荷美爾 (HRL) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by.

Welcome to the Hormel Foods fourth quarter earnings conference call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS) This conference is being recorded Tuesday, November 20, 2007.

I would now like to turn the conference over to Fred Halvin, Director of Investor Relations.

Please go ahead, sir.

Good morning.

Welcome to the Hormel Foods conference call for the fourth 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 website at www.Hormelfoods.Com under the Investor section.

I wanted to point out that our corporate website has changed to HormelFoods.Com, from previously Hormel.Com.

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

I hope you had a chance to catch Jeff on CNBC this morning, Squawk Box Edition.

Jody Feragen, our Senior Vice President and Chief Financial Officer is also on the call with us today.

Jeff will provide a review of the operating results and an outlook for the new year, and Jody will provide the 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 a.m.

Central Time today, November 20, 2007.

The dial in number is 800-405-2236, and the access code is 11102214.

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

Before we get started with the results of the quarter, I first need to reference a 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 the fluctuations in the cost and availability of raw materials, and the market conditions for finished products.

Please refer to Pages 26 through 31 in the Company's Form 10-Q for quarter ending July 29, 2007 for more details.

It can be accessed on our website.

Now I will turn the call over to Jeff.

Good morning, everyone.

We were pleased to end the year with a strong finish, allowing us to deliver respectable full year results in a challenging environment.

The combination of strong consumer demand for our products, and solid execution by our team members, were the key drivers to the strong finish.

This momentum also positions us well as we begin 2008.

Sales for the quarter were $1.7 billion, up 7% from the prior year, and up 4% excluding acquisitions.

Earnings per share for the quarter were $0.73 compared to $0.64 last year, an increase of 14%.

Included in this years Q4 results is a $0.02 per share gain from the sale of a Company airplane, and a $0.01 per share gain from the dissolution of our Patak's joint venture.

For the full year, sales were $6.2 billion, up 8%, and exceeding $6 billion for the first time.

Earnings per share for the full year were $2.17, up 6%, or $2.14, without the plane sale and the Patak's divestiture.

As I evaluate this years performance, I am pleased that all five segments reported top line growth, and four out of five segments reported operating profit growth as well.

The one segment that reported lower operating profit, JENNIE-O TURKEY STORE was burdened with over $80 million in higher grain inputs for the year.

This segment made good progress to offset these higher costs, as evidenced by it's solid Q4 results.

I believe 2007 provides another illustration of the value of our balanced model.

In a difficult environment like the first three quarters of 2007, it created stability.

When conditions turn more favorable like the fourth quarter it provides an upside.

This morning we announced a robust 23% increase to our annual dividend rate, making the new rate $0.74 per share.

We have an exceptional history of returning profits to our shareholders through dividend increases.

Today's announcement is the 42nd consecutive year of increases, and is the largest dividend increase in our Company's history.

This more significant increase is based on our confidence to deliver improved cash flow in the future.

Our consistent earnings history is similar to a packaged food company.

Over time, we intend to move our dividend yield closer to a packaged food company yield.

I will now take you through each segment.

The Grocery Products segment reported a 2% increase in sales, and a 9% decrease in segment profit for the quarter.

There were both positives and negatives in the quarter for grocery products.

First the positives, very good progress continues to be made building our HORMEL COMPLEATS microwave trade business.

We are improving our shelf presence and gaining distribution.

The television advertising launched last quarter for this product line has proven to be very effective.

Sales for the quarter were up over 40%.

This level of explosive growth comes with its challenges, specifically in keeping up with demand.

We will continue to bring on more capacity in 2008 and beyond to support this demand.

We also had very positive results from both our STAGG and HORMEL chili businesses.

The STAGG brand benefited from new distribution during the quarter.

Areas for Grocery Products reporting weaker results in the quarter, were the SPAM family of products and Valley Fresh chunk meats, the lower results for the SPAM family of products were related to a very strong third quarter promotion, that may have pulled some sales forward, and also a difficult year ago comparison.

For the full year, SPAM volume was slightly above last year.

Although it was kind of a roller coaster year for Grocery Products in 2007, the unit completed the year with top line growth of 4%, and operating profit growth of 3%.

The Refrigerated Foods segment capped off a great fiscal 2007 with a strong fourth quarter, reporting 15% higher operating profit, and an 8% increase in sales for the quarter.

For the year, operating profit for Refrigerated Foods was up 17%, and sales were up 8%.

We believe we are the industry leader in value-added protein, based on our ability to innovate, our understanding of consumer and customer needs, and our execution of our plans.

Products in the Retail channel reporting strong growth, include Always Tender marinated meats, DiLUSSO DELI Company products, and HORMEL party trays.

Foodservice items reporting strong growth for the quarter included BREAD READY sliced meats, AUSTIN BLUES barbecue products, and premium fresh pork.

The Burke Corporation acquisition, which was announced during the fourth quarter, was accretive to the Refrigerated Foods results, and strengthens our portfolio of products in the important pizza topping category.

JENNIE-O TURKEY STORE reported a stronger than expected fourth quarter, with operating profit of 15%, and sales up 7%.

Improved product mix, operational efficiencies, and better recovery of higher costs through pricing were the key drivers.

The incremental burden of higher grain costs for JENNIE-O TURKEY STORE were $29 million for the quarter.

For the year, operating profit was down 17%, while sales were up 5%.

Despite a year of distractions caused by difficult input costs, our JENNIE-O TURKEY STORE Management team stayed focused on growing their value-added portfolio.

Value-added growth was up 10% for both the quarter and the year.

Some of the items driving this growth include JENNIE-O TURKEY STORE OVEN READY products, rotisserie products, premium deli products, and Turkey burgers, in both the Retail and Foodservice sections.

We anticipate grain markets to continue to be volatile through 2008.

It is our expectation that grain markets will be somewhat higher in 2008, causing feed costs to overall be $40 million higher than 2007.

The Specialty Foods segment reported 5% top line growth in Q4.

They finally ended their exceptional run of year-over-year improvement in operating profit, primarily due to a very difficult year ago comparison.

Over the last two years, this segment has grown very fast, and has become a significant contributor to our total Company top and bottom line.

The three businesses that make up this segment, Hormel Specialty Products, Century Foods, and Diamond Crystal Brands, all delivered excellent full year results, which contributed to the segment's top line growth of 26%, and operating profit growth of 27% in total 2007.

As previously mentioned, we expect the long term growth rate of this segment to be more in-line with our total Company goals of 5% top line and 10% bottom line.

In the All Other segment, our international business unit had another good quarter, with sales up 22%, and operating profits up 10% compared to last year.

Value-added export sale growth, worldwide demand for the SPAM family of products, and strong results from our Purefoods-Hormel joint venture located in the Philippines, were the key drivers.

For the year, sales for international were up 26%, and operating profit was up 34%.

Our SPAM export volume was up 14% for the year.

As I look forward to 2008, I am confident we can return to our long term growth objective of 10% earnings per share growth.

I anticipate a combination of external factors to impact our business.

On the negative side, we do expect to see continued pressure from higher grain and interview costs.

On the positive side, we expect to see the benefit of lower protein input costs.

The demand for our products continues to be vibrant, both in the Retail and Foodservice channel.

Our focus on innovation has never been stronger, as evidenced by the achievement of our $1 billion challenge goal two years ahead of schedule.

For those of you not familiar with the $1 billion challenge, we set a target that by the end of 2009, we wanted $ 1 billion worth of sales from items introduced during the decade.

We surpassed the $1 billion goal in 2007 sales alone.

Now for the 2008 earnings guidance.

Effective with 2008, we have changed our earnings guidance practice to only provide annual guidance.

We feel this is consistent with the long term view the Company takes in making business decisions.

After assessing industry factors and our business plans and prospects for the upcoming year, we are setting our fiscal 2008 guidance range at $2.30 to $2.40 per share.

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

Thank you, Jeff.

Good morning, everyone.

Acquisitions added $40.4 million to the top line in the fourth quarter, and about $100 million for the year.

Volume for the fourth quarter was 1.2 billion pounds, basically flat with fiscal 2006 quarter.

Acquisitions added 25 million pounds to the quarter.

Volume for the full fiscal year was 4.5 billion pounds, up 3 % from fiscal 2006.

Acquisitions added 59 million pounds to the year.

Selling and delivery expenses in the fourth quarter were 10.4% of sales this year compared with 10.7% last year.

For the full year, expenses were 10.6% of sales compared with 11.1% last year.

Freight cost was lower year-over-year, due to the benefit of cost saving measures we implemented throughout the year.

As we look ahead to 2008, some of these benefits are likely to be offset by higher fuel costs.

We are expecting selling and delivery expenses to be closer to 11% of sales for next year.

Our Marketing investment in the fourth quarter was $18.9 million, or 1.1% of sales, compared with $20.6 million, or 1.3% of sales last year.

For fiscal 2007, Marketing expense was 1.8% of sales, compared to 2% last year.

We are expecting about 2% for fiscal 2008.

Administrative and General expense was 2.3% of sales for the quarter, compared to 2.9% last year.

G&A expense for the full year was 2.6%, compared to 3.2% last year.

The fourth quarter expense includes a $4.8 million gain from the sale of our Company airplane in 2007.

Full year expenses in 2006 include 9.2 million of stock option expense, related to executive retirements, and the adoption of FAS-123-R, a $5.8 million of non-qualified pension plan settlement charges, and a $2.3 million gain from the sale of a Company plane.

We are expecting administrative and general expenses to average 2.7% of net sales in 2008.

Interest expense for the quarter was $7.7 million, compared to 6.4 million last year.

Short-term debt balances mostly related to the Burke acquisition, were higher throughout the quarter this year compared to fiscal 2006.

Year-to-date interest expense is $27.7 million, compared to $25.6 million last year.

We expect interest expense to approximate $28 million in fiscal 2008.

Total long term debt at the end of the quarter was $350 million, even with where we were at at the end of 2006.

We also ended the year with $70 million outstanding on our short-term line of credit, related to the Burke acquisition.

Depreciation and amortization for the quarter was $33 million, compared to $31 million last year.

For the full year, depreciation and amortization was $127 million, compared to $121 million last year.

We expect depreciation and amortization to be approximately $130 million in 2008.

Our effective tax rate in the fourth quarter was 34.9%, versus 36.2% in the fourth quarter of last year.

The year-to-date effective tax rate was 35.8%, compared to 33.5% last year.

The full year tax rate was lower in 2006, due primarily to discrete tax benefits recognized last year, mostly related to the Medicare subsidy.

Our initial projections for the effective tax rate in the first quarter of fiscal 2008 is a range of 36 to 37%.

We are currently finalizing the work associated with adoption of FIN 48, and will have more visibility into our expected full year tax rate at the end of the first quarter.

Capital Expenditures for the quarter totaled $29 million, compared to $34 million last year.

For the full year, Capital Expenditures totaled $126 million, compared with $142 million last year.

For 2008, we expect Capital Expenditures to approximate 145 to $150 million.

The increase is the result of planned expansions to meet expected consumer demand for value-added products.

The adoption of Statement of Financial Accounting Standard Number 158 required the Company to recognize the funded status of our benefit plans on our balance sheet this quarter.

While the adoption of this Accounting Standard had no impact on earnings, it did reduce shareholders investment, other comprehensive income by $100 million, and increased pension liabilities by a similar amount.

It also increased our deferred tax assets but that increase was offset by a decrease in our net pension assets.

The basic weighted average number of shares outstanding for the fourth quarter was 136 million, and for the full year was 137 million.

The diluted weighted average number of shares outstanding for the fourth quarter was 138 million, and for the year was 139 million.

We repurchased 1.1 million shares of Common Stock during the Fourth Quarter at an average price of $35.63.

For the full year, we have repurchased 2.4 million shares, compared to 1.1 million shares repurchased during fiscal 2006.

As I outlined at our Investor Day in October, we are targeting share repurchases to be at levels similar to our 2007 activity.

We have 4.2 million shares remaining to be purchased from the 10 million share authorization currently in place.

We processed 2.4 million hogs in the fourth quarter which is even with last year.

For the full year, we processed 9.4 million hogs compared to 9.2 million last year.

The actual live hog cost in the fourth quarter was $49 per live hundred weight, in-line with our forecasted market we provided in our third quarter conference call, and basically, the same as last year.

We anticipate an average market of $41 per live hundred weight for the first quarter of fiscal 2008, compared to a $46 live hundred weight for the first quarter in 2007.

We expect the hog supply to increase approximately 2% in 2008.

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.

(OPERATOR INSTRUCTIONS) Our first question is from Farha Aslam with Stephens Incorporated.

Please go ahead.

Hi, good morning.

Hi, Farha.

Congratulations on a good quarter.

Well, thank you.

This morning, hog prices are [a limit] up on talk that China is seeking to buy more U.S.

pork.

Could you comment on your expectations of international pork demand, and your thoughts on hog prices going in for the full year 08?

As I had indicated in my portion of the call, Farha, I expect that for the first quarter, the live hog prices would be about $41.

We are fully expecting that prices for protein be lower across-the-board than they were in fiscal 2007.

I know there has been lots of speculation and conjecture regarding demand coming out of China, but we just haven't seen that so far.

Thank you.

And when you talk about the $40 million increase in grain costs, at this point has your turkey pricing that is in place offset the higher costs?

Yes, a lot of that is going to occur during the first half of the year because with a 22-week life cycle for the Tom Turkeys, even though grain started going up last year in September, we weren't feeling that in our product cost until after, mostly after the first quarter was over, and so yes, the pricing activity we have been embarking on for the last couple of quarters is in place, to cover down as much of that as we think is prudent.

Great.

And if you look at what's assumed in terms of grain in that 40 million, could you just give us a ballpark of where you think corn and soy bean yield is factored in there?

Corn is in the high $3.50 to $4.00 range, and soy meal would be in the mid to upper mid-200 range.

Okay, great.

Thank you very much.

Our next question comes from Bill Chappell with SunTrust Robinson Humphrey.

Hi, this is actually Shahzad in for Bill.

Good morning.

Hi.

So recent pork packer margins are very strong.

How should we look at that as an impact on your Grocery Products business going forward into the first quarter, and maybe even into the second quarter?

We certainly would see a benefit from having those lower protein input costs to the Grocery Products, segment particularly our products utilizing SPAM, utilizing pork such as SPAM.

For our total Company model, the more significant areas that will show up would be Refrigerated Foods, and Refrigerated Foods has excellent momentum now.

They are 15% up quarter, and it is in good shape heading into early '08.

Okay, so why do we expect the slow start in grocery products?

I mean is that related to the Valley Fresh acquisition that has been showing kind of softer results over the past few quarters?

That is one contributor.

We have had a couple quarters in a row where grocery products has had negative segment profit, so we think we will get back to at least a neutral position.

We are still on somewhat of an investment mode in that division, particularly in terms of that COMPLEATS line, as we spend against product slotting and against racking systems, and other items related to that launch, and then as we head into the second half of the year we expect them to hit their stride, and contribute at much more significant levels.

So looking at Valley Fresh though, are we going to see a turnaround maybe in the near future?

Valley Fresh has really been, there has been two issues with it.

One has been for a good segment of last year, chicken prices were quite a bit higher than what we expected.

That has moderated quite a bit, and so that will be a benefit to that franchise, and then secondly, as I think we discussed during Investor Day somewhat, in retrospect, we feel that our promotional strategy on that brand was not optimal, and we have kind of gone back to how Valley Fresh was sold prior to when we acquired it, and we do expect that over time that will benefit, and get that franchise back where it belongs.

Okay, and one last question here.

Just future uses of cash, I mean is the dividend really the one thing we were kind of looking for, or should we look for more to come in terms of uses of cash?

Well, I guess I would go back to our stated uses of cash that I think we have gone over many times, we are going to look at investing in our business either organically or through acquisitions.

We are going to look to return to our shareholders either through dividend increases which I think we have made a good start in that front with the announcement today, and then also in the area of share repurchase, where I fully expect that we will be repurchasing at a level equal to 2007, so all in our attempt to try to take advantage of the capacity we have to improve our capital structure.

Sounds great.

Congratulations on the great quarter!

Thank you!

Our next question comes from Jonathan Feeney with Wachovia.

Hello, good morning everyone.

This is actually [John San Marco] on behalf of Jonathan Feeney.

Thanks for taking a couple of quick questions.

Hi, John.

Just going back to pork cost, particularly in China, are you expecting to see any release specifically in China there by the end of F'08, and you are closer to it than we are.

Are you seeing improvement in the condition of the hog hurd there?

It is improving.

Our costs have moderated in our China venture.

They were up almost double during one stretch of the year, and they have come back maybe 40 to 50% off of that, but they are still on a historical basis high.

We don't raise hogs in China, but obviously we have some connection with the folks who do.

We are hearing it is improving, but it's a difficult place to get complete information, but we are optimistic about that unit's ability to deliver decent results even with these markets.

Great.

And then sort of as a follow-up there, it seems like here domestically, you have benefited from lower pork prices, particularly in Refrigerated.

Do you expect that the pricing increases you have taken in recent years to be sticky there, or would you be expect to have to give some of that pricing back, if pork continued to be deflationary year-over-year?

Pork pricing really has two parts to it.

I mean, there are market based items like fresh pork and a lot of the mid-tier ham sales, or program bacon sales, that frankly ride up and down more on a demand market, than they do on what our cost of goods are.

You get as much margin as you can out of those types of items.

In terms of our value-added items, we have been very strategic and methodical about where to take price increases, and it isn't just grain, it isn't just pork input that goes into that equation.

We are looking at energy costs, we look at general plant inflation, so we are comfortable about our ability to hold those prices.

Okay, that is great.

That is all I have, thank you.

Okay.

Our next question comes from Akshay Jagdale with JPMorgan.

Please go ahead.

Good morning, this is actually Akshay on Pablo's behalf.

Good morning.

Couple of questions.

First one is related to Refrigerated foods, and just a follow-up to some of the questions.

Just trying to, you have said in the past, that margins in Refrigerated Foods are pretty stable.

I mean, they can be sticky on the way down.

We are just trying to get an idea of the upside to the margins in Refrigerated Foods, given the expectations for lower hog prices.

The highest margins we have seen over the years was about 6% in '04, and this quarter matched that, so just trying to see how much of the upside in lower hog prices can be sustained for '08, if you could give us any guidance around that, or help us try to understand that a little better?

I think when we look at the Refrigerated Foods segment on a normalized year-over-year basis, we look at a 5.5 to 6.5% return for that business unit segment to be in their normalized range.

So as I understand then in your investor venue, it said 5 to 6% for '08, I believe for Refrigerated foods.

I mean, does your outlook for hogs now change that?

If you are at 5.5 to 6.5, the mid-point is 6%, which is the high end of your range, so has that changed in terms of your expectations for '08?

I perhaps gave the wrong rounding estimate, but I would say we are off to a good start so far this year, and it probably isn't unreasonable to look at the higher end of the 5 to 6 that we had given you on Investor Day.

Okay, and then just on JENNIE-O TURKEY, I mean, I know you have talked about this in the past and you gave quite a bit of detail in your investor packet, but if you could just remind us in terms of normalized margins there, maybe even what will be better is if you could tell us what EBIT per pound would be in that business, in normalized terms.

I know you said 80 million in grain cost increases.

Most of that is probably related to Turkey, and I think that the math that I did based on price increases that you were expecting, shows that you are going to more than offset that so it is sort of two questions, if you would answer those, that would be great.

I don't know that I could help you on that EBIT by pound.

I just don't have that available.

Our expectations for segment profit for JENNIE-O TURKEY STORE would be in the 9%, 9 to 10% range.

In terms of pricing, the larger number, the $80 million number was the full year feed impact for 2007.

It is hard to calculate because you have so many mix changes going on as well, but our best estimate is that we cover down maybe two-thirds to three-quarters of that, so we don't believe we are able to price to cover all of it, but the unit did a nice job of obtaining other operating efficiencies, in their farm areas and their plant areas, to cover down the rest and allow us to have the momentum you saw heading into the fourth quarter.

And just one last one if I may.

If you could just also give us some sense of the value-added opportunity in the Turkey business.

I mean again from the numbers that we have, value-added was about 42% of volume in '06 I believe.

Where is that now, and where do you see that going a year from now, two years from now?

That may be about the right number on volume, because we tend to not count whole bird sales other than Oven Ready as being value-added.

In terms of dollar sales, it is already at a 70 to 75% rate of our sales but there is lots of upside.

The four major proteins by far the lowest per capita consumption.

I think we will finally see an up number from the USDA this year, in terms of Turkey consumption given the markets we saw and given the supply situation, and JENNIE-O TURKEY STORE is really the undisputed leader when it comes to the value-added portion of it, so we have focused groups against Retail, Deli and Foodservice at JENNIE-O, and they are all growing at a high, single digit, even in some cases low double digit rate, and we have seen that now for quite some time.

Okay, great.

Thank you very much.

Our next question comes from Tim Ramey with D.A.

Davidson.

Good morning, congratulations!

Thanks, Tim.

You cited the value-added business in JENNIE-O TURKEY STORE, and that clearly was the upside surprise, but how did the whole bird business do, and how is sort of the holiday ham business coming through for you?

Well, the whole bird business did well.

The market values this year just even on the more commodity side of whole birds are higher than they were last year, and our Oven Ready franchise continues to grow.

It is up another 40%, so this is the fourth year of that being in market and we just kind of keep snowballing it forward, so that has contributed nicely to margins.

Some of the Turkey effect comes through Q1.

Particularly the fresh sales for Thanksgiving and any Christmas related sales and those are looking good, and we are in a decent clean-up position, in terms of our inventory and the same really can be true on the ham side.

We are really, we have been running our plants very hard, but we are in good shape to fulfill our customers needs on those items, so we are optimistic and that is part of our encouraging thoughts toward Refrigerated Foods for the year.

Jeff, just to clarify I was a little confused by the last question.

Did you say that the incremental cost of grain in '08 over '07 was $40 million?

No.

We gave two numbers and I am sorry if that caused confusion.

The $80 million number is our best estimate for the total year effect in the fiscal year that is now on the books.

The $40 million number is our estimate of grain cost increases yet to roll through '08 versus '07, and that related to what I mentioned before about how first quarter we still have some catch up to do on costs versus '07.

Okay, so saying that another way an incremental cost of 40 million next year, is that correct?

Yes.

Terrific, thank you.

Mostly in the first half of the year.

Our next question comes from Diane Geissler with Merrill Lynch.

Good morning.

Congratulations on your quarter!

Thank you.

I have a question on your stance on the quarterly guidance.

You know, I appreciate getting people to look at your business from a long term perspective, but the reality of the situation is the Street looks at things quarter to quarter, and you are not a commodity Company, and your valuation is not at kind of a commodity level versus some of your competitors in the protein space, so I guess my question is, I don't expect commodity companies to kind of give me guidance, but for a Company that has a valuation like yours, and has a big skew of their business in kind of non-commodity related items, I guess I am just not understanding the move away from quarterly guidance.

Well, we looked at our peer group, and we looked predominantly at more of the packaged food peers.

Our information indicated that they were down to about 25 to 30% that were still giving quarterly guidance, and so that was something that our Board looked at when we made the determination.

We do believe our business over time with our balanced model provides a decent amount of stability quarter to quarter.

I think our thrust is really in us not advancing and trying at all times to hit against the quarter numbers, but to be more consistent with how we run our Company, which is more on a full year or longer term basis.

Clearly, if we were to see some major event occurring that isn't encompassed by our annual guidance, then we would be expecting to inform our investment community of that type of thing, but absent that, we think the transition should be fine.

Okay, well I appreciate a little bit more clarity there as to the reasoning behind it.

I guess that kind of brings up the whole fourth quarter, kind of what the what the guidance reiterated at your Analyst Day at the beginning of October.

Was October just that much better than you had anticipated?

Was that primarily, what happened in the hog markets that caused you to be above the high end of your range?

Yes, the big changes were on the protein sides of our business, both JENNIE-O TURKEY STORE and Refrigerated Foods, it is an important time of year for both of those businesses, and so when we saw the kind of significance in both volume enhancement and margin enhancement in those areas, that really led to us ending off the year stronger than what we expected as of early October.

And we started the quarter with the hog market kind of in topsy-turvy mode, and didn't see that the impact of that would turn as quickly as it did towards the end of the quarter.

Okay, well just the volatility is pretty extreme in that space right now.

And then I guess you had indicated in your commentary that the Burke acquisition was accretive.

Could you give us an idea about to what level it was?

I know it is a sort of a smaller business.

It was maybe a penny in the quarter.

Okay, is that ahead of where you thought it would be?

It is about what we thought.

It is doing very nicely.

And we really only had two months of activity with that business on our books, so I would expect it to return Refrigerated Food-type margins on the higher end.

Okay.

All right, well that was all I had.

Have a great Thanksgiving!

You too!

Okay.

Our next question comes from Robert Moskow with Credit Suisse.

Please go ahead.

Hi, good afternoon.

Hi, Robert.

You gave guidance on cost inflation for Fiscal '08 at 3 to 3.5%.

That sounded kind of low compared to other food companies that we are seeing, maybe some of this is the low number has to do with protein prices.

Do you have an updated number for us?

Or have you seen anything different?

We really haven't updated that number.

In fact we are seeing that the protein markets are perhaps a little lower than what we originally estimated.

Now that is being offset by some increase in energy costs, and we will have to put the pen to paper, and see if there is a significant change, but right now my plans still include that range.

Great.

And in Turkey, I am looking at fresh prices, and I know you have a great value-added business, but the fresh component does play in.

Fresh Tom Turkey breasts are down sequentially from $3.75 a pound, and now tracking to closer to $2.95 a pound , it was $2.95 a pound and maybe now at $2.00, tender is down as well.

Are you seeing similar numbers flowing through for yourselves, and how do you view that?

Is it a function of a lower priced market or

Well, it is uneven.

A lot of, for example, when we really get down to selling meat on a commodity basis, the dark meat parts of the Turkey are much more significant for our business, and the thigh market is really quite strong now, even on a year-over-year basis.

There are some of the whole bird and breast items that are lower, for this time of the year, whole bird pricing, a lot of those prices are set earlier in the year, a lot of them are delivered earlier in the year.

It really depends on what the retailer wants to do, so whatever the quoted market ends up being at the very end of the year, there isn't a large percentage of our volume that is actually sold on that basis.

Okay, and your chicken competitors, I guess they are kind of competitors, they have made some rather aggressive statements about how much they intend to dial up production during the course of the year.

Historically, have you seen any kind of reaction in the Turkey markets when chicken is doing something like that?

Not really.

The one year that would be the exception to that, would be back when think was the foreign embargo in the early part of the decade, and at some point if there is so much meat backing up into our system, it affects all proteins, but chicken has a much quicker turnaround.

We have seen it up.

We have seen it down over the last few years, and Turkey seems to be able to be much more steady and not have a big reaction against that.

Again if you look at it from a retailer standpoint, chicken is a feature item that is a major add driver for the retailer.

Turkey frankly is not.

It is a very nice niche item.

We have very loyal consumers in our area, but aside from Thanksgiving Turkey, we are not a driver of feature items in most retail outlets.

Okay, thank you very much.

Yes.

Our next question comes from Christina McGlone with Deutsche Bank.

Please go ahead.

Good morning.

Hi, Christine.

Just taking a look at Grocery, I was surprised to see kind of negative price realization, given the price increase that you took at the end of April.

Why was that?

Why did that occur?

Pretty significant promotional spending and that comes out of pricing.

I mean, when all is said and done the price increases we did discuss are being reflected on the marketplace, but we heavyed up in some of the areas against certain items, and that ultimately ended up not only contracting the sales price quoted, but margins for the whole division.

And so Jeff, when you talk about a slow start to grocery, just following up on a previous question, do you mean in terms of top line, or are you talking about operating profit because of the lag in realizing the lower protein prices there?

Or is it a combination of both?

It is more the profit side we are talking about.

We are just trying to be cautious and realistic in relation to that we've had two quarters in a row of negative segment profit return year-over-year, and our outlook would be able to able to flatten that out in the first half.

We will see a little less growth on the top side than we would have otherwise, because of the divestiture we mentioned of Patak's.

It was not a significant profit contributor, but it is about $ 6 million in sales over the course of the year, and so that will be out of the mix as well.

Okay, and then most of them, most of the package food companies are kind of thir growth algorithm has changed where you really see strong top line growth and then really no operating margin improvement, so it is just kind of the critical top line growth leading to the same sort of operating profit growth, and then financial leverage, but you are guiding to your long term targets where you do see operating leverage.

Can maybe you talk about your balanced model, and how that enables you to get that sort of operating leverage when a lot of the Packaged Food peers aren't able to?

I think that it is really maybe less the balanced model, and more related to areas such as innovation, that when we bring out new products we are always looking to really add elements of convenience, flavor, whatever to the consumer, but we are also looking to price it accordingly, and expect to have those margins be superior to items that have been in the market either a long time, or items that have a lot of competitors in the same space, and one of the things we mentioned in our release was I have talked about our $1 billion challenge, and I have mentioned a number of times that although we haven't hit any home runs in terms of new products, we have a lot of items that are kicking in 20 million, 40 million, 80 million, $60 million in annual sales at very significant margin enhancements, and so that is adding to our ability to leverage it down to the bottom line.

Okay, and then just last question.

I think Jody, at the Investor Day you had said that working capital would be I think neutral next year in terms of cash flow, but it looks like inventories finished a little higher than I would have thought.

I am just curious if that is still your guidance, in terms of neutral working capital next year?

To the extent that we have acquisitions you are probably going to see slightly more working capital in inventory and Accounts Receivable area.

Burke added about 30 to $35 million in the current asset side of things.

Seeing a little bit higher inventories at JENNIE-O because of the grain inputs into the Turkey, but that sometimes is a cyclical thing as well, so I would model it flat to up slightly.

Okay, thank you.

Our next question comes from Eric Larson with Piper Jaffrey.

Please go ahead.

Yes, good morning.

Congratulations on a good quarter and year, everyone!

Thank you, Eric.

Jeff, one of the things that your organization made some pretty good strides on in 2007, is just you are selling delivery expenses, your administrative, general expenses as a percent on some of those, they are the lowest they have been since well prior to 2001.

Also your marketing spending as a percent of sales was the first time below 2% that we have seen in a long time as well.

Can you talk about the expenses, those expense ratios, are they sustainable, and then on the marketing side, I don't know if you have got the absolute dollars are sufficient out there, they are dropping as a percent of sales, but do you feel you have sufficient stimulus against your brands to keep the marketing prowess going?

Let me take the marketing question first, and Jody will talk to more the SG&A side.

We really would expect our marketing spend to be more back up to the 2% level.

We did defer a couple of programs that we had originally anticipated running in the fourth quarter.

We deferred an ad campaign against SPAM luncheon meat, because we were rolling out SPAM Singles on a national basis, and we wanted to give our salesforce adequate time to gain the kind of distribution it needs to really make that spend worth while.

And we also deferred some of the JENNIE-O TURKEY STORE advertising in part because of the year they had been having, and in part because their early focus in advertising is on Oven Ready, and we found that it really works just as well to have that advertising in the two to three week timeframe right before Thanksgiving, as opposed to kicking it off in September or October as we did in prior years, so on that piece, we do, you should see some more significant growth in the marketing side in 2008.

And then I guess if I were to address the selling and delivery cost, we have made several acquisitions.

We have launched many new products, and we have done that with a pretty steady base of salespeople delivering those same results, so certain leverage in that area.

We have also taken advantage of some great programs in the logistics area, to reduce our costs of delivering products to our customers, so certainly some great work internally.

From the whole G&A aspect, last year certainly had some unusual costs, and we have outlined those before for you.

I would take advantage of leveraging those assets as we move forward, and gain scale on the top line, and we are obviously always looking for ways we can cut costs.

Okay, thanks, and maybe I missed it, but didn't Tim Ramey didn't give his wine picks this year for Thanksgiving, unless I missed that.

Maybe there will be a follow-up e-mail.

All right, okay.

Happy Turkey Day everyone!

Thank you, Eric.

Our next question comes from Oliver Wood with Stifel Nicolaus.

Please go ahead.

Great, thank you.

Nice quarter.

Thank you, Oliver.

A feel like I am kind of beating a dead horse here, but just getting back to these live hog markets, it seems like currently, what I would characterize as way too many hogs out there, that margins are fairly terrific on the packing side, but given the size of the breeding herd, just trying to understand how these markets will rebalance.

I guess we are calling for the live prices to be under where they were for full year 2007.

My visibility into the first quarter of 2008 puts it at about a $41.

I am not sure that I am answering your question but wasn't sure where it was going either.

Well I am just trying to get a sense for if there are just too many breeders out there, are we going to get balance from export markets picking up, or is there some sort of bigger question that needs to happen, just within the actual mechanics of that market?

Well from the breeders standpoint, they have invested a lot in infrastructure and that is something that you don't turn off perhaps as fast as the chicken producers can, so I think they have had several good years in a row of profits on the producing side, and my expectation is that they will plan on hanging in there, and the proteins will have to be clearing the market before that changes.

So the market is in a better position to sustain losses?

I think from the producers standpoint, they have had several good years of profitability in raising it.

Well sounds like it is good news for you guys.

And then just wanted to clarify with guidance, does that include any benefit of acquisitions, or would that be incremental?

We typically don't include any acquisitions in our planning process and forecasting.

Long term, we will say that we are going to grow the top line 5 and a bottom line 10, and a portion of that will come from acquisitions, but our near term guidance for 2008 does not include any acquisitions.

Okay, great.

Thank you very much.

Thanks, Oliver.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up from Tim Ramey.

Please go ahead.

Well here comes the wine comment.

Well, by popular demand, I think the thing that you want to have with your JENNIE-O TURKEY STORE Oven Ready Turkey, would be an Oregon Pinot Noir, both patriotic and luscious to have with that whole bird, so we will give our guidance once a year only as well.

Very good.

(laughter)

Thank you, Tim.

At this time, I am showing no additional questions in the queue.

I would like to turn the call back over to management for any concluding remarks they may have.

Well, this is Jeff Ettinger.

I just want to thank you for joining us on our call today.

Hopefully from moving it from Wednesday to Tuesday that was beneficial for everyone in terms of their holiday get-aways, and we look forward to working with you in the future.

Happy Thanksgiving!

Ladies and Gentlemen, this does conclude the Hormel Foods fourth quarter earnings conference call.

You may now disconnect, and we thank you for using AT&T Conferencing.