荷美爾 (HRL) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Hormel Foods second quarter earnings conference call on today, the 19th of May, 2010.

Throughout today's recorded presentation all participants will be in a listen-only mode.

After the presentation there will be a opportunity to ask questions.

(Operator Instructions)

I will now like to hand the conference over to your host, Mr.

Kevin Jones, please go ahead, sir.

Thank you, Donny.

Good morning, everyone.

Welcome to the Hormel Foods conference call for the second quarter of fiscal 2010.

We released our results this morning before the market opened, around 6:30 AM 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.

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.

Because Jeff and I are in New York and Jody is in Austin, you may experience a bit of a delay in some of our responses to your questions as we sort out who should respond to a particular question.

We appreciate your patience in that regard.

Jeff will provide a review of the operating results for the quarter.

Then Jody will provide detailed financial results for the quarter.

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

An audio replay of this call will be available beginning at 10:30 AM Central Time today, May 19, 2010.

The dial-in number is 800-406-7325 and the access code is 4286994.

It will also be posted to our website 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 will be making.

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

Please refer to pages 27 through 33 in the Company's Form 10-Q for the quarter ended January 24, 2010, which was filed with the SEC on March 5, 2010, for more details.

It can be accessed on our website.

Now I'll turn the call over to Jeff.

Thank you, Kevin.

It's nice to be here in New York this morning and to have the opportunity to talk about another fine quarter of results.

We are pleased to report strong earnings and sales for the second quarter.

Our Q2 earnings of $0.67 per share, excluding the onetime charges of $0.10 per share associated with the plant closing and the healthcare laws, represent a 14% increase over our results of a year ago.

Total dollar sales were also up 7% over a year ago.

This quarter once again demonstrates the benefit of our balanced business model as the strong performance of our Jennie-O Turkey Store and specialty food segments more than made up for the results of our grocery product and all other segments.

I will now take you through each segment.

Our grocery product segment reported a dollar sales increase of 6% and a segment operating profit decrease of 2%, the latter after adjusting for the onetime charges associated with our Valley Fresh plant closing.

Net of the new item sales of Mexican products under the MegaMex Foods venture and of the discontinued Carapelli Olive Oil sales, revenues for grocery products would have been flat for the quarter.

Stronger sales of our Mexican products and our Hormel Chili and Hormel Mary Kitchen hash products were not able to completely offset the pressure on margins in our Spam family of products and our Hormel Bacon Bits items, prompted by higher raw material costs.

The increased sales of Hormel Chili and Hormel Mary Kitchen hash resulted from increased distribution and from our new Hormel brand advertising campaign.

The campaign is designed to leverage our leading brand strength in numerous categories to promote cross purchase intent.

We are pleased with the success of our MegaMex Foods venture so far, as sales of over $120 million through the first half are on pace to easily exceed the base level sales of $200 million on an annualized basis.

Our refrigerated foods segment reported operating profit of 7%, aided by stronger cutout margins compared to a year ago.

Sales were also up 7% for refrigerated foods.

We enjoyed particularly strong sales of Hormel party trays and Hormel pepperoni, helped in part by new products, in part by our Hormel brand advertising campaign, and in part by the great efforts of our sales organization in generating meaningful in-store promotions.

We are pleased with the progress and the integration of our recent Country Crock side dish business.

Our team has done a good job stabilizing this business during the quarter.

We can now provide complete meal solutions to consumers in the refrigerated section of the store, complimenting our Hormel refrigerated entrees and Lloyd's Barbecue products.

We have begun to see signs of improvement in the food service trays.

Sales of our natural choice deli meats, Austin Blues barbecue products and Cafe H ethnic products all grew during the quarter.

Segment operating profit at our Jennie-O Turkey Store segment increased by a noteworthy 93%, with sales up 1%.

Jennie-O's results came from improved efficiencies throughout the entire business.

Export sales of dark turkey meat have given us an added boost, as stymied pricing has remained very strong.

Sales increased for Jennie-O in all three value-added areas, retail, deli, and food service, led by retail tray pack fresh turkey and rotisserie deli products.

We continue to generate excellent exposure for the Jennie-O Turkey Store brand through our sponsorship of the Biggest Loser reality TV show.

Our specialty food segment again posted improved segment operating profit and sales, up 39% and 13% respectively with contributions by all three subunits of specialty foods.

The leading drivers of these improved results were sports nutrition products, private label canned meat products, and sugar substitutes.

In our all other international segment, segment operating profit declined 18%, while sales increased by 7%.

We did generate excellent sales of our Spam family of products, but this was not sufficient to offset the reduced returns we experienced related to lower fresh pork exports.

In our February call we mentioned that higher hog costs were on their way.

These increased costs did indeed arrive and at a higher level than originally anticipated.

We expect this trend to continue as we get into warmer weather.

On the other hand, commodity turkey prices have firmed up as a result of industry production cuts and grain prices appear to be in a fairly stable position.

Taking these considerations into account and in light of our strong results in Q2, we are again raising our full year guidance range from $2.68 to $2.78 per share to $2.75 to $2.85 per share, excluding the onetime charges of $0.10 per share associated with the plant closing and healthcare laws.

At this time, I will turn the call over to Jody Feragen in Austin to discuss the financial information relating to the second quarter.

Thank you, Jeff.

Good morning, everyone.

As we announced in our earnings release issued this morning, our second quarter results were impacted by the onetime charges related to the closure of our plant in Turlock, California and tax charges primarily related to the newly enacted healthcare laws.

These onetime charges resulted in an adjustment to diluted net earnings of approximately $0.10 per share for the second quarter.

A table reconciling our adjusted earning calculations to earnings calculated under generally accepted accounting principals was included in our earnings release as well.

For the second quarter of 2010, adjusted net earnings totaled $91.3 million or $0.67 per share compared to $80.4 million or $0.59 per share a year ago.

Adjusted net earnings for the first half of fiscal 2010 totaled $202.5 million or $1.50 per share compared to $161.8 million or $1.20 per share a year ago.

On a GAAP basis, net earnings for the second quarter of 2010 totaled $77.9 million or $0.57 per share, GAAP net earnings for the first half of 2010 were $189.1 million or $1.40 per share.

Dollar sales for the second quarter totaled $1.7 billion compared to $1.6 billion last year, a 7% increase.

For the first half of the fiscal year, dollar sales increased 4% to $3.4 billion.

Volume for the second quarter was 1.1 billion pounds, up 2% from fiscal 2009.

Year to date, volume was 2.3 billion, also up 2% from fiscal 2009.

Selling, general, and administrative expenses in the second quarter were 8.6% of sales compared to 8.8% last year.

Year-to-date, selling, general and administrative expenses were 8.5% compared to 8.6% last year.

We expect selling, general, and administrative expenses to be approximately 8.8% of sales for the remainder of the year.

Advertising expenses were 1.5% of sales for the quarter compared to 1.6% in 2009.

Year-to-date, advertising expenses are 1.5% of sales, even with last year.

We saw an absolute dollar increase in advertising expense in the second quarter and expect that advertising dollars will exceed 2009 expenditures on a full year basis.

Interest and investment income was $1.4 million for the second quarter compared to $8.6 million in fiscal 2009.

In the second quarter of fiscal 2009, we recorded a $3.6 million gain on the dissolution of the Carapelli joint venture.

In addition, we experienced higher returns on our rabbi trust investments in 2009.

We expect difficult comparisons in the back half of the year due to the strong performance of our rabbi trust investments in 2009.

Interest expense for the quarter was $6.6 million compared to $6.9 million last year.

Year-to-date interest expense is $13.1 million compared to $14.4 million last year.

We expect interest expense to be approximately $27 million to $28 million for fiscal 2010.

Our effective tax rate in the second quarter was 40.7% versus 35.3% in fiscal 2009.

The increase in 2010 was driven by the onetime impact of recently enacted healthcare legislation and the reduction in the value of our deferred tax assets due to the change in the tax treatment of Medicare Part D reimbursement.

Year-to-date, effective tax rate is 36.8% compared to 34.9% last year.

For fiscal 2010, we expect the effective tax rate to be between 36% and 37%.

Basic weighted average number of shares outstanding for the second quarter was 134 million.

The diluted weighted average number of shares outstanding for the second quarter was 136 million shares.

We repurchased 330,000 shares of common stock during the second quarter and have 367,000 shares remaining to be repurchased from the 10 million share authorization in place.

Total debt at the end of the quarter was $350 million.

Depreciation and amortization for the quarter was $31 million, even with last year.

For the first half of the year, depreciation and amortization was $61 million compared to $62 million last year.

We expect depreciation and amortization to be approximately $125 million to $127 million in fiscal 2010.

Capital expenditures for the quarter totaled $22 million compared to $20 million last year.

For the first six months of the year, capital expenditures totaled $40 million compared to $46 million last year.

For fiscal 2010, we expect capital expenditures to be approximately $105 million to $115 million.

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

Operator?

(Operator Instructions) Thank you.

And the first question comes from Farha Aslam.

Please go ahead with your question.

Hi, good morning.

Hi, Farha.

Congratulations on a good quarter.

Thank you.

My question relates to hog prices and the impact on refrigerated foods and grocery products.

This quarter you benefited from a really good cutout.

Do you think that cutout continues to help results going into the third quarter or do you think the higher hog prices are going to come pass the cutout and therefore pressure margins in that business?

If it's okay, I'll go ahead and have Jody start with that question and if you need any additional follow-ups, I'd be happy to provide it.

Okay.

Good morning, Farha.

We certainly have seen hog costs that are much higher than in 2009.

And as we expected those to happen, only they happened a little sooner for us this year.

I don't expect the trend to keep escalating in hog prices.

I expect they will stay high.

The cutout, we've seen a nice spread there, as you commented, the cutout really is going to depend on the demand side of the equation.

Exports have been strong.

If those continue, there is the possibility for the cutout to move up as well, but then also you have the rising, the impact of the rising prices and what that does to consumer demand.

So I don't see the cutout as clearly as I do on the hog price side.

Thank you.

And then my follow-up is on turkey.

You had an extraordinary margin in the quarter.

It's above your corporate target of 8% to 10%.

Do you anticipate turkey to remain above that corporate target for the rest of the year?

Well, Farha, quarter to quarter in the turkey business does vary somewhat, but if you compare it to the proper quarter comparison, we do think conditions are fairly favorable right now for the Jennie-O Turkey Store group and that they are attaining a lot of efficiencies in their operations.

And so I do think that will continue to track somewhat above a typical quarter in each case.

Thank you.

Very helpful.

Thank you.

And the next question comes from Jonathan Feeney.

Please go ahead with your question.

Good morning, thank you.

Hi, Jonathan.

If I were to think about the refrigerated foods business as -- split it in two parts, the profits you enjoy from commodity sort of suggests slaughtering and, business you deemphasized over the past ten years, and the sort of more value-added component, taking those meats from, I know you get them internally, but from wherever you would happen to get them and selling in some value-added form, can you give me a sense of what the two components would have looked like this quarter if I were to split it in that way?

Well, I think the commodity side that you're describing would have benefited from more favorable cutout margins during the quarter.

The value-added story has benefit more mix.

We still have a number of items within the value-added portfolios of both meat products and food service that are doing very well in the current environment and then we have others that are a little bit softer based on the steep ramp-up in costs that we've been seeing.

But could you -- I guess I'll use my one follow-up.

Could you give me a sense what those ballpark, what those components would be between commodity and value-add and what that usually is?

I don't have a profit breakdown for you.

I think we have talked in the past that approximately 75% of our sales go out in a form that we consider to be the value-added products.

Okay.

But am I right?

I guess let me just think about is the historical range anywhere from -- I always thought it was anywhere between 50%, 60% of the total profits to 120% of the total profits of that business would be value-added.

Is that the -- would that be a right range?

Well, it clearly -- and we describe what the percentage of sales was value-added and we do expect that the value-added items should attain a better profit margin and a more reliable profit margin than the commodity side.

Great.

Okay.

I think that helps.

Thank you very much, Jeff.

Thank you.

And the next question comes from Akshay Jagdale.

Please go ahead with your question.

Good morning.

Congratulations on a good quarter.

Thanks, Akshay.

Just one question on grocery products and if I can, another one on turkey.

In grocery products it seems like the margin sequentially came down.

Looks like that's the piece of your business that got most impacted by higher costs.

Can you talk about how much of that is a timing issue?

And also, the volumes were really strong again and I may have missed your commentary on that.

So if you could comment on those two things.

For grocery products?

Yes.

Akshay, I do think that for second quarter results you saw more pronounced impact on the cost increase on their side of the business.

We did feel the same impact in certain elements of the refrigerated foods portfolio, but they had the offset of the hog cutouts to dissipate that somewhat.

Items that are pork-based items, particularly our Spam luncheon meat or Hormel Bacon Bits, did see early steep increases in the raw material costs during the quarter and that did compress the margins then to a lower level than what we had been generating in the prior quarter and even the prior same quarter of last year.

In terms of sales, grocery products overall did generate positive sales for the quarter.

As I mentioned, if you sort out the discontinued business, the Carapelli and you put aside the new franchises that we joined to the Company through the MegaMex venture, the net effect of those two would be to flatten out GP sales, so it was kind of a mixed bag again within their portfolio.

Chili did well, hash did well, the Mexican products did well, completes was sort of back to even which was, is trending the direction we need it to trend.

But we did see softer sales of some of the other canned items such as Spam and Dinty Moore this quarter and the chunk meat items also were a little bit off.

Great and just one follow-up, if I can, on turkey.

I know Farha asked something to this extent, but if I look at the seasonality in your business, obviously 4Q and I believe 1Q for your fiscal year are the best seasonal quarters for turkey and the highest margin on a quarterly basis in those quarters is around 13.5.

It seems as though turkey, much like chicken, is set up pretty well right now, supply/demand wise, and you have some momentum on the profit margins going in.

I mean, do you see this being, could be, 4Q could be a record profit year for turkey?

I mean, should the profits should trend up, right?

Without giving a specific number in terms of net margins for the division, it clearly would be our position that as we talked about our balanced model, that as we feel a little bit of pressure in the grocery and refrigerated segments for their value-added items, with a spike in pork costs, we do feel we have an offset in place with more favorable conditions and solid results for Jennie-O.

So that it would be correct that we should be able to trend upward from what we delivered this quarter on a quarterly basis.

Great, thank you.

I'll pass it along.

Thank you.

And the next question comes from Diane Geissler.

Please go ahead with your question.

Good morning.

Hi, Diane.

Congratulations on your quarter.

Thank you.

Jody, can you tell me what was your average live hog price in the quarter?

And then as we look to your increased guidance, what are you booking in for hog prices for the back half of the year?

Our average hog cost this year was about $10 alive hundred weight more than 2009.

Is that a first half or a second quarter number?

That's second quarter number.

Okay.

Yes, about $10 over what we paid in the second quarter of 2009.

I actually think that we're going to see hog prices kind of stay at this elevated level, but perhaps not trend up too much higher.

So I haven't put a lot of increase in the back half of the year.

I do think that after our fiscal year we'll probably see them come down quite a bit.

I have a feeling that these are attractive prices for producers and that some of those empty sow stalls will now start filling up.

Okay.

Thank you.

And then I guess for Jeff, you talked a little bit about seeing a recovery in food service.

I guess we could look at your portfolio and saying you probably had some brands that did very well with the value-conscious consumer.

Can you just talk about what you expect over the next six months if we do see a shift out of retail into food service, what that means for your portfolio.

And I guess even within the grocery products, I would guess completes would do a little bit better, but Spam would be a little bit weaker.

But I would like to hear what your nearby forecast is, so say in the next six months for your product portfolio.

Okay.

We don't -- we're certainly seeing more favorable signs in the food service environment.

I mean if you look at kind of total sales for Hormel food service, for example, they were flat for the quarter.

On the branded or more highly value-added items, we saw some gains.

And we had more territories up than were down.

And that was an encouraging sign versus prior years.

We would expect that trend to gradually accelerate.

I guess we don't feel that -- we're not carrying from the food service marketplace that the clouds have all parted and everything is excellent now.

But if we do experience a shift where people start going out a little bit more often and businesses start attending a few more conferences, et cetera, we're certainly well positioned to take advantage of that.

We have food service elements in four of our five operating segments and they are all poised with good sales organizations and with good products we hope to deliver against that audience.

Within the grocery environment, not talking just grocery products but grocery stores, our impression has been that the recession has had mixed results.

I mean we clearly saw some benefit to the traditional canned franchises for a time there, where almost all of those items were up.

This quarter was more mixed in that regard with chili and hash up and Dinty Moore and Spam down.

But we also did lose some momentum in our convenience items, both completes and our refrigerated entrees during last year.

And so as consumers -- if consumers gain more confidence and the economy starts looking better, we do expect those franchises to improve.

Great, thank you.

Thank you.

And the next question comes from Tim Ramey.

Please go ahead with your question.

Thanks so much.

Jeff, the improvement in specialty was impressive and I'm wondering if there's any new product activity or new activity for new co-pack activity for customers there or if that's just kind of a steady state improvement.

Well, specialty has seen solid growth and that's the one piece of our business that does have some private label involvement, the specialty products group.

And they've steadily increased their business, both in the traditional items they have been in in the past, such as gelatin, but also some canned meat items.

That is contributing to results.

The Diamond Crystal group has found ways to continue to grow their business, even during the recession.

They sell, in many cases, to a different group of food service operators than the meat side of our business traditionally focuses upon.

And then one other element that helped us this quarter was last year we had kind of a lag effect or negative effect from the Century Foods operation, as they had lost some significant business.

And they have done a nice job of replacing that business and getting back to more traditional margins for them.

So all three components are working well right now and our outlook for the second half would be for that to continue.

And just a quick follow-up on the Jennie-O business.

I don't know that you said it, I'm scrambling here.

Did you say what your unit performance was there and do you expect -- I mean, I know you've cut production there.

All proteins have essentially been cut.

But what should we expect for the rest of the year on sort of your unit performance there?

I want to make sure, when you say unit performance, what you are --

Tonnage, I guess.

Oh, okay.

Total sales for Jennie-O were up 1%.

The value-added portion was up more than that and that's the game plan.

I mean we have cut production over time.

Those production cuts are starting to lap the time when we cut them and so you won't see the declines going forward as much in terms of total tonnage, but the focus continues to be driving more products into the value-added area and we saw really kind of very solid sales from all three of the value-added groups at Jennie-O.

Thanks, Jeff.

Nice job.

And the next question comes from Christina McGlone.

Please go ahead with your question.

Thank you.

Good morning.

Morning, Christina.

Jeff, you talked about flat sales in grocery without the acquisitions and dispositions.

What would volumes have been, just because I'm curious what the price mix is and the core price mix in that division.

My recollection is that it would be very similar without the -- again, excluding those items.

If any of the folks in Austin have a different number, please go ahead and chime in.

It's -- Jeff, they were -- volume was down just a little bit more than flat.

Okay.

So it would have been -- volume was a little bit more negative, but you get into all the mix issues, so that's kind of a difficult one.

Okay.

So I guess the question is, given the raw material increase, what do you think the outlook is for pricing in grocery and what do you think the retail and consumer response will be?

Well, for the grocery items, we are going to take a little bit of a wait and see approach.

We certainly knew that this spike was coming, but we're still not clear on how long it's going to last.

When we take pricing on our branded items, both within grocery and the meat products portfolio, we want to have a reliable price out there in the marketplace that then we can promote against.

And so we've not made a call at this time yet as to whether that group needs be looking at pricing on those specific items.

As we move closer to the fall and we have a better look as to whether the hog market's going to be as Jody described and potentially receding back a bit or whether we're at a new level, then we'll have to make that call.

Okay.

And Jeff, just I'm curious about the acquisition pipeline, because I know last year you were saying that there were distressed assets on the block, but that's not really what Hormel looks at.

But I'm thinking now there could be higher quality companies that sort of fit in your profile that may be motivated by changes in tax laws to sell.

So I'm wondering if the acquisition pipeline is more encouraging.

I think it would be correct to say that the folks that we said were on the sidelines last year for valuation or economic reasons might be more encouraged now by the current environment.

We've been probably just as active as ever in terms of exploring ways to grow our business and utilize the cash that we know we have on hand.

So we're certainly actively exploring things, but we don't have anything to announce at this point.

It's the confluence of a willing seller, willing buyer, the right value, and the right strategic fit that need to come together.

And we've had times in the past few years where we've had several of those kind of things come together at once and then other times where we go a stretch without one.

Okay, thank you.

Thank you.

And the next question comes from Eric Larson.

Please go ahead with your question.

Yes, good morning, everyone.

Hi, Eric.

My question relates to the protein markets right now.

The -- actually the hog markets have been benefiting quite nicely from a very strong ham export market.

It seems like there is selective strength on the export side.

And then I think in your prepared comments, Jeff, you talked about very strong exports in the dark turkey export market, dark parts market, which if you get some good pricing and some good demand in that derivative market, that's really going to help your profitability for Jennie-O.

So can you give me a feel of what's going on in these export markets and really the protein markets that -- are these unusual events or are they sustainable and what's driving those things?

Well, why don't I let Jody start with talk about the hog side and maybe I can fill in on the turkey markets.

Yes, we certainly have seen -- the exports have been up year-over-year and I think the USDA's most recent forecast is for a full calendar year to be up about 6%.

Granted, the ban from Russia was just lifted, but they do have some restrictions, I believe, on the amount of tonnage.

Really the drivers have been our neighbors to the north and south, Mexico's strength, as well as Canada.

How long we expect that to continue, boy, depends on the economic conditions in those countries, actually, that are going to drive the export as prices continue to stay firm.

So I would expect that we'll see exports on the hog side or the meat side of, pork side of things to be up 5%, in that 5% to 6% for the year.

Eric, on the turkey side, I mean the markets have been quite strong.

Based on what we know right now, our anticipation is that they would remain at that level.

We've seen quite a recovery on the white meat side of the turkey business also in terms of the commodity meat markets.

And although that has less direct meaning to our results, because we don't sell a lot of surplus breast meat, it is supportive of the overall market.

Okay, thank you.

Thank you.

And the next question comes from Robert Moscow.

Please go ahead with your question.

Hi, thanks.

Hi, Robert.

I wanted to ask you about just a broader picture about the impact of higher hog prices on your two businesses.

If all of these refrigerated meats and processed meats companies are getting hit by hog prices together, wouldn't it be fair to say that they would all raise prices together because it's just -- it's the same impact across everybody?

Well, it certainly is the same impact across everybody, but all businesses have to make independent business decisions.

It may depend on the strength of their relationship with a given customer or the strength of their brand in a given marketplace, but clearly just as we probably talked a year or two ago about realizing that in the long run the hog production deficit couldn't last, hog producers couldn't last forever getting a negative return.

Same would be true in terms of costs and pricing in the marketplace.

That if we attain a new level and it stays there for a while, then in the long run prices are going to have to migrate up to that new level.

Okay.

Do you think stepping back, refrigerated products, is that kind of the easier part of the business to pass along the higher input costs because they tend to be, I don't want to say commoditized, but certainly it looks more like a refrigerated product rather than a packaged product.

Robert, there's a significant portion of the refrigerated food sales that that would definitely be correct for.

There are items -- the fresh pork items clearly trade on a market basis and ham and bacon sales traditionally in both the retail and food service trade move with markets and indeed we have taken pricing on those types of items to reflect what the current market conditions are.

The items where you would not see that, where we are holding back and looking at them more as we do the grocery items would be the pepperonis and the refrigerated entrees and those types.

And Natural Choice, those types of items

Yes, that makes sense.

So even natural choice, it would be more challenging, you think, to take prices higher?

We just look at it differently.

I'm not saying it would be more challenging, but we just look at that as a consumer packaged item that we are not, we don't want to have it just fluctuating all the time based on underlying markets.

Natural choice, frankly, sells -- we sell roast beef, sliced ham and sliced turkey, so you have all sorts of different inputs within the line, but you want to have a certain target price you're looking for, for those lines.

You have promoted prices you're trying to attain.

And if we see in the long run that there's just a total difference in the costs that we have to deal with, then we'll have to address it accordingly in pricing, but we just don't do it on as quick a basis.

Yes, I guess if you can kind of get where I'm going here, if there is a negative thesis on Hormel, it is that higher hog prices would impact your earnings growth going forward.

I guess what I'm just trying to figure out is going into fiscal 2011, how big of a negative impact is it really?

Is it enough to kind of slow your ability to hit your normal targets, or is it just a, is it a just something that you can offset through other parts of your portfolio, either because the portfolio's very balanced or because you think that the pricing can eventually cover it?

We have not completed any sort of budgeting cycle yet for 2011, but I can give you a general sense that we've talked before that one environment for our Company that provides some short-term challenges for certain units is when prices go up, costs go up quickly.

And we certainly have seen that in the pork area.

And so sort of baked into our second half number here is the expectation that it's going to be a more challenging environment for grocery products and refrigerated foods.

We do think some of the other segments can offset that substantially, but that is out there.

Our best outlook right now for 2011 would be along the lines of what you're describing, which is I would expect our team to react to the environmental change and we're either going to have to address pricing, if there is a new higher cost level that is going to stay in place, or if some of those costs recede somewhat, we should be in a position in 2011 to achieve our normal long-term growth objectives.

Okay.

So then just a modeling question then.

So if we look at fiscal 2010 and how it's kind of playing out, the first half of the year you definitely over delivered on where you thought you would be.

And as we get to the second half of the year, the comparisons are tougher, operating profit growth was very big in the second half of fiscal '09, so it will be a comparison issue and maybe a little bit of a challenging environment because of the higher hog prices.

It's kind of like a tale of two halves for fiscal 2010.

I think that's fair.

But again, we try to run the business on the basis of the full year and that was part of why we moved to annualize guidance.

By moving up our guidance range, now it is the second time we've done it this year, the midpoint of that range would be a solid 10% increase on an earnings per share basis over last year's results and a better increase than that on an operating profit basis because you want to wash out the rabbi trust effect.

Yes, we're going to look at the year, if we can deliver the second half the way we've described it as being a very successful year and one we can build on going forward.

Okay.

Thanks a lot, Jeff.

Thank you.

And the next question comes from Ann Gurkin.

Please go ahead with your question.

Good morning.

Hi, Ann.

You all have accumulated a nice amount of cash on your balance sheet.

Just was wondering if you could review your priorities of cash again.

Jody, would you like to address that one?

Ann, I'm afraid they haven't changed since last time, but certainly we continue, as Jeff indicated before, we continue to look at opportunities to invest strategically either internally.

Our CapEx spending has been lower and I guided the full year a little bit lower because, while we've got great projects in the pipeline, it seems to be that we're taking a little longer than I originally anticipated in getting some of those things done and equipment ordered and whatnot.

So CapEx should be coming back online and getting back to more normalized levels in the back half of the year.

So we look at acquisitions, investing in our own business.

Certainly we're committed to our dividends to our shareholders and share repurchase as well.

So those seem to be the key.

That's great.

Thank you.

That's all I have.

Thank you.

And the next question comes from Mike Hamilton.

Please go ahead with your question.

Good morning, everyone, and congratulations.

Thank you, Mike.

One question, but with a few parts, Jeff.

Been a while since I've heard you discuss the dynamics of your hog contracts and I'm just wondering, given the volatility of what we've been through, kind of from 30,000 feet, if you could assess what you've accomplished, what you're seeing out there, if you think you're taking market share, if this environment has given you an opportunity to continue to upgrade the quality of your producers in terms of their financial strength and capabilities, just kind of the picture as you see it of the progress you've made there.

Okay.

If it is okay I'll go ahead and I'll have Jody proceed with that question.

Good morning, Mike.

Our hog contracts generally are based on markets.

So it's usually a spread to the western corn belt,since that's where most of our hogs are sourced.

So we really do kind of follow the market.

We have been fortunate that the producers we've aligned ourselves with have had a lot of financial strength.

We have some of the smaller operators have fallen on the wayside when they have got in over their heads and were losing money, but generally, our producers have been stronger.

And we continue to work with other producers that maybe are unhappy with their current packer that they are dealing with and have some opportunities there.

We feel very comfortable about the supply of hogs for the future for Hormel and these are generally long-term contracts, 5 to 10 years.

May you continue to be fortunate.

Thank you.

Thank you.

And the next question comes from Diane Geissler.

Please go ahead with your question.

Good morning, again.

Thanks for taking the follow-up.

Jody, I think you said you repurchased 330,000 shares and you had a little bit over 300,000 left on your share buyback, is that correct?

Yep, let me dig out the exact number for you since I--

Maybe while you're looking for that, can you tell me when does the board (inaudible - technical difficulty) because you're almost out on your share authorization.

So is that something the board takes up on a quarterly basis or how does that go?

The last time we had an authorization, I think it was in 2003 that it was implemented, so obviously we've been given a long-term for it.

There's 367,000 shares that were left at the end of the second quarter.

I certainly would recommend to the board that we do an additional authorization, but that's obviously something that the board would decide.

And I don't think there's any specific timing to that, to answer your question.

Okay, great.

Thank you.

Thank you.

And we have a follow-up question from Christina McGlone.

Please go ahead with your question.

Thank you.

Jody, so you said CapEx guidance was $105 million to $115 million.

Is that down?

I thought it more in the $130 million to $140 million range before.

Is--

I'm sorry to interrupt you.

Did you have more to the question?

No, no.

Am I right and if that's true, why is it down?

As I had indicated in an answer to Ann earlier was we have projects in the pipeline for CapEx.

It's not for lack of wanting to get things, to do things.

They just seem to be taking longer than I originally anticipated in my guidance, so I did pull it down for the full year.

I think it's being conservative.

We might go over that, but I was trying to give you a real picture of where I felt our CapEx spending would be.

The new plant basically up and going, we have -- obviously, we're adding some additional production capabilities into there.

That should get in this year.

I know Jennie-O's got some specific projects that they are working on, but they don't seem to be happening as fast as I thought they would.

Okay, thank you.

And we have another follow-up question from Akshay Jagdale.

Please go ahead with your question.

Hi, thank you.

Thanks for taking the follow-up.

Just one comment and then I wanted to get your reaction, Jeff or Jody.

Most of your protein competitors who, publicly traded ones, who are more I would say on the non-value-added side, had said that we are tight, protein right now, especially, beef and pork and chicken, may be changing and in that environment, some of your, some of the publicly traded ones have actually increased their normalized margin ranges for pork margins, et cetera.

And do you agree that we are in a quote, unquote, tight protein, and if that's the case, doesn't that bode well for pricing in grocery products as you look at it over the next six months or so?

Akshay, I would agree that protein is certainly significantly tighter than it was a year ago or two years ago.

The pricing equation has other elements to it.

I mean, you have to look at other feature alternatives that the retailers have.

We certainly have to be mindful of a consumer that in many cases is having constrained budget and is looking for as good a value as possible on items.

And so we have to balance what the needs would be in terms of pricing to cover down our costs and what the market will bear in terms of what our consumers are looking to pay.

Okay, thanks a lot.

(Operator Instructions) We do not appear to have any further questions.

Please continue with any points you wish to raise.

Very good.

Thank you, everybody, for your participation today.

I will get back to the sell side analysts who cover us with some contact information of where I'll be later this week.

I'm going to be tied up in a conference today, but I will give you some contact information so we can talk tomorrow, if not, later today.

Thank you very much.

Have a great day, everyone.

Bye-bye.

Ladies and gentlemen, this concludes the Hormel Foods second quarter earnings conference call.

Thank you for your participation and you may now disconnect.