荷美爾 (HRL) 2008 Q2 法說會逐字稿

Welcome to the Hormel Foods second quarter conference call.

(OPERATOR INSTRUCTIONS) Following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS) This conference call is to recorded today, Thursday, May 22nd of 2008.

I would now like to turn the conference over to Kevin Jones, Director Investor Relations.

Please go ahead, sir.

Good morning.

Welcome to the Hormel Foods conference call for the second quarter of fiscal 2008.

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

Central time.

If you didn't receive a copy of the release, you can find it on our Web site at www.hormelfoods.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 fiscal year 2008.

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 11:00 a.m.

central time today, May 22, 2008.

The dial-in number is 800-405-2236, and the access code is 11113993.

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

Before we get started with the results of the quarter, I 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 be will be making.

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

Please refer to pages 24 through 29 in the Company's 10-Q for the fiscal quarter ended January 27, 2008, for more details.

It can be accessed on our Web site.

Now, I will turn the call over to Jeff.

Good morning, everyone.

We were happy with our results in the second quarter, especially in light of the macro-conditions confronting the food industry.

In reviewing our performance this quarter, all five segments reported top-line growth, and three of our segments reported bottom line growth.

Sales for the quarter reached $1.59 billion, up 6% from the prior year and up 4%, excluding acquisitions.

Earnings per share for the quarter were $0.56 compared to $0.49, an increase of 14%.

I will now take you through each segment.

The Grocery Product segment had another strong quarter reporting 4% sales and 6% operating profit growth.

I was particularly impressed to see this profit growth on top of last year's Q2 increase of over 20%.

Operating profit also improved 30 basis points in Grocery Products compared to last year.

Strong sales of the HORMEL COMPLEATS microwave trays and the SPAM family of product were key drivers to sales and earnings for this segment.

Our growth rate for COMPLEATS was more modest during the quarter, but still had the double-digit level.

The continued rollout of the Green Label product and the introduction of new promotional efforts are expected to continue our momentum on this product line.

Pricing was taken on the SPAM family of products, our microwave trays and bacon toppings to compensate for the increased input costs experienced by the segment.

Notwithstanding the price increase, sales volume for the SPAM family of products was up nicely in the quarter, aided by continued promotional and advertising support as well as increased distribution of SPAM Singles.

Sales of our Hormel chili and DINTY MOORE products helped off-set the continued weaker results from Valley Fresh chunk meats and CHI-CHI'S sauces.

We just recently initiated the rollout of our reformulated CHI-CHI'S sauces with new packaging and a new advertising campaign and are optimistic about the results.

The Refrigerated Foods segment had an excellent quarter, reporting 26% higher operating profit and 4% increased sales.

Sales increased 1%, excluding acquisitions.

This group benefited from lower pork raw material input costs, but also saw continued strong sales from their value-added products.

Both Hormel refrigerated entrees and HORMEL NATURAL CHOICE sandwich meats experienced double-digit sales growth aided by a national advertising campaign that drove increased volumes.

The acquisition of Burke -- Burke Corporation also contributed to the segment sales growth for the quarter.

Our Food Service division experienced some loss volume in the casual dining segment, off-set in large part by pursuing other channels.

Jennie-O Turkey Store's revenues were up 8%, reflecting a combination of price increases and volume gains.

Sales volumes were up in retail products, such as Jennie-O Turkey Store Fresh Tray pack products, frozen turkey burgers and marinated tenderloins.

Commodity meat volumes also increased due to higher harvest counts and improved bird weights.

These gains off-set sales declines in other retail product lines, such as Jennie-O Turkey Store Pan Roast and Turkey Franks and certain Food Service and deli products.

Jennie-O Turkey Store was not able, however, to cover all of its $39 million of higher grain costs through pricing, hedging and production efficiencies, leading to the reported decline in earnings of $2.2 million by this segment.

We expect to reduce turkey poult placements by about 5% over the coming months, which should result in reduced production by the beginning of our next fiscal year.

The Specialty Food segment reported increased sales of 8%, but a 5% decrease in operating profit versus a year ago.

The Specialty Products business units earnings were hindered by higher dairy and other input costs.

Diamond Crystal brands results were hurt by higher sugar costs, resulting from the Imperial Sugar Plant explosion in February and higher dairy input costs for nutritional products in addition to lower volumes.

Century Foods International posted improved earnings, resulting from higher sales of nutritional jar, and ready-to-drink products.

In the All Other segment, our International Business Team delivered another excellent quarter with sales up 19% and operating profits up 20%.

Strong export sales of the SPAM family of product and fresh pork were the key drivers.

Overall, the results of the quarter once again illustrate the benefits of our balanced business model.

I am proud that our team was able to come through with a 6% top-line growth and a 14% earnings per share increase given the circumstances we confronted.

As you are aware, grain and fuel costs have continued to rise to record levels.

The pricing actions we have taken in recent months are insufficient to cover the latest round of these increases.

And so, our team will once again be challenged to recoup these additional costs through pricing and through finding other areas to control costs in the upcoming quarters.

In addition, starting late in the second quarter, we have seen a rapid run-up in hog input prices.

While we have been expecting higher hog prices for 2009, these recent market moves have been sharper and earlier than anticipated.

In our view, the jury is out on whether this current run-up will moderate given that there's still very significant numbers of hogs coming to market in the coming months.

We will continue to implement price increases aimed at trying to stay even with the input costs while maintaining our focus on growing our value-added products and pursuing manufacturing efficiencies.

After evaluating all of these factors, we are reconfirming our fiscal 2008 guidance range of $2.30 to $2.40 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.

Earnings for the fiscal 2008 second quarter totaled $77.6 million, or, as Jeff indicated, $0.56 per share compared to $68 million or $0.49 per share a year ago.

Earnings for the six months of fiscal 2008 totaled $165.7 million, or $1.20 per share, compared to $143.3 million or $1.03 per share a year ago.

Dollar sales for the second quarter totaled $1.6 billion compared to $1.5 billion last year, a 6% increase.

Acquisitions added about $30 million to the top line in the second quarter.

For the first two quarters of 2008, dollar sales increased 7% to $3.2 billion with acquisitions adding about $69 million to the top line for the first six months of 2008.

Volume for the second quarter was 1.1 billion pounds, up 5% from fiscal 2007.

Acquisitions added 20 million pounds to the quarter.

Volumes for the first two quarters of the year was 2.3 billion pounds, up 5% from fiscal 2007.

Acquisitions have added about 49 million pounds to the first half of our fiscal 2008.

Selling and delivery expenses in the second quarter were 13.2% of sales this year compared with 12.8% last year.

Year-to-date, the expenses were 13% of sales, flat with last year.

We do expect selling and delivery expenses to be above last year's levels for the remainder of the year due -- due to higher freight and warehousing costs.

Advertising expenses calculated on a GAAP basis were 1.7% of sales for the quarter, which is the same as last year.

Year-to-date the expenses are 1.7% of sales compared to 1.8% in fiscal 2007.

We expect advertising expenses for the full year to be above fiscal 2007 levels as we begin advertising the HORMEL COMPLEATS line in the third quarter and continue media campaigns for several other product lines.

Administrative and general expense was 2.7% of sales for the quarter and year-to-date, even with last year's quarter and year-to-date percentages.

We expect administrative and general expenses to remain at current levels for the remainder of the year.

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

Year to date interest expense is $13.1 million compared to $13.4 million last year.

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

Total long-term debt at the end of the quarter was $350 million, and we ended the quarter with $25 million outstanding on our short-term line of credit, related to some working capital needs.

Depreciation and amortization for the quarter was $31 million compared to $32 million last year.

For the first half of the year depreciation and amortization was $64 million compared to $63 million last year.

We expect full year depreciation and amortization to be about $125 to $130 million.

Our effective tax rate for the second quarter was 36.1% versus 37.4% in fiscal 2007.

The year-to-date effective tax rate is 36.4% compared to 36% last year, and, for the full year, we expect the effective tax rate to be between 36% and 36.5%.

Capital expenditures for the quarter totaled $36 million compared to $34 million last year.

For the first six months of the year, capital expenditures totaled $68 million compared with $70 million last year.

For 2008, total year, we expect capital expenditures to be about $140 to $150 million.

Capital expenditures related to the construction of our new microwave tray plant in Dubuque, Iowa will begin towards the end of our fiscal year.

The basic average weighted number of shares outstanding for the second quarter and first six months of the year was 136 million.

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

We repurchased 205,000 shares of common stock during the second quarter at an average price of $37.87.

We have 3.6 million shares remaining to be purchased from the 10 million share authorization currently in place.

We processed 2.4 million hogs in the quarter, even with last year.

For the first six months of the year, we processed 4.8 million hogs compared to 4.7 million last year.

The actual live hog cost in the second quarter was $43 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 $48 in the same period last year.

We're anticipating an average market of $53 to $57 per live hundred weight for the third quarter compared to $55 last year.

Though sow liquidation has increased recently, we continue to see an abundant supply of hogs in the market and believe that prices will come down from the current levels during the third quarter.

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

Thank you, ma'am.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) And, our first question comes from the line of Farha Aslam of Stephens, Inc.

Please go ahead.

Hi.

Good Morning.

Morning.

Good morning, Farha.

Could you clarify how SPAM trends are going?

Because I've just heard mixed reviews on that.

And what your outlook is for that business as the economy weakens.

Were you talking about SPAM trends?

Is that what you said.

Okay.

My connection wasn't that tight.

Our -- they have been excellent.

We have a significant promotional campaign against SPAM.

We have the first national advertising campaign on the brand in several years.

And, we saw very solid results in the first and in second quarter.

Due to input costs, we've had to push pricing in that category, but the brand has withstood that increase, and it's delivered excellent results.

And, we have -- our outlook going forward is very favorable toward it.

Are would -- are you able to inventory SPAM when hog prices are weak so that in periods like the summer when you are experiencing higher hog costs that can protect your margins there a little bit?

Well, yes, in theory, you could.

What realistically happened this year is that our sales volume have been so significant in both the domestic market and the International market that we weren't able to get particularly far ahead, that we've been running very strongly in our facilities to keep up with current demand.

Okay.

And could you just share with us, given the volatility in hog prices and grain prices, how you're running your businesses differently and how you're pricing your products differently?

Well, clearly where the pricing is hit, or the cost has hit our business the soonest was in the turkey segment of the business.

And, we've talked about that in past calls.

They were given their vertical integration and given their ownership of feed mill and the fact they feed even the family farm, turkey operations within the region.

They've had to bear the brunt of the entire feed increase and have had to significantly change their operating performance in relation to that.

They've looked for every opportunity they can to find operational efficiencies, moving production lines, where they make sense into other product areas, and they've gained some efficiencies in terms of their logistics area.

And, then, obviously, they've had to really be aggressive on the pricing side to try to stay even as best they can with these cost increases.

I think the team up there really did a very nice job during the first half of this year in taking what was at that time that wave of cost increases, which was kind of from the mid-$3 range up to about $5 corn we were talking about the last time we were on the call.

Where we've had a more difficult time recovering pricing would be in the remaining commodity elements of the business, where, clearly, they still face the same price -- same cost pressures in terms of the input, but have less of an ability to drive pricing beyond a market rate.

Right now, the market rate for commodity meat, although it's on a historical basis, they would be considered just fine.

They're not covering cost of production.

On the challenge then for the other -- for the remainder of the business is -- really comes down to what the outlook is for the hog markets.

We recognize that in the long run, there's going to be a migration at some point to cost of production within the hog side of business as well.

There, obviously, have been a pretty steep increase here recently in hog prices.

As we indicated earlier, it's kind of hard -- it's a hard read right now for us to determine with just an early run, a typical summer run, or is this the start of a new plateau in terms of values for hogs.

And, there are contradictory signals out there.

There are plentiful hogs numbers still.

There's high cold storage holdings, which would indicate that the pricing should potentially come down.

But, we also certainly hear about solid liquidations, and we understand the cost of production side, which would let -- go the other direction.

Either way, the burden then on our team is to make sure they're on their game and are keeping our pricing as current as possible against what the cost environment is that they're going to be confronting.

Are you at all concerned about low hog prices in the fall and then going into the early part of '09 a really steep price increase in hogs?

So, then, you would have low pork prices in the fall and have to put in very, very steep price increases in the early part of next year.

And, that would be a challenge for you?

Well, we've talked before that we have a history of being able to perform well, whether they're high or low market situations.

So, the advent in the long run of higher values of hogs isn't something that should harm our business in the long run.

We also have, though, conceded that fast moves are hard.

And, if any time there's a steep increase, the value added element of our portfolio, just by the way the business world works, you don't just walk into your customer and say tomorrow we're going up in price.

And, so, whether it comes in the fall or whether it comes next year, it would, obviously, be a preferable scenario for us to have it be more gradual.

But, we'll, obviously, fend for ourselves and do the best we can whichever environment we end up in.

Okay.

Thank you.

Yes.

Thank you.

Our next question comes from the line of Mark Churchill with Piper Jaffray.

Please go ahead.

Yes.

Can you please give us an idea of the current distribution of the HORMEL NATURAL CHOICE line of deli meats?

Where you think that can go, and whether you're looking at line extensions, such as antibiotic for your organics?

Sure.

The current distribution of NATURAL CHOICE is in the 70-plus percent range in terms of nationally CB on the sliced items.

That would be sliced ham, sliced turkey.

The roast beef was a more recent introduction.

And, to be honest with you, I don't have that number.

I know they have been satisfied with the acceptances to date, but whether it's gotten up to that same 70% level I'm not sure.

We do believe that the NATURAL CHOICE line can be a platform for numerous products.

We have already introduced such items as chicken strips, uncured bacon and crusted pork loin.

And, we are experimenting with the potential of having a secondary item within the line that would not only be an all-natural product, but would be antibiotic-free.

But, that's at very early stages right now.

Okay, and then on the Food Service-side, what percentage currently goes through that channel?

Well, I mean, on a company-wide basis, if you count all the different elements we have in Food Service, it's almost a third of total sales.

It's nearly $2 billion counting all the different divisions of Hormel that have some sales into the Food Service channel.

Okay.

And, then, obviously, it stayed flat for the year, or for the quarter, it sounded like.

But, some of that, there was some lost volumes that you had to make up for.

Was that on restaurants you're selling into closing or just lower costs there -- store sales for the casual dining customers?

Clearly, I mean what we're hearing from the restaurant industry is a picture of more flat sales.

We do think we've had some successes in certain segments of the Food Service industry and with certain product lines within our portfolio that we're still delivering better than that.

But, the net overall right now is that instead of kind of the high single-digit growth that we had enjoyed for Food service that this is a tougher slog for them right now.

But, again, we've talked about our balanced business model in the past.

And, we feel at this time if Food Service is having a harder run, that we're probably seeing some benefit in terms of our grocery business because we did have solid performances by both of our retail units here at Hormel.

Okay.

And, then, given the macro-pressures on Jennie-O, is there anything you think you can do to shore improvements, or are you just trying to tread water until the macro-environment improves?

Well, no We wouldn't be satisfied with long-term treading water.

We recognize, though, when we get the steep run-up in costs, this happened to us last year for a couple quarters, where the timing of their pricing actions don't match up exactly with the timing of the cost increases.

Over -- in the long haul, if this is the new reality of what it costs to raise turkeys, we have to have our products priced accordingly in the marketplace.

The other thing we are taking a proactive stance in is the poult reduction we talked about.

As we do in our pork business, in our turkey business, we're -- we raise turkeys or support the raising of turkeys in the system to support our value-added businesses.

And, given that we have seen a little bit of a slowdown in the volume trend there and given that we're feeding $6 plus corn to the turkeys, there's no reason to bring in extra at this point.

So, we are looking at reducing the amount of poults we place in the barns over the next few months, which should reduce -- which should result, excuse me, in reduced volumes next year of available commodity meat.

But, as I mentioned earlier on the call at this stage, we're selling commodity meat at a loss, and, so, that is something that should benefit the division overall if it's pulled off correctly.

And are you seeing competitors follow suit on that?

It's too early to tell.

I mean, we, certainly, have heard that kind of commentary out of folks on the chicken side of the business, and some are seeing it, and some aren't.

But, on the turkey side, I really don't have an indication yet for you.

Okay, thank you very much.

Okay.

Thank you.

Next question comes from the line of Jonathan Feeney with Wachovia Securities.

Please go ahead.

Hi, good morning.

Hi, John.

This is actually John San Marcos

Okay.

on behalf of Jonathan Feeney.

Sure.

You referenced a couple of soft spots in the Jennie-O value-added portfolio.

What was the cause of that?

Was that just pushing the pricing lever too quickly or something else?

I think we're running -- in the categories of products that are less differentiated, if you're on bid business to a major food service operator, or if you're in your mid-tear deli type items, as we've had to push price two, three, four times, there always could be a player out there that looks at the situation differently and decides that either they want to run their plants more aggressively.

Or they don't have an alternative outlook for the meat or whatever, and they don't take the same pricing action you do, and you have some vulnerabilities to lose those kind of bids.

In our more differentiated areas, such as value -- retail Fresh Tray pack and retail tenderloins and so forth, we're still seeing excellent growth on those items, where we really bring a significant point of difference.

Okay.

Presumably, those -- those soft spots should harden as the timing sort of corrects itself relative to your competitors' pricing.

I think that's correct.

Okay.

Just one more on Jennie-O related to pricing.

We've had three or four rounds of price increases of late, and --input -- input costs have done anything but tread water since those.

Whose pricing sensitivity threshold do you think is more threatened?

Is it your customer, or do you guys get the sense that the consumers' running out of capacity to absorb more pricing?

I think it depends on the area of the store, and it depends on what's happening with the competitive set There's been some element within our business that it may be as we've lost some deli turkey sales because the turkey prices have been pushed, that we may well have gained some of that back recently in ham sales because ham has been a better value than turkey.

If hog markets go to the level that they may go based on cost of production, that gap would get narrowed, and, again, you just would kind of adjust your selling behavior accordingly.

I'll give you some examples.

You asked about Jenny.

But, if -- if I could go into the grocery area, for them example.

I mean, we've had to take pricing within the grocery area as well as inputs have been up on such items as HORMEL COMPLEATS and SPAM luncheon meat.

But, we're still seeing very robust sales there because I think the consumers in this environment are still seeing those as excellent values versus some of their alternative meal options.

And, so, we feel we still we can still drive our business even in this environment.

It would seem to me that your portfolio relative to the packaged foods base at large does have sort of an advantaged value positioning in an environment like this.

But, does that make some of those more value offering products more susceptible to private label competition.

And, if so, have you seen any change there in the private label pricing gap and competitive threat from private label?

We really haven't seen any change in the pricing gap.

I mean, the value-added -- excuse me, the private label players are confronting many of the same cost increases we are, and, so to stay in business, they're going to have to adjust their prices into the retailers as well.

It's a mixed bag in terms of our categories as to how significant a threat private label.

I mean, there are some areas of the deli that their entire grocery store programs that are private label, and so, those -- that's something we have to deal with it -- with.

In the grocery environments, I think we've said in the past, a couple of the segments that we more significant competition would be salsa and the chunked chicken area, and those are two areas that we are having a little more trouble.

So, it could be in part a migration to private label there.

But, in other franchises, such as our branded items like Hormel chili and DINTY MOORE, SPAM luncheon I mean those sales were great last quarter.

So, we're not seeing that in those areas.

That's very helpful.

Thank you for taking our questions.

And, your next question comes from the line of Robert Moskow in Credit Suisse.

Please go ahead.

Hey, good morning.

Hi, Robert.

Morning.

Is there any way of quantifying the benefit that you've experienced in the first half of the year from very low hog prices.

And, then, trying to quantify what the risk to earnings would be if the futures market is correct.

And, by next year, we have lean hog futures in the $0.90 range, and maybe this is not the way to look at it.

But, you did have outstanding profit growth in the first half of the year, and my perception is that the low hog price environment was a big driver of that.

Well, the low hog price environment certainly helped the Refrigerated Foods group, but they were also helped by really strong value-added sales, their innovative new products, by bringing on the Burke Corporation and the earnings we have gotten from that.

We have seen improvement from our Farmer John operation, albeit, from the a very low base, but that team I think has got the right things in place to make that business grow.

I don't think you can pick just one component like that out.

I wouldn't have that number for you anyways, but, even if I did, it really depends on what is -- what are the values of the primals in relation to the hog price that we're having to pay, how fast does it go up.

There are significant elements of both our retail and Food Service Refrigerated group that are still kind of market-based pricing, typical bacon, ham sales, that over history, all -- they trend with those same markets.

And, so, those would be less susceptible to getting compressed simply just because hogs go up.

nd, the area that we'll have to keep an eye on, our value-added items that don't trend -- sale -- sell on a market basis, Hormel Pepperonis, refrigerated entrees and so forth.

And, in those cases, if we get to a point where we say this -- the market's up, and it's going to stay up, and here's new input.

Then, they're going to have to price their products accordingly.

Okay.

And, another thing, Jeff.

In your analyst day, you presented some very good numbers on how you have taken miles out of the system, and that has helped you manage through higher diesel cost environment.

Can you give any more color on what you're doing.

What your next steps are in that regard, and how that might help you manage the next tranche up in diesel costs?

Yes, I think that team continues to do an excellent job, and we've seen, probably, even better rules in terms of their ability to offset steep increases in fuel from even what we presented last fall.

They're doing an excellent job at increasing weights per truck.

They're doing a great job in finding rail options whenever that makes more sense.

And, that's both in the parent system and the best we can in the subsidiary systems.

And, then another area I could point to where we really have continued to drive synergy would be in the purchasing area, where we've bought a number of companies, obviously, over the last few years.

And, as we get our hands around those operations, and those teams become more used to the Hormel system, we're doing a better job of collaborating on the key buys we do as a company and again try to offset some of the steep grain and other inflation by controlling costs in some of the other raw materials.

But, we will see an increase in the selling and delivery expense for the back half of the year because diesels really taken a move up.

And, as much as the guys take pride in their ability to off-set some of that, I think we're hitting the point where we'll -- we will see an increase in that..

That sounds unavoidable.

One of your competitors has said that what they're specifically trying to do is to reduce the number of touches that they have from products -- slaughtering product to doing the value-added to getting to the distribution center.

Are there opportunities like in that your supply chain as well, or are you pretty efficient in that in making sure that -- touching four facilities it only goes to two or something like that?

There are opportunities -- some opportunities in that.

We do have somewhat -- a network of some cold packers in addition to our own plants, and we've been examining where we should run what products.

I think things that we're working on may be more significantly in the whole area of sustainability, that really gets you focused on reducing packaging, on reducing shipments, on reducing usage of energy and other raw materials.

And, I think our facilities have made some nice gains there.

And, then, I think both of our larger operations teams have done a good job at really examining our total plant portfolio and where necessary, moving product lines to the best place, the place closest to the right raw material or places where we can have long runs without lots of cleanups for doing short runs.

So, there are some opportunities to continue to gain efficiency there.

And, we've also taken actions with our customers to encourage them to make larger orders, less frequently.

Got it.

Very good.

Thank you.

(inaudible)

Thank you.

Next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

Please go ahead.

Good morning.

Good morning.

Morning.

Can you talk about more on the institutional side, or, I mean, on the Food Service side, do you think we've seen a bottom, or trends --?

Do they look to improve as we move throughout the rest of the years, and then maybe your ability to pass off price increases through that channel.

I don't know whether we've he seen a bottom.

We kind of -- the National Restaurant Show was this -- last weekend, we certainly communicate to a lot of folks there.

That's not the most optimistic group of people right now that you'll ever run across, but there are certainly parts of the Food Service segment that are still enjoying success in this environment.

But, it's -- it is a challenge right now, and so I don't have a sense for you whether, okay, is it turning now, is it turning a quarter now, is it turning two quarters from now.

In terms of pricing, it's kind of the same story I was mentioning earlier when I was using Jennie-O as an example.

If you're -- as we've developed some unique items that have strong points of difference, I think we should have a very strong ability to make sure we're getting the price for those product that deliver a sufficient margin for our total system.

If you're in components of the Food Service business that are very bid based or very competitive, then you've got some more wild cards in play.

Even at that, all the other competitors are facing the same cost increases we are, so that's part of the environment.

We certainly hear examples from the Food service trade of efforts they're making potentially to lower portion size in some cases to downgrade their offering, et cetera, to address a critical cost -- price point on their menu, and we're certainly working with them to try to help them find solutions in that regard.

But, beyond that, I don't -- I can't quantify for you precisely.

Got it.

Well, did you see trends deteriorate sequentially, or did they pretty much flat?

Well, I mean, we've seen it the last -- that unit, the larger Food Service unit for us would be within the Refrigerated Foods group, and, after several years in a row of kind of high single-digit growth we went through a couple quarters of mid- to low single-digit growth.

And, then, this quarter it was down to flat.

So, there's been some graduality to the, but it's not just a fluke at this point certainly.

And, finally, just on use of cash, is the M&A environment any better, any worse?

Is there any further thought of -- of changing your leverage ratios with some of these uses of cash, and how do we look at that as we move through the year?

Well, today I'm not so sure -- I am unhappy with our current under-leveraged position, but we do look to add to our businesses through acquisitions.

The environment I think is improving.

We still get the opportunity to look at plenty of transactions.

Some of the pricing still seems to be a little bit unrealistic.

I can't say that we have anything that we're announcing today because, obviously, we would have put in that the press release.

Great.

Thank you.

Thanks.

Thank you.

Next question comes from the line of Tim Ramey with D.A.

Davidson.

Please go ahead.

Good morning.

Morning, Tim.

Were there any marked-to-market hedging gains or losses in the quarter that we should be aware of?

No.

I don't think so.

There's clearly, I think, when we quantify it in the public releases, we'll have hedging off-sets, as I mentioned earlier, to some of the corn run-up and some of the soy run-up.

But --

Tim, we -- our accounting for hedges qualifies under the FASB 133, so we don't have marked-to-market.

Everything that -- any hedging gains or losses that are realized goes into our product costs.

Got it.

Okay.

And, Jeff, the discussion on kind of what to do strategically on the production of turkey for next year I think is interesting because, obviously, turkey and poultry in general has a higher conversion rate for corn.

So, it could be price advantaged versus pork and beef.

How do you kind of -- you said there's no reason -- you made a very strong statement, there's no reason to continue to increase at current losses, and yet that might be a reason.

What do you think about that argument?

Well, I mean, we do have some flexibility within the system that, if the environment changes, we're not closing barns.

That's why we're doing it on a poult placement basis.

But, that is our best outlook for the next, kind of, 12 to 18 months, and it takes a certain amount of time obviously to enact this kind of a change.

That given the volumes that we would need to support the value-added businesses next year and given what the recent trends have been in terms of commodity value that we think this will put us in the best return basis we can for, say, 2009, but it's something we'll talk a very close look it at each quarter that goes by.

You're not going to give up value-added, but, if returns on commodity meat get to be great, you might give up some of that?

Is that the way to look it at it?

Well, that's where we he will have sufficient value -- volume -- sufficient meat to cover the value-added sales that we're looking to make.

And, so, to the extent this is a total pound decline in the system, it will come out of the commodity meat area.

And, if we see a change in the overall picture, the G markets are such that, that's become a more favorable segment again, then we can make a change again later.

Okay And, then on Food Service, would you characterize the -- you said you picked up business in other channels.

Flowers this morning said that they were seeing it in quick serve and fast-food as a pick up from casual dining.

Are you seeing it there, or are you seeing it on the retail side?

Two things.

Within what we would categorize as, kind of, reported or Food Service results, they're gaining some benefit of off-set in the non-commercial segments, selling to schools and hospitals and other institutional sales.

When you flip over to retail, yes, I do believe that we're seeing some benefit.

We had a really strong quarter when you look at our retail items within the grocery trade.

I don't know how much of that is a trade from people moving from Food Service to grocery items.

We obviously think that we're engaging in activities that are helping to drive that as well.

We've had stepped up advertising -- or really focused advertising campaigns against the Hormel brand over the last couple of years, and the total Hormel brand sales are up significantly in both grocery and meat items.

And, we talked, clearly, that we've added ad campaigns to SPAM and to DINTY MOORE.

And, we saw good performances from those items as well.

Also, I think it's a combination of the advertising efforts, sales course execution, some new products within those areas, and then admittedly some economies effects as potentially people are shifting out of restaurant occasions and into home-use occasions.

Thanks a lot.

Okay.

Thank you.

Next question comes from the line of Diane Geissler with Merrill Lynch.

Please go ahead.

Morning Diane.

Hi, Diane.

Just a question on turkey.

Sort of had a lot of questions on it here in relation to grain.

But, if I look at your results this quarter versus the quarter a year ago, either on an EBIT basis or on an absolute basis, given that you won't see the benefit of your production cut until the beginning of your next fiscal year.

In the back half are we looking at sort of a similar trend year-over-year, or would it be on an order of magnitude would we expect turkey to be down even further than what it was in this quarter?

I think your perception is right.

That would be our best assessment right now is that in the coming couple of quarters, we could well see it down on a year-over-year basis, a little bit worse than what we experienced in Q2 as that unit absorbs the full impact of the kind of latest run-up we've seen in grain.

Okay.

And, from your commentary, it sounds like that is -- that is a bit of a change over the last few months.

In addition, we've had a bit of a change on sort of original expectations about where hog prices would be this year versus your February call.

So, I guess, with keeping guidance at the $2.30 to $2.40 level, what is the area that is outperforming your original expectations that keeps you confident in maintaining the guidance?

Well, a couple of things.

I mean, we are still -- we still see strong trends in Grocery.

We see strong trends in International.

We think Specialty will improve somewhat, but that won't be a big change in the overall picture.

And, so, for the second half, I mean, here we finished the first half where both quarters we had 14% earnings growth, over 15% for the half.

That was probably a little better than we originally had expected for the year, and, now going into the second half, the second half is looking probably a little more challenging than we had expected at the beginning of the year.

As Jennie-O, as we just talked about, probably does a little worse than they did in the most recent quarter, and as Refrigerated Foods is probably going to be a little more pressure to try -- to be able to keep up with these 20-plus-percent increases that they've been generating.

So, net-net, we see the second half still being -- we should still have the ability to grow our business, but we don't think it the's going to be at the rate we've been delivering in the first half.

And, that's kind of where we added up to leaving the earnings guidance to where we had it.

Okay.

And, then, I guess, ny other question really revolves around hog -- hedging hogs.

I know you have many methods under which you buy hogs, whether it's in the spot market or under your long-term contracts with your growers, et cetera.

Can you comment at all about where you -- what you might have put into place prior to the run in hogs?

Do you actively hedge in the hog market, or are you more hedging in the grain market?

We actually are hedging programs typically cover our input costs, and we look at our hog contracts as being a hedge against that.

But, they are mostly based at market prices.

Right.

Okay.

All right.

Okay.

Thank you very much.

Thank you.

And, your next question comes from the line of Ann Gurkin with Davenport.

Please go ahead.

Good morning.

Morning.

Morning.

Wanted to see if we can get some more detail on the export of fresh pork.

I'm assuming strong results seeing sales were up year-over-year, is that right?

And, are you picking up any new business from new market?

Well, for us, our fresh pork sales were very -- very strong strong.

Our team there has done an excellent job of developing customers in many key markets.

We're not a big player in Japan.

We're not big -- we really do not have any fresh pork sales to speak of in those numbers to China like a lot of folks have talked about in the overall market.

We tend to be more of a niche player.

But, we are still seeing very strong demand in those segments for the items that we've developed.

Okay.

And, then, switching to the Jennie-O Turkey business, have you set your contracts with retailers for the fall?

Where are we with that?

Well, whole -- you're talking about whole bird sales?

Whole bird sales, yes.

It varies.

It's really kind of -- it's a negotiation, and, in some, cases it's up to what the retailer wants as to whether they want to lock in pricing way back in the spring, whether they want to base it off of a market.

and, same thing in terms of when they take delivery of the turkeys, frankly.

The whole bird market is looking decent this year.

It's, obviously, cost of production is high, but the values have been reasonably good, and so we're -- we're in a pretty comfortable position right now on whole birds.

great.

That's all I have.

It's not a real big profit area for the Company, but it's -- we think it's an important thing for our brand to carry at that time the most important time of year when people think about turkeys.

We're very happy with our oven-ready franchise and want to continue growing, kind of, value-added whole turkeys for the holidays.

But overall, it shouldn't be a big pressure point for us.

That's great.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And, our next question comes from the line of Christina McGlone Deutsche Bank.

Please go ahead.

Hi, good morning.

Good morning.

Good morning.

Just, from the last call you quantified feed costs to be $80 million, I guess, above the $40 million you had talked about earlier.

Can you give us an update on that number?

The best I can do is that it's north of where it was before.

We did have that discussion in the last call, and, actually, kind of some back and forth even with some of your brethren in the investor community about whether that was all that helpful in number without a hedge number with it.

And, kind of on balance, okay, given that that's an important factor, too, in that we really don't want to be disclosing our hedge positions for competitive ropes, I guess we are going to kind of go the route of not being quite as specific.

But, clearly, we were talking $5.10 corn, I think, the last time we were on the line.

And, now, it's over $6.

And, so it, clearly, is an even higher number right now.

Okay.

I guess maybe another way, where -- if we -- in order to absorb $6 corn, where -- where did turkey prices, if we're look at, say, breast meat prices, where do they need to be?

They need to be north of $2.

Okay.

And, not just a penny or two.

Like in the $2.50 range, or --

Yes, it's probably between $2 and $2.50.

Okay, and maybe could you talk about some of the fundamental factors in the hog market?

Because it seems like you're saying, you're seeing a lot of hogs come in so the price today, it's not really fundamentally justified, perhaps.

I mean, what about the liquidation in Canada?

Is that having a big impact and could that make this run-up more sustainable?

Well, we certainly expect every spring to see a run-up or a spike in the hog market.

What happened this spring was much earlier and much sharper than we originally expected.

But, on the other hand, we are still seeing large numbers of hogs out there.

The processing in the industry has been maintained at pretty high levels from an historical standpoint.

The Canada -- Canadian situation, I think there is a push to get those hogs out of Canada and down into the U.S.

before the country boards and labeling starts.

We've seen the significant numbers come in from Canada has slowed a little bit in the more recent trends.

But, obviously, the guidance that I gave you for the hundred weight live prices indicates, I am assuming, that it's going to back down a little bit more as we go into the third quarter.

We will, as Jeff indicated, at some point see hog prices rise up to the cost of production or the supply/demand will right-size itself.

Jody, I thought for the language for the country of origin in the Farm Bill that it was -- it was actually going to say now from the U.S., Canada or Mexico?

Maybe, can you talk about the Farm Bill language?

There's different categories that are going to be allowed.

There will be a category that it U.S.-raised only.

There's a category that would say it could be a product of U.S.

and Canada, and, in that case, it's only for feeder pigs.

They are not going to be able to bring in market hogs across the border and have it be that.

If a market hog is processed here in the United States, it was raised in Canada completely, that's going to have to be product of Canada.

The question that's still out there is, okay, are there -- how many retailers are going to want product only of U.S.

versus ones that will take the mixed label items.

And, it's too early to tell that right now.

But, that is -- that is having a chilling effect also in terms of the thought of Canadian exports going forward.

And, of course, the whole situation with currency isn't exactly favorable for them to bring in hogs right now, either.

We're, actually, I think the last numbers I looked at showed you know increases in exports to Canada on pork.

Okay.

And, then last question, Jody, you talked about an increase in short-term debt to cover working capital.

And, I'm assuming with the increase in corn and maybe hogs in there, too, but are you seeing an impact with your hedging from the higher margin requirements?

Is that something we should think about going forward, or is it not really material?

I wasn't worry about the hedging side of things.

Really, the working capital borrowing has to do with, you're right, higher inventory prices and the timing of some tax payments.

Okay.

And, I think before you told me working capital would be kind of neutral this year.

Now, we should look for use.

I would say, because of the run-up in the values on inventories, it will probably continue to see those increases.

Okay.

Thank you.

Thank you.

And, I'm showing there are no further questions.

Mr.

Jones, at this time, I will turn it back to you for closing comments.

Thank you.

I appreciate all of you taking the time today to listen in, and, those of you who participated, we appreciate your questions.

So, thank you all for joining us today.

Thank you.

Ladies and gentlemen, that will conclude today's teleconference.

We do thank you again for your participation, and, at this time, you may disconnect.

Have a nice day.