 and the access code is 9380966.

It will also be posted to our Web site, an archived for one year.

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

Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.

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

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

Please refer to pages 26 through 31 in the company's form 10-Q for quarter ended January 28, 2007, for more details.

It can be accessed on our Web site.

Now I'll turn the call over to Jeff.

Good morning, everyone.

I was pleased with the strong performance of the majority of our business segments this quarter.

We delivered excellent topline results across all five of our business segments.

We also generated double digit increases in operating profit performance in four out of five of our segments.

Sales in the quarter reach $1.5 billion, up 10% from the prior year and up 8% excluding acquisitions.

Our earnings per share for the quarter were $0.49 compared to $0.48 last year, an increase of 2%.

The higher tax rate due to $1.6 million of discreet tax events lowered our earnings per share by $0.01.

The clear disappointment in the quarter was the Jennie-O Turkey Store was not able to pass on higher grain costs through pricing as quickly or as thoroughly as we expected.

While Jennie-O had some success in implementing price increases in the quarter, they were not nearly enough to offset $22 million of higher grain costs.

I will now take you through each segment.

The Grocery Product segment had an excellent quarter by all measures, reporting 11% sales growth and 28% operating profit growth.

Operating profit improved 230 basis points to 17.5%, the 230 basis points was an improvement over last year.

Continued strength in microwave meals was a key driver behind the division's growth.

We have repositioned our microwave trays under the Hormel Compleats brand and we currently offer 21 varieties of this line.

These shelf stable products are now available in over 90% of U.S.

grocery stores.

Major gains were achieved in terms of household penetration and space on shelf and our umbrella Hormel brand advertising campaign will feature this product line starting in July.

Hormel and Stagg Chili and the Valley Fresh line of products were also key contributors to the improved margin results for grocery products.

We now have reached our first anniversary since the acquisition of Valley Fresh, and we are very pleased with the results and synergies this acquisition has delivered thus far.

The Spam family of products reported 2% higher volumes, but slightly lower net sales dollars due to promotional activity in the quarter.

This year marks the 70th anniversary of Spam and we have some special events planned to recognize the brand.

In the second half of the year, Grocery Products will experience higher input costs for pork and chicken raw materials.

The price increases that were implemented at the beginning of the third quarter will help offset these higher costs.

The Refrigerated Foods segment posted an 11% increase in sales and a 23% increase in profits.

Strong pork packer margins, which are the spreads between the live hog costs and meat values benefited the division during the quarter.

High demand for pork because of increased beef and chicken prices and strong export sales pushed the meat values up faster than the live market.

The continued strong performance of the Foodservice business unit and the improved performance of Farmer John were also important contributors to the bottom line results in Refrigerated Foods.

Within the Foodservice business unit, the bread-ready sliced meats category, which uses our high pressure processing technology registered solid gains, as did premium pork, pizza toppings and Austin Blues BBQ.

The Meat Products business unit delivered solid top line growth behind products such as Hormel sliced pepperoni, Dilusso Deli Company products, and Hormel party trays.

We continue to provide advertising support to the Hormel Natural Choice line of products and we have been successful in achieving additional distribution for this line.

The rapid rise in meat values pressured margins for meat products, but price increases are being put many place to help offset these higher input costs.

Jennie-O Turkey Store revenues were up 6%, reflecting a combination of price increases, mix improvements, and volume gains.

Value-added sales were up 9%, driven by such items as Jennie-O Turkey Store Oven Ready whole Turkeys and breasts, Turkey burgers, and rotisserie items.

As we look at the second half of the year for this segment, we will continue to narrow the gap between grain costs and finished product pricing.

Going forward, we will see added benefit from the previous quarter's pricing activities and additional price increases that were announced and implemented effective with the start of the third quarter.

We anticipate that operating profit for Jennie-O Turkey Store will continue to be significantly lower than last year during the third quarter, but the gap should narrow substantially by the fourth quarter.

The Specialty Foods segment had another strong quarter with operating profits up 33%.

Once again all three businesses that report within this segment, Diamond Crystal Brands, Specialty Products Division, and Century Foods all contributed to the gains.

Improved product mix, price increases, and improved capacity utilization were the drivers behind the strong sales results for this unit.

In the all other segment, our international business unit posted another quarter of excellent results, with sales up 22% and operating profits up 16% compared to last year.

These results were primarily achieved through strong fresh pork export sales and worldwide Spam sales.

While volume is still relatively small, our recently launched Spam fitters have been exceeding our expectations in the England market.

All in all I would say it was a mixed quarter.

We knew it would be challenging for Jennie-O Turkey Store.

When we talked at the last conference call, we had anticipated a year over year decline for about $10 million for that segment in Q2 in light of the cost run up.

Our actual experience was somewhat worse, ending up with a $12.6 million drop.

On the flip side, we provided an optimistic outlook about the other four segments and they all met or exceeded our expectations.

At the segment operating level, they recovered all of Jennie-O's deficit and still gained another 8%.

A significant portion of this increase was then offset by the year-over-year increase in our effective tax rate.

Based on our current expectations for markets and our business plan for the rest of 2007, we are modestly lowering our guidance range from $2.15 to $2.25 to a range of $2.12 to $2.22 per share for the full year.

This reflects the $0.02 per share drop we have already experienced in the first half and another penny in Q3 in light of the continued pricing challenge at Jennie-O Turkey Store.

Our guidance range for the third quarter is $0.42 to $0.48 per share.

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

Thank you, Jeff.

Good morning, all.

Earnings for the fiscal 2007 second quarter totalled $68 million or $0.49 per share compared to $67.3 million or $0.48 per share a year ago.

Earnings for the first half of fiscal 2007 totalled $143.3 million or $1.03 per share compared to $136.6 million or $0.98 per share a year ago.

Dollar sales for the second quarter totalled $1.5 billion compared to $1.37 billion last year.

As Jeff said, a 10% increase.

Acquisitions added $24.2 million to the topline in the second quarter.

For the first two quarters, dollar sales increased 8% to $3 billion compared to $2.8 billion last year.

Acquisitions added $42.6 million to the topline in the first half of fiscal 2007.

Volume for the second quarter was 1.1 billion pounds, up 5% from fiscal 2006.

Acquisitions added 13.5 million pounds to the quarter.

Volume for the first half of the year was 2.2 billion pounds, a 5% increase.

Acquisitions added 24.3 million pounds to the first three quarters.

Selling and delivery expenses in the second quarter were 10.7% of sales this year compared with 11.4% last year.

Year-to-date, selling and delivery expenses were 10.8% of sales compared with 11.3% last year.

Lower freight costs was the biggest contributor to the decrease.

Our marketing investment in the second quarter was $31.3 million or 2.1% of sales compared with $32.2 million or 2.4% of sales last year.

For the first half of fiscal 2007, marketing expense was 2.2% of sales compared to 2.4% last year.

Administrative and general expense was 2.7% of sales for the quarter compared to 3% last year.

The first half of the year was 2.7% compared to a 3.5% last year.

We expect administrative and general expenses to be about 2.8% of sales for the year.

Interest expense for the quarter was $7 million compared to $6.4 million last year.

Year-to-date, interest expense is $13.4 million compared to $12.6 million last year.

We expect interest expense to be approximately $26 million for the full year.

Total debt at the end of the quarter was $350 million compared with $361 million last year, no change in debt is currently anticipated for the rest of the year.

Depreciation and amortization for the quarter was $32 million compared to $30 million last year.

For the first half of the year, depreciation and amortization was $63 million compared to $60 million last year.

We expect the full year to be about $125 million.

Our effective tax rate in the second quarter was 37.4% versus a 33.8% in fiscal 2006.

The year-to-date effective tax rate is 36% compared to 32.4% last year.

The effective tax rate was higher for the quarter and year-to-date due to some unfavorable audit settlements this year compared to discreet tax benefits recognized last year.

We expect the effective tax rate to be in a range of 35.4% to 35.8% for the remainder of the year, which should give us a full- year effective tax rate in the range of 35.5% to 36%.

Capital expenditures for the quarter totalled $34 million compared to $38 million last year.

For the first half of the year, capital expenditures totalled $70 million compared with $64 million last year.

I expect full-year capital expenditures to be about $145 million.

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

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

We repurchased 321,000 share shares of common stock during the second quarter at an average price of $36.48.

We have 6.3 million shares remaining to be repurchased from the 10 million share authorization in place.

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

For the first half of the year, we processed 4.7 million hogs compared to 4.5 million last year.

The actual live hog cost in the second quarter was $48 per live hundred weight, in line with the forecasted market we provided in our first quarter conference call.

This compared with an average live base price of $43 in the same period last year.

We are anticipating an average market of $54 per live hundred weight for the third quarter, which is comparable to the $53 paid last year.

We continue to expect the slight increase in the hog supply for 2007.

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

(OPERATOR INSTRUCTIONS) We'll pause just a moment to compile the Q&A roster.

Your first question comes from Farha Aslam.

Hi.

Good morning.

Good morning.

Just a couple more questions on Jennie-O so we fully understand the impact.

For the full year, what is the hit you're expecting from higher feed costs?

I didn't quite catch --

The higher feed costs for the full year 2007, what do you anticipate that to be?

For the full year, it will be in the $55 to $60 million range.

And has that been -- are you fully locked your feed costs in, or if we get a decline in corn markets, you could see some benefit?

Farha, as we've discussed in other calls, we have a hedging program in place for the rest of fiscal 2007, we're leaving a substantial portion of that at market to take advantage.

Okay, so you're mostly on market for a significant portion of that.

And in terms of pricing in Jennie-O, how much have you taken so far, how much have you announced, and when will that filter through?

We look back at the second quarter and made an assessment of how successful the division was at gaining pricing.

Clearly the goal on a per-unit basis is in the 4% to 5% range, but there are timing differences between different segments of the business, there are parts of the business that we had under contract.

When all was said and done if the second quarter, we probably got about 2% on a year-over-year gain.

So for the items that we were able to push through the price increase were at the target we discussed, but on average it's not -- it's not hitting a 4% to 5% level overall per product.

Okay.

Then just moving on to Grocery Product, Spam has been kind of -- Spam sales have been weak in the last two quarters.

Could you highlight -- are you concerned about that, or that just due to the promotional activity related to the anniversary?

The volume sales were up 2%, which in the long run for Spam, that's been a decent amount.

So we really don't have a particular concern over Spam.

Spam is one of our longer-term advertising priorities, so we are looking for ways to continue to stimulate consumption in the brand, but it's not one that right now I have particular concerns about.

And it's really doing very well on the international side.

And that's a sizable part of our international export business.

And my final question is, Jeff, you've been working on the Hormel brand -- on that branding initiative.

Could you just give us a progress on how that's progressing?

Really, the label conversion is occurring in the marketplace.

Many of the items have already converted.

It kind of depends on the typical shelf turn time scenario as to when you'll see it completely in the market.

But in terms of what our production is, it's all new-label items.

We've had the benefit all year of the ad campaign in place, really placing a lot of our emphasis on that brand and on a unified approach between the grocery and meat divisions.

I think it's really done quite well.

When I look at the Hormel-branded items within grocery, they were up over 10% during the second quarter.

The meat side of the business is almost all Hormel items.

We do have some Lloyd's and a couple other smaller brands, and the Meat Products side was also up over 8% in the quarter.

So we're pleased with how consumers seem to be responding to that campaign.

Great, that's helpful.

I'll pass it on.

Thanks, Farha.

Your next question comes from John McMillin.

Good morning, everybody.

Hi, John.

Good morning.

You did take a price increase the end of the quarter, and I guess your feeling is that there was not much retail buy-in before that.

But why did accounts receivable go up so much?

We have a few of our business units, like Specialties, that are seeing increases in sales and they have slightly longer terms than our traditional Meat Products and Grocery sides of the business.

And then it all comes in on the timing of the sales, we ended the quarter strong, we're seeing Grocery continue strong right through the end of the quarter.

On the Grocery side, we really did not see any of the significant load-ins that maybe would have characterized past years.

Our sales force really took a lot of concern not to allow that to happen and the first couple weeks of the period would bear out they're right, the numbers continue to be very strong.

I guess it is a hedging policy not to have forward hedges, if you follow me.

And I know that's traditionally how you run your Turkey business, Sanderson's out, but other meat companies, like Smithfield, don't really do it that way.

Is there something to Turkey that would cause you not to -- and this is -- everybody always has this discussion when corn goes from $2 to $4, I don't mean to hit you on the timing of it.

I just want to understand, is there a history in Turkey where competitors not to forward buy as with hogs they do and chickens they do?

I'm just trying to understand why you don't do it?

Let me clarify our position, then, John, because maybe we haven't made that clear in the past.

For many years, we didn't hedge at all.

Starting two to three years ago, we did start exploring and started getting involved in using forward hedges, particularly focused on corn and soy purchases for the Jennie-O operation, because that's where we would take delivery and we actually own farms or have contracts where we deliver grain.

What happened this year, we had settled into a pattern where we would study the markets in the fall and establish hedge positions in the fall and this year that happened to coincide when the significant run up occurred.

So we were not covered as aggressively this year as say we were the year before, heading into the season.

Obviously, that hurt us.

We do on a moving-forward basis, we do intend to use hedge positions to help us average down our cost and to protect us against major run ups.

We have some hedge positions in place against the Jennie-O grain exposure right now.

So there really -- there isn't -- we kind of would agree with you, there isn't anything unique about Turkeys in that regard that would prevent us from utilizing that as a strategy.

Great.

Thanks a lot.

Okay.

Your next question comes from Jonathan Feeney.

Good morning, John.

Jonathan, your line is open.

Your next question comes from Bill Chappell.

Hi, Bill.

Good morning.

Good morning.

First, just on the Grocery Products segment, the margins were above my expectations even before the price increase.

I guess part of that has to do with the competitive environment on the chili market.

We are all seasoned there.

What do you expect as we move into the fall?

Do you expect the competitive landscape to increase, or does it look pretty good for the next few quarters on that standpoint?

If you look -- be careful to look at it on a year-over-year basis, you'll see good improvement again on a year-over-year basis in Q3 and Q4.

But historically Q3 is a little bit of a dip quarter just in terms of the product mix.

We're not looking at the 17.5% number in Q3, but it will still be a nice increase over last year's number.

Overall, we do think -- the elements that moved us forward should be sustainable within Grocery Products.

We do think we should be able to restore more normalized profitability in chili.

We're reaping the benefits of the Valley Fresh acquisition not only for that branded franchise, but for the Hormel chunk items as well that are now produced in that facility, and we will continue see margin benefits over time from the Hormel microwave growth that we're experiencing.

We're very happy with where Grocery Products seems to be trending right now.

So it's safe to say that margins can get back to that fourth quarter 20% level that they have been in years past?

Yeah, 19 to 20 would be what we'd be looking for.

Okay.

And then turning a little bit to the International segment, there was comments about commodity costs in the international environment.

Can you give us a little bit more color there?

The challenge for international for the remainder of the year is in China with hog costs having gone through the roof in China.

We don't process a lot of hogs there, but it definitely impacts the value added items that we sell into the market.

The rest of our business internationally continues to be excellent.

We're enjoying growth in the export of Spam, we have a really outstanding group that works on our fresh pork business into various Asian markets and we've been able to gain volume and margins in those areas.

So the major threat would be in the China market.

Okay.

One last on the Turkey, as you look at the back half of the year with prices going higher, do you foresee having to go out and buy in the open market to meet demand?

What's your thought there?

Our managers at Jennie-O are operating the business to avoid having to do that.

By doing that, you may see somewhat smaller value-added growth in the second half from Jennie-O than what we've been generating on a year-over-year basis previously, but that will not only enable us to avoid having to buy meat, it's also a necessary outgrowth of being aggressive on pricing, is that you're not going to get every pricing advance you seek, but we understand how important it is to push pricing in that area.

So that's a worthwhile trade-off for us right now.

Okay, great.

Thanks.

Your next question comes from Jon Feeney.

Can you hear me this time?

Yeah, is your phone working?

I think it's okay.

One question I had.

Jeff, we've talked a little bit, as a follow-up, over the long run about how much margins might be migrating up in the Jennie-O Turkey Store over the long run.

We're probably a little bit below normal right now, we used to think like 8%.

Has that drifted up in your mind at all with more of the value-added products?

Well, If you could ever study state of business like that, we do have an expectation that we ought to be improving 30 to 40 basis points because of the success we're having in new product introductions.

It's probably hard to see that with as much bouncing around as has been going on over the last couple of years in terms of the macro factors for Jennie-O, but we're still comfortable right now in that 8% to 9% range and if we can get a stabilized environment, we'll incrementally push it up from there.

Okay, thank you very much.

Thanks, Jon.

Your next question comes from Pablo Zuanic.

Hi, good morning.

This is actually Akshay on Pablo's behalf.

How you doing?

Good.

Good morning.

Good.

Just had a question on the Refrigerated Foods and the hog side.

In the past you've talked about your contracts for hogs being more so linked to the cut out values and in this quarter, margins were up about 90 basis points and you talked about fresh margins being up helping you.

If you are tied more to cut out values, then you shouldn't see really a jump in your fresh spreads.

So are we missing something there?

And then I have a follow-up to that.

Yes.

We do have contracts that are more market-based.

So it's about 50/50, I would say, between the market-based type contracts and those that are directed on the cut outs.

So we do get an advantage when it's in these circumstances.

Okay.

A follow-up to that.

So if you are 50/50 and hog prices moving up, I know you gave out expectation for prices, but with that -- with the $53 price that you're quoting for 3Q, what do you expect margins to -- what's the outlook for margins in hog -- on the fresh side?

We're experiencing some good -- or the industry is experiencing some pretty good packer margins right now, but we really look for the refrigerated business unit to return to about the 5% or 6% range on an operating profit basis.

Okay.

One last one, just a follow-up to -- on Jon's Jennie-O.

If you can help us understand the evolution there.

Some of the chicken companies, if you look at the results they're reporting, you can see that it's a cyclical market and pricing has come around as supplies have come down.

Where would you say you're in that cycle for Turkey?

You gave a little bit of guidance in terms of 3Q profitability still being down and getting better in 4Q, but would you consider this quarter as a bottom for Jennie-O?

I would characterize Jennie-O Turkey Store, first of all, as being not quite as cyclical as some of the chicken company numbers that I've seen, at least, and that's because of the strong percentage of value-added product sales we have within the unit.

That being said, we still do have quarter to quarter a certain amount of volatility in the business.

I think we've been able to migrate through the increase in value-added in the new products, we've been able to migrate the range upward.

So the 5% operating results you saw there in Q2, I think that should be around the bottom these days of what we should be getting out of Jennie-O and you've seen other quarters that were more the upper end of the 12% and 13%.

So that settles us back into that 8% to 9% as being if we can get a normal operating environment, that's where we should level out.

Okay.

Just one last one.

What is your mix in terms of value-added versus other in Jennie-O?

The dollar sales would be about three quarters value-added.

Okay.

Thank you.

Your next question comes from Tim Ramey.

Good morning, Tim.

Good morning, Tim.

Good morning.

News hits Oregon a little later, I think, but I totally must have missed Spam fritters, what's --?

They're big in England, John.

It's an item the local population has made with Spam for years and as with many of our products,we're making it more convenient for them.

is it on a stick?

It's a frozen batter -- no excuse me -- It's a refrigerated batter item, it's not on a stick.

It's kind of a breaded, in essence, Spam.

It's wonderful.

We'll look for that here soon.

The comment on lower freight, is there a -- are you seeing something that's sustainable there, or was that just kind of a year-over-year blip?

Freight, it's been -- it's been a mixed set of factors.

Obviously, gasoline prices aren't overly favorable now, but for this year the spread between gas and diesel has been frankly better than it was last year.

Secondly, our logistics group has really done an excellent job of driving efficiency in the area.

We've taken advantage of some of the synergy from acquisitions and from centralizing some more of the freight activity, so they're really holding the line for us very well in the cost area for freight.

We're seeing heavier trucks go out of our operations and we're taking advantage of rail whenever possible.

So the group's really done a super job.

I'll note the absence of a comment on branded fresh, unless I missed it.

Is that business just marking time right now, or are we growing it, are there new opportunities?

Are you talking about Precepts or beyond that?

Yes, well, Precepts and Hormel-branded pork as well.

The Meat Products group and Foodservice group are always looking to expand the general Hormel-branded items.

We're having excellent sales right now on marinated, that franchise and we've added some new customers.

Precepts in particular, the key priority for this year has been the rollout of our business with Hy-Vee.

That's been going very well.

We did not intend to even seek to take on another customer until we had that rollout completed and successful and that will carry us through the remainder of this year.

Precepts had a very good quarter though.

Both in terms of -- We met the volume expectations and it's generating a decent return for the company as well.

Good.

Then just on the new microwave line you opened, how does that impact margins as we go throughout the year?

Was there -- I don't remember the exact timing on that, but were there start-up expenses of that in this number, or should we think about margin accretion building through the year?

You should think about margin accretion building over the next few years.

This year it's a hot item, we've been gaining distribution at a lot of places, so there can be slotting implications to that.

We're also going to have the first ever ad campaign against the line.

We're putting racking systems up in many of the stores because the items sell much better when they have those in place.

So this is not a normalized total contribution yet from a line, but it's -- we're very encouraged in terms of the total volume of that line and the kind of contribution it can make over a long period of time.

This is the -- well, we rebranded it here recently, and that was part of the press announcement, but it's the same microwave line we had the excellent momentum against for three or four years in a row of 30% or 40% plus growth.

We're talking just the tray line alone is about a $120 million product line and growing in very significant double digits.

So we're very excited about what that can do in the long-term to the Grocery Products Division and to the total company.

Terrific, thanks.

Your next question comes from Edward Roche.

Hi.

Good morning.

So I just wanted to be clear on the Grocery Products Division.

It sounded as if you're going to see higher input costs on the meat side and maybe that's going to step up versus the fiscal second quarter, but then on the pricing side, that didn't really impact the quarter and you'll see all of that flowing through in the second half; is that right?

That's basically right.

The cost increases we're seeing, they may not be exactly item for item, but in general we knew there'd be cost pressures in the system a lot driven by the same grain issues that Jennie-O is seeing.

So the division got ahead of the game and announced the price increases effective May 1 for a number of items within the Grocery Products line.

So that we do expect that those price increases will then allow us to mitigate against the cost increases we're seeing for certain of those franchises.

Great, thank you.

Then just two other quick questions here.

The advertising investment , I guess I was expecting the full year would be up a little bit more.

Am I wrong there, or is the second half going to see a stronger ramp-up year over

What you're going to see mostly is this mix shift that I was talking about.

On a media-only basis, the number is up fairly significantly versus last year, though total marketing including what we've done less of are the onpacks and the coupons and the floor graphics and those types of marketing devices, and that we're focusing much more of the spend against Hormel.

So now all that being said, I think by the fourth quarter, last year we were kind of winding down some of our marketing activity and this year given the strong strength of launch with Compleats and Spam and other things that we have going on, we should see a sustained higher level of advertising in Q4.

You won't see it probably in Q3, though.

Okay.

Last question, you mentioned on the Jennie-O Turkey Store segment that there's some contracts in place and some other delays on the pricing side.

Was push back from the retailers or at the consumer level much of a factor in not being able to price, or was it just some contractual issues?

We really haven't seen any push back at the consumer level.

There are always occasions at the customer level, if you're in a category where your points of difference are not as strong, then if you make the decision to push pricing but others don't, you do have some vulnerability to lose items or not be able to get your price increase through and we saw a little bit of that the in the quarter.

A lot of it did have to do with timing.

In this day and age, the notice requirements on pricing are a lot more substantial than they used to be.

There are price increases that we know got put into place during Q2, but they may have only hit the last period of Q2 in terms of any kind of impact on the price realized by Jennie-O.

Thanks for the color there.

Sure.

Your next question comes from Eric Larson.

Good morning Eric.

Good morning.

Good morning, everyone, how are you?

Good.

Fine.

A couple quick questions.

Jody, did you give either the loss or the gain on your hog contracts in the quarter?

oh, I'm so glad you asked.

It was about -- for Q2 '07, about $1 million loss versus a $600,000 gain last year.

Year-to-date, we're at there are 1.3 million loss versus 1.5 gain last year.

So really it's becoming much -- not much of an issue anymore.

Right, it really is.

These numbers are relatively insignificant.

They used to be quite a bit larger two, three years ago.

Absolutely.

And we've got less than 5% of our contracts under those old ones, so --

Okay.

It will keep dwindling over time.

So in other words I should just take this question out of my Q&A going forward?

I'm glad you asked, because I had the answer.

Okay.

The other question I have, I think you mentioned, I need clarification on this, I think you said you took, you're trying to implement pricing of about 4% to 5% in Turkey.

Did you give that number for your Grocery -- what you're trying to get for Grocery starting May 1?

Well, I do want to -- just so I don't leave the wrong impression, what I'm saying is when we seek pricing on an item, that's the range of increase that we would like to see.

But I think I did say last quarter for Grocery in particular there are some items in the franchise that we chose not to push pricing on.

So you're not going to see that kind of average over the whole portfolio Grocery, nor have we seen it yet against Jennie-O.

But, yeah, that's in the range of what we think the sustainable price increase can be against -- in these areas -- in these franchises.

Okay.

But if you take that 4% to 5% for the -- if you spread it across the whole Grocery division, it will be something less than that?

Yes.

Yeah, 2% to 3%.

Gotcha, okay.

Good.

Just a quick question on your tax rate.

I know you talked about some discretionary issues in the quarter, some discreet issues.

If you could talk about that, it would be great as well.

But then, how current are you on your federal audits?

How far -- are you current on those?

Do you have some outstanding audits?

Where, roughly, does the corporation stand there?

We're a large case taxpayer, so we have federal audit ongoing at all times and the adjustments -- and it's the accounting nomenclature that requires us to call them discreet events.

So the minute you know something instead of maybe previously spreading it over a longer period of time, you take it all in the quarter that it's once discovered.

So we're very current on our federal audits.

What we are seeing is states becoming extremely aggressive on their positions with tax.

We're not as current with some of the larger states, just because they don't get out as often.

We had a favorable discreet event last year that brought our rate down from where we expected the continuing tax rate to be.

And unfortunately this year, we had unfavorable tax settlements that hit us this quarter.

Okay.

You don't anticipate anymore unfavorable discreet events near-term, do you?

if I anticipated, I would have to take them -- you would --

You would put them in your numbers?

Yeah.

I think what the world is going to see is a lot more volatility in effective tax rates because of the accounting treatment.

Yeah, I wish I could predict.

All right, well good, Thank you.

I'll pass it on.

Thanks, guys.

Eric.

Your next question comes from Christina McGlone.

Good morning.

Good morning.

Most of my questions have been answered, but in terms of pork exports, they seem to be slowing recently and I guess if beef exports pick up, we could see that happen even more.

How would that impact international and also refrigerated in terms of the packer margin?

We're really not seeing the slowdown.

We're not a big exporter of large program pork to, say, Japan.

We tend to be more of a niche exporter, a lot of our product goes to Korea and it tends to be specialty items as opposed to the loins and other major items.

With the recent conditions I mentioned earlier in China, or even hearing that the Chinese potentially want to import, which in the past they've been much more reluctant to do.

So we're not seeing any slowdown in it right now.

It's a solid contributor in our international division, but it's not a -- it doesn't make or break their numbers on a quarterly basis.

We still see exports being in the 8% to 10% range right now.

Okay.

It seemed in Jennie-O pricing trailed your expectations, but going forward do you have increased confidence because those contracts are now in place, or could it kind of be the same issue as we end the third quarter?

Christina, I'm confident that we're going to improve.

I guess the more we look at on an item-by-item basis, I probably have a little less confidence.

When the data is done in this fiscal year that we're going to cover every nickle of the corn increase.

It was a very substantial increase.

We sell mostly value-added products and so we push the envelope as much as we can on pricing, but we also have to be cognizant of what consumers are willing to pay for items versus competing items.

Over the course of the year, our costs are going to go up because of grain in the 6% to 8% range, and as I was talking earlier, we're targeting more of a 4% or 5% total price increase for the company.

So when the day is done at the end of the year, we don't expect probably to cover it all down, but that will still leave us in that normalized 8% operating range and what I am telling you it's all baked into our numbers in terms of what we've given you for guidance.

Okay, thank you.

You have a follow-up question from John McMillin.

Just on the consolidation of the industry, Premium Standard Farms is now part of Smithfield.

Swift is publicly stated it's for sale.

I know this is not -- you're not trying to get away from this, but does any of this have an impact on Hormel?

Do you care where Swift goes?

Well, Jon, beef frankly makes almost no difference to us.

We prefer the niche items we use beef in, we have various raw material supplies that we don't feel are threatened at all by who ends up holding those assets.

We have our Precept joint venture on case-ready beef, but Cargill has plenty of supply available, so we're not concerned with that either.

On pork, the key for us is what it's been for many, many years.

We've never tried to be the big player on the block in pork.

We are not trying to be a seller of commodity meat items.

We just want to make sure we are a basic processor and that we have enough supply to support our value-added business growth.

We feel comfortable with the contracts we have in place, we obviously have become even little more vertical over the last couple years between the Mountain Prairie operation on the wingling side and also by virtue of the Farmer John acquisition and having some company-owned farms there.

So as we sit here today, I'm comfortable where we're at for our hog supplies, but that's obviously an area we keep an eye on a little more aggressively.

Okay, thanks.

Your last follow-up question comes from Edgar Roche.

Thanks for taking the follow-up.

Sure.

One point of clarification, Jeff.

Did you mention China is now more interested importing raw commodity pork?

And is that more the specialty, or is that just on a wholesale basis?

What I'm responding to so what's occurring right now in the market.

It's been a tight supply year there really from the beginning of the fiscal year.

It's gotten even tighter.

They do have some disease issues within China that are constraining the availability of hogs.

So what I'm hearing from our local operators is a potential greater willingness to bring in more raw materials in order to satisfy the consumer growth against pork that's really been strong in that country for a number of years.

Time will tell if this is just a short-term blip in the market there or if it's a more sustained need from that country.

All right.

Thank you.

Sir, there are no further questions.

Well, thank you all for joining us in our conference call today.

This concludes today's conference call.

You may now disconnect.