荷美爾 (HRL) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and 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 today, Tuesday, November 22, 2011.

I would now like to turn the conference over to Kevin Jones, Director of Investor Relations. Please go ahead, sir.

Thank you, Tedeo. Good morning, everyone. Welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2011. We released our results this morning before the market opened, around 6.30AM Eastern Time. If you did not receive a copy of the release, you can find it on our website at www.hormelfoods.com under the Investors section.

On our call today is Jeff Ettinger, Chairman of the Board, President and Chief Executive Officer, and Jody Feragen, Executive Vice President and Chief Financial Officer. Jeff will provide a review of the operating results for the quarter and the year and our guidance for fiscal 2012. Then Jody will provide detailed financial results for the quarter and the year.

The line will be opened for questions following Jody's remarks. As a courtesy to the other analysts with questions, please limit your questions to one question and one follow-up question. If you have further questions, you can get back into the queue.

An audio replay of this call will be available beginning at 10.30AM Central Time today, November 22, 2011. The dial-in number is 800-406-7325, and the access code is 4482517. 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 33 through 39 of the company's 10-Q for the quarter ended July 31, 2011, for more details. It can be accessed on our website.

Now, I will turn the call over to Jeff.

Good morning, everyone. Bearing in mind that all of the quarterly comparisons were affected by the return to a normal 13-week duration versus last year's 14-week fourth quarter, we are pleased to report solid results.

Earnings per share for the fourth quarter were $0.43, down 4% from a year ago, on sales of $2.1 billion, up 2% from a year ago. We generated segment profit increases in four out of five of our operating segments.

Tonnage was down in comparison with last year's 14-week quarter, but we held our own in the faces significant pricing action. Further impacting this volume comparison was the shift of significant whole-bird sales at our Jennie-O Turkey Store segment into earlier quarters.

For the full year, earnings per share grew 19% to $1.74 over the US GAAP earnings of $1.46 per share in 2010. Sales reached $7.9 billion for the full year, up 9% from a year ago, with all five segments registering gains.

I will now take you through each segment. Our grocery products segment contributed nicely to our solid Q4 results, with segment profit up 3% and sales down 2%. For the year, segment operating profit was up 4% and sales were up 2%.

Segment profit during the quarter and for the year was adversely impacted by higher raw material costs. Products registering sales gains in the quarter included such stalwarts as our SPAM family of products, Hormel bacon toppings, Dinty Moore Beef Stew and Hormel Mary Kitchen Hash.

Our MegaMex Food business also contributed to our grocery products' results, and they supported their Herdez, Chi-Chi's and La Victoria brands with advertising during the quarter. We have also been pleased with how the WHOLLY Guacamole refrigerated dips and related products have contributed to our growth.

We are encouraged by the progress we are making with the rollout of the new items and packaging for our Hormel Compleats microwave meals. Dollar sales were down a bit on flat volume, but this was largely due to stronger promotional efforts associated with the rollout, not to mention the comparison with the 14-week quarter.

Our refrigerated foods segment operating profit declined 19%, with sales up 1%. For the full year, operating profit in this segment was up 6%, and sales increased 10%.

Pork operating margins in the quarter were up against a very difficult comparison with historically high margins a year ago. Those margins have declined, while pork prices have remained at elevated levels, pressuring the margins of our value-added products. Nonetheless, our meat products group had some sales performers that did solidly in their product portfolio, led by Hormel convenience bacon, Hormel Cure 81 premium ham, and Hormel Natural Choice deli meats. We also continued to see growth of our Hormel Country Crock refrigerated sides.

Our foodservice group saw growth in its value-added product portfolio, including sales of Hormel Natural Choice deli meats and pizza toppings.

Our Jennie-O Turkey Store segment completed a very strong year with a good quarter. Segment operating profits were up 4% and sales up 2% during the quarter. For the full year, segment operating profit was up 43%, and sales increased 12%.

Results at Jennie-O in the quarter were driven by the continued growth in value-added sales and efficiencies throughout their supply chain and in their operations. These more than made up for significantly higher feed costs during the quarter.

Sales increased for Jennie-O in all three value-added areas -- retail, foodservice and deli -- led by Jennie-O Turkey Store retail tray pack and turkey burgers. Our second Make the Switch advertising campaign helped propel sales of these products.

Our specialty foods segment got back on track with a segment profit increase of 12% and a sales increase of 10% in the quarter. Improved mix with higher sales of blended and nutritional products and better sales of canned meats were the primary drivers of the positive results during the quarter.

Whole-year results for specialty foods had operating profit down 5% on 7% higher sales as they were unable to fully address higher raw material costs until later in the year. Pricing taken in the third quarter helped offset those higher costs in the fourth quarter.

Our international -- all other segment capped off a very strong year with another good quarter, with segment operating profit up 3% and sales up 12%. Strong fresh pork exports drove the positive results. For the full year, segment operating profit was up 39%, and sales were up 26%.

As I've stated at our Investor Day in June and subsequently, we expect to grow both sales and earnings in fiscal 2012. We are looking for our refrigerated foods and Jennie-O Turkey Store segments to hold their own, while our grocery products, specialty foods and international -- all other segments will provide the earnings growth.

We recognize that we will encounter difficult comparisons in the first half of fiscal 2012, becoming more favorable later in the year.

Overall, headwinds to our outlook for 2012 include continued volatile raw material costs, higher grain costs, and an anticipated decline in processing margins. We will continue to take strategic and modest price increases where we need them in order to partially offset these higher raw material costs.

On the positive side, we continue to enjoy solid topline momentum with a number of our important value-added franchises. For example, the strong sales growth of our Jennie-O Turkey Store fresh tray packs and turkey burgers should continue into 2012, fueled by our Make the Switch ad campaign and the trend toward eating more nutritious products.

The general wellness movement also lends strength to our Hormel Natural Choice deli meats.

With the recent addition of the WHOLLY Guacamole line of refrigerated products, our Mexican foods portfolio is now well positioned to leverage its scale and our full range of product offerings in this fast-growing category. We look for strong contributions from our Hormel pepperoni and party trays as snacking occasions continue to be a big part of consumer eating occasions. The Hormel Compleats microwave meal line should benefit from the new packaging and advertising implemented this year. These are just a few of the platforms we believe will contribute to our growth in 2012.

After taking into account all of these significant factors, we are setting our fiscal 2012 earnings guidance range at $1.79 to $1.89 per share.

At this time, I will turn the call over to Jody Feragen to discuss the financial information relating to the fourth quarter and fiscal 2011.

Thank you, Jeff. Good morning, everyone.

Net earnings for the fiscal 2011 fourth quarter totaled $117.3 million or $0.43 per share compared to $121.1 million or $0.45 per share a year ago. As Jeff stated, the fourth quarter of 2010 included an additional week.

Net earnings for the 12 months of fiscal 2011 totaled $474.2 million or $1.74 per share compared to adjusted net earnings of $409 million or $1.51 per share a year ago. GAAP net earnings for the 12 months of fiscal 2010 were $395.6 million or $1.46 per share.

A table reconciling our adjusted earnings calculations to earnings calculated under generally accepted accounting principles was included in our earnings release.

Dollar sales for the fourth quarter totaled $2.1 billion compared to $2.06 billion last year, a 2% increase. For the full year, dollar sales were $7.9 billion, a 9% increase from last year.

Volume for the fourth quarter was 1.2 billion pounds, down 7% from fiscal 2010. Year to date, volume was 4.8 billion pounds, up 1% from fiscal 2010.

Selling, general and administrative expenses in the fourth quarter were 7.4% of sales compared to 8.1% last year. Year to date, selling, general and administrative expenses were 7.8% of sales compared to 8.4% last year. We expect selling, general and administrative expenses to be between 7.5% to 8% of sales for next year.

Interest expense for the quarter was $3.3 million compared to $7 million last year. Year-to-date interest expense was $22.7 million, down from $26.6 million last year, as lower debt levels and lower interest rates reduced this expense. We expect interest expense to be approximately $12 million to $15 million for 2012.

Our effective tax rate in the fourth quarter was 34.3% versus 34.8% in fiscal 2010. The year-to-date effective tax rate was 33.3% compared to 36% last year. For fiscal 2012, we expect the effective tax rate to be between 34.5% and 35.5%.

The basic weighted average number of shares outstanding for the fourth quarter and full year were 265 million and 266 million shares, respectively. The diluted weighted average number of shares outstanding for the fourth quarter and full year were 270 million and 272 million shares, respectively.

We repurchased 2.6 million shares of common stock during the fourth quarter, spending $72.3 million. For the full year, we spent $153 million purchasing 5.5 million shares. We have 3.3 million shares remaining to be purchased from the current authorization in place.

We announced a $0.09-per-share increase to the annual dividend, making the new dividend $0.60 per share. This represents an 18% increase on top of a 22% increase last year and marks the 46th consecutive year in which we increased our dividend rate.

Depreciation and amortization for the quarter was $31.2 million compared to $33.5 million last year. For the full year, depreciation and amortization was $124 million compared to $126 million last year. We expect depreciation and amortization to be approximately $115 million to $117 million in fiscal 2012.

Total debt at the end of the quarter was $250 million compared to $350 million last year. The change was due to the issuance and repayment of notes earlier this year.

We invested $61 million in our MegaMex Foods joint venture in the fourth quarter to facilitate the WHOLLY Guacamole refrigerated dips acquisition.

Capital expenditures for the quarter totaled $41 million, up from $26 million last year. For the full year, capital expenditures and property acquisitions totaled $104 million compared to $90 million last year. For fiscal 2012, we expect capital expenditures to be approximately $140 million to $150 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). Akshay Jagdale, KeyBanc Capital Markets.

Good morning. Thanks for taking the question. Just wanted to ask a question on the Jennie-O Turkey business. Was there any benefits from mark-to-market this quarter? And can you just help us frame your expectations for next year, given that it was a record year on sales and margins?

We saw no change in terms of mark-to-market, so that did not affect the results in Q4 at all.

In terms of our expectations for next year, the team is doing a great job at overcoming steep cost increases that have been coming at them for several periods now and will continue into next year. They've done that in part with efficiency gains in the operation and in part by pushing pricing in the various value-added segments.

I think our advertising campaign for the Jennie-O Turkey Store brand has also helped to support value-added sales growth, and we seem to have good momentum heading into next year with those value-added products.

And just one follow-up. What kind of increase in grain costs are you expecting next year? You had some hedging, good hedge positions this year, and there's been a lot of movement in grain costs. Can you help us understand just roughly magnitude-wise what kind of increase you might be expecting there?

I guess I will probably let Kevin provide a follow-up to you maybe later in terms of any additional specificity. But, clearly, we've said for the last several years that we're actively involved in hedge programs on our material grains for the major operations at Jennie-O. We've guided to between a 25% and 75% coverage range.

We did say last year, for 2011, we were on the upper end of that range. Heading into 2012, we're kind of right in the middle of that range. But in terms of specific cost differences, we'll kind of have to do that on a follow-up basis.

Okay, great. I will get back in line. Thanks.

Christina McGlone, Deutsche Bank.

Thanks, good morning. Jeff, I was just wondering, where are you in terms of pricing through the raw materials? Are you pretty much caught up, or is there more to go, and then the kind of demand response you're seeing? And also, if you could talk about the most points of pressure in terms of raw material costs?

Okay. In terms of pricing in general, I think our refrigerated operations had been in pretty good shape, as had grocery. What has been a little bit unexpected is the level at which some of those raw material inputs have stayed this fall. And so the teams are continuing to assess whether they have the right pricing in the marketplace to fully cover down those costs. And that will continue to be a challenge for them as they head into the beginning part of next year.

The Jennie-O Turkey Store team I think has done a good job of trying to stay ahead in terms of pricing against their cost inputs, so they still have a little bit more coming as well.

In terms of demand reaction, this is the second -- we kind of view this quarter, when all is said and done, as being fairly flat in terms of volumes. Obviously, reported volumes are lower than that. But when you net out the comparison just roughly, we're looking at a kind of flat quarter. And that is the second quarter in a row that the volumes have been flat.

These have both been quarters where we have had to take significant pricing, and so holding the line in terms of those volumes has been important to us. Clearly, in the long run, we're looking to grow volumes of our value-added franchises. But as long as we continue to be in this kind of pricing environment, you will continue to see larger net sales increases; then you will see volume increases.

Thanks for that. And then just the pressure points in terms of raw materials, is it trim costs? Is it manufacturing beef? What are the things we should be watching?

Yes and yes. You had two of them that have been certainly in our attention. Beef costs certainly have been a challenge for some of the value-added meal-based items that utilize beef for both our meat products and grocery products groups. And then trim certainly is an important factor for SPAM, for our dry sausage items, and those have been at elevated levels through the fall here.

Okay, thank you.

Christine McCracken, Cleveland Research.

Good morning. Just on the rollout of Compleats, you talked about it being on the shelf now, but I didn't see any -- it didn't appear to have a significant contribution in the quarter. I'm just curious if you are happy thus far with takeaway. I know it's early days, but maybe just an early read of that, and whether or not you have put any marketing dollars behind that?

Yes, I'm actually pretty happy with it. We had an up quarter -- a cleanup quarter in the third quarter. For fourth quarter, volumes were actually flat. But again, if you compare, that was on a 13 week versus 14, so that was encouraging in terms of the volume signs.

We have had an advertising effort against it and indeed have now created a new ad campaign for the three major Hormel featured items heading into 2012. So that will be Compleat, Natural Choice and pepperoni. And in addition, we unveiled a new label design at Investor Day in June and have certainly been diligent at selling it into the retailers and getting it into the market.

You know, my observations are that on shelf it is still maybe at about half the accounts. I mean, it takes a while to work through inventory. So we expect to have continued benefit as that new design and the new varieties are more readily available on shelf in 2012.

And then just in terms of price points, as a follow-up, historically I think this is viewed almost as a premium product. Is it getting the takeaway in this economic environment that you would expect, or if things maybe improved a little bit, would you expect a little better velocity?

I guess we view Compleats more as a mainstream product line as opposed to a premium product, but I guess that is in the eye of the beholder somewhat. We have experienced, since the recession hit, a little bit of a downturn initially in the business and now more of a leveling off and starting to grow slowly again.

So it does -- I think single-serve convenience items certainly were something that seem to be impacted by the recession. So if we all end up coming out of that, we do expect that to be a further tailwind in terms of being able to grow that item.

Thank you.

Diane Geissler, CLSA.

Good morning. I want to ask you a question about pricing within your grocery products segment, because if I look at your results, if I make an adjustment -- and I appreciate I may be making some assumptions here that are correct. But if I make an adjustment for last year's quarter to exclude the extra week and then compare it with the number you posted this morning, it looks like your revenue within grocery products was up around 5.5%, which is not atypical with what you did in the third quarter, when your revenue in the grocery products segment was up 4.5%.

So, is that kind of what you saw in grocery products? And then I guess if you could comment on what the mix is between pricing and volume within that segment?

Our read is similar to what you just described in terms of how we're seeing those volumes. And then as we head into 2012, we do feel the grocery division has several solid initiatives that should allow us to continue to grow top line. It will be the 75th anniversary of SPAM. We will have new advertising creative to help support that product line, and it has good momentum heading into the new year.

We do expect growth out of Compleats. And then MegaMex, as we continue to add to that franchise, has had good experience in terms of growing its sales, and we expect to see that continuing going forward.

Okay, but I guess the question here is really you didn't begin pricing in grocery products until the third quarter. So certainly I would expect your first and second quarter, you should see some pretty nice benefit year on year in terms of pricing before you overlap what you did last year. And then, obviously, if input prices stay high, you may have incremental pricing that you take within grocery products?

Yes, that was I guess --

Is that what you're working on now?

-- what I was referring to earlier.

Got you. Got it.

We seem to be at component levels of certain of the raw materials, and we talked about beef and trim being a couple of them, that are quite a bit higher than historical rates, quite a bit higher than the normal seasonal trend. And so that is what we have to assess here, is that -- are we just getting kind of a hangover effect from pricing from the earlier part of the year, or is this establishing some sort of new norm for what these costs are going to be, and therefore we need to consider what our pricing should be accordingly?

Okay. And then as you move pricing into the retail environment, what has been the reaction from the retailers? Are they accepting of that? Because, obviously, they are seeing it in every aisle, but some categories I'm sure they're probably more accepting than others. If you could just comment on, or even maybe the channel mix, what the reaction at the retail level has been?

Well, we have to work very closely with our retail partners in determining the appropriate price for the item. Clearly, we are still dealing with pressured consumers. It's a key measure to us, is takeaway, ultimately. If our franchises continue to grow, or at least in the short run if we see some flattening but not declines, we're satisfied with that, as long as we see the other end of it and start seeing the growth coming.

You know, when you look at a lot of our franchises over the course of the year, we have a lot of franchises, not just in grocery products, but in the grocery store, period, that experience very solid growth. So, overall, I think we have that credibility with the retail partner, that we are measuring the right mix of advertising, promotion, shelf price, et cetera, to keep these items healthy and to make sure that consumers are reacting to them.

Okay, great. Thank you.

Jeff Farmer, Jefferies & Company.

Great, thank you and good morning. I think this is the fifth quarter in a row you have called out supply chain efficiencies for the Jennie-O segment. So I guess my question is, how much runway do you have left going into FY '12?

I mean, each year they are looking at aspects of their operation, both on the farm side and in the plant operations, where they think they can continue to obtain efficiencies. I think we've given you sort of a general guidance for next year, that we're looking at somewhat of a flat year for Jennie-O Turkey Store. And when you compare that to the large increases in that result that you've seen for the last two years, that certainly does show that our expectations of being able to generate those kind of huge savings are probably less in 2012. But we do think the team will continue to be able to show at least something in that regard.

Okay. And then you might have touched on this, but you've seen two quarters of falling Jennie-O volumes, even when you sort of adjust for the 13-week to 13-week basis. What is your volume growth expectation for that segment heading into FY '12?

Well, Jennie-O is always a tricky read for volumes, because you mix in the macro trends, and what are our bird numbers and then what are the value-added volumes. We are saying for 2012 we're going to continue to run a tight operation. With meat costs being where they're at, we want to make sure we have the right amount of meat to support our value-added businesses, but not a lot more.

And so total volumes for Jennie-O you will see for next year, as we report each quarter, may well be down flat to down somewhat. But we always also let you know with the value-added trend has been. And as was mentioned on today's call, our value-added trend was still positive. We saw growth in retail, deli and foodservice.

And so our expectation for next year is that they will continue to grow net sales on a value-added basis, probably on small volume increases there, but the total volume for Jennie-O Turkey Store in a given quarter may well be down based on those macro conditions.

Thank you.

Lindsay Drucker Mann, Goldman Sachs.

Good morning, everyone. I just was curious if you could comment on -- you know, you mentioned that some of the upside you guys have had in refrigerated foods and Jennie-O has given you a bit more flexibility to invest back in your grocery private brands while some other food companies were struggling.

Can you give us any measures, whether it be market share trend or even just anecdotally what you're seeing in the marketplace, that reflect kind of the fruits of this benefit?

In many ways, the Jennie-O benefits of the efficiencies we've, frankly, reinvested in Jennie-O. We've been able to support very significant advertising campaigns the last two falls in a row.

Within the Hormel part of the portfolio, we really have done less of trying to take it from refrigerated and invest it in grocery and more just looking at the Hormel brand as a whole. And of course, it does go over both segments. I mean, we have some of the Compleats items, or in other years, Hormel Chili would be items we support for the Hormel brand in the grocery division, and our pepperoni and Natural Choice, and in other years for refrigerated entrees or Hormel items within refrigerated.

The overall Nielsen trends on our items, especially when we look at them over the course of the totality of 2011, are favorable. We're very pleased with the kind of growth we are seeing. As we have said before, our items are still, relatively speaking, low household penetration items with relatively low buy rates. And so we can create improvements such as what we've generated in 2011 with fairly incremental gains. And we are confident the team can continue to deliver those.

Okay. And then to clarify on your outlook for next year, you talked about Jennie-O and refrigerated foods especially holding their own. Does that imply flattish profits year over year?

That's the range we're looking at.

So, if we are talking about tough comps for the hog cutout, what does that imply in terms of your expectation for the balance of the refrigerated foods business?

Well, first of all, the cutouts will be part of what we have also talked about in terms of timing of results for 2012. Our first quarter last year, as everyone will recall, was a blowout quarter, the highest quarter we have ever had. And one of the major contributors to that were the exceptionally high cutout margins enjoyed by refrigerated foods.

We don't look for that to repeat here in 2012. Beyond that, it still does get back ultimately to growing the value-added franchises. And we think refrigerated, with both its retail aspect and its foodservice aspect, should be able to steadily do that.

Okay. And then lastly, just a quick clarification -- you mentioned something about the pull-forward of sales of whole birds for Thanksgiving. Can you just give a little more color on that?

Yes. Really, whole-bird sales are highly dependent on what the customer wants in terms of when they take deliveries for frozen turkeys. Now, fresh turkeys, there is a small segment of the market that is fresh. Those are processed in our plant within three to four weeks of the Thanksgiving season, and those are not pulled forward. They are very reliable sales during the month of November.

But frozen sales could be delivered anytime from January or February of the prior year all the way up until just prior to the holiday. And we do that in partnership with the retailer. They can take it either way. And this year, we just ended up having more wanting to take them earlier. And so we did reflect some of those sales earlier in the year in 2011.

Too early to tell how 2012 will play out on a year-over-year basis. We start having those discussions with the retailer in about February or March of the ensuing year.

Okay, thank you.

Tim Ramey, D.A. Davidson & Co.

Good morning and thanks. If you're prone to worry, as I sometimes am, you know, I think about the really great corn hedge position that Jody delivered last year early in the year. And then if we kind of think of you being 50% bought forward, we might have relatively high corn costs relative to cash early in the year. And I think that is what you are alluding to in your prepared remarks.

Is there any risk that we see pricing pressure in the Jennie-O business in kind of the more commodity side of it as maybe people who operate in the cash markets have more favorable cost position than your hedge position?

In the aggregate, our hedge positions for 2012 are perfectly favorable to the current cash market. It certainly won't provide the major benefit that our hedge positions provided in 2011, but we're not ahead of the cash market right now.

Okay, so that's helpful. And then, as I think about your CapEx budget, did you tell us what the big uptick was in CapEx for '12 versus '11? If so, I apologize; I missed it.

I don't think we mentioned anything specific, Tim. But certainly we have had two years before this where we have been -- we were cautious at the beginning of 2010, and we didn't get our spending up to the levels we thought, and we worked hard on that in 2011. But it takes time to get some of these large projects going.

So I have a significant amount of project that started in 2011 that will be completed and capitalized in 2012, plus a couple other good projects related to some exciting new products that we hope to introduce next year.

Thanks so much.

Farha Aslam, Stephens Inc.

Good morning. First a question on refrigerated foods. Jeff, if you could provide some color on how your foodservice sales are faring and price competition in packaged foods? Packaged meats?

Sure. Our foodservice team, one of the measures we really study internally is how they're doing against their industry. And they continue to generate solid results on that kind of a comparison.

That being said, we started 2011 with some optimism. There was some momentum building in terms of true volume gains early in the year, and then those kind of screeched to a halt as a total industry when gas prices started to go up in the spring. And it has been a choppy and tougher year since then.

They ended up still showing some nice growth, especially with their higher-end items, more highly value-added items such as Austin Blues and Cafe H and Natural Choice, and those continue to be an area of emphasis for them. They continue to do an excellent job not only serving the commercial trade within the restaurant world, but also a lot of the noncommercial vendors, and are growing their business there as well.

In terms of price competition, it really is all over the board. It kind of depends on how differentiated the items are. Clearly, some of those market-based items within refrigerated foods, the bacons and the hams, those are price-competitive categories, but those prices have been going up a lot this year because the inputs are such a huge portion of the overall product costs and everybody's facing those input pressures.

But when you get into the more differentiated items, then you really -- frankly, you're pricing against the consumer. You need to make sure you're getting the right level to sustain your volumes against your following for that type of item, and it's less what the competition is at.

And a differentiated item would be your pepperoni?

Sure, party trays, Compleats, those kind of items.

okay, thank you. And then could you just provide some color on the M&A landscape and your priorities for cash? So far, you've been doing mostly small tack-on, acquisitions. Anything in larger scale, and is there a particular international market that you are focusing on?

Obviously, we don't have anything to announce today, so our priority continues to be the same as I discussed with the previous question on CapEx. We're looking to do some internal investment. And I think there is some and excitement around some of the projects we have going there.

I believe we have stated that our priorities are to invest in our business, and that is part of it, investing in CapEx, but also looking at acquisitions. And we will announce those as they come. But we also have done a nice job of returning to our shareholders with our dividend increase this year and last year, coupled with our nice share repurchase this year.

And is that any international markets, or mostly domestic focused?

You know, I think we are looking globally for opportunities. And as Jeff has stated in previous presentations, it seems to make sense that the Asia-Pac area would have particular attractiveness to us.

Great. Thank you.

Robert Moskow, Credit Suisse.

Hi, thank you. I want to know if you quantified where you think maybe just industry packing margins were a year ago in the first quarter and where you think they are today so that we can get a better sense of -- your first quarter is going to be a really tough comp in refrigerated foods. And we want to make sure we're setting it up the right way.

Well, if I look at just the spread between the USDA pork cutout and the Western corn belt for averages for what would be our first quarter, they were in the mid- to low teens last year. Against the five-year average, that would be $5 to $8.

Okay, got it. Okay. And then also, Jody, can you give us a number for CapEx spending this year? You kind of --

Yes, I did -- $140 million to $150 million.

Okay, so it will be up. And what about spending on MegaMex?

We haven't included any specific projects in there because that wouldn't show up in our capital expenditures. That just shows up as an investment in our MegaMex business. But I think there is some opportunity to make some further investment there, even with the franchises that we currently have.

Okay, because I'm looking at your cash flow statement. It says $95 million increased investments, equity affiliates for 2010.

Right. That was the investment in Fresherized Foods that each partner put into the joint venture.

Okay, and $51 million in fiscal '11.

$10 million was Don Miguel.

Don Miguel, yes, and setting up for the MegaMex venture.

All right. So fiscal '12, is it going to be similar to fiscal '11, around $51 million again, or is it zero, or where do we think we are?

Well, the acquisition has been fully reflected now for Fresherized. So we have no new acquisitions announced at this point. Whether there could be other investments in the business to grow it, that certainly could happen. But it's unlikely at this stage to be at those kind of levels, absent a new acquisition.

(multiple speakers) cash flow generation.

The acquisitions are on a different line in the cash flow statement. What I'm really wondering --

No, no. For investments that MegaMex makes, it will show up in that investment line versus acquisitions, because we are not the acquirer. It's the joint venture that is making that acquisition. You have to look at both lines, I guess.

All right. I think I'm on the same page. So $51 million in fiscal '11 this year; fiscal '12 may be down a little bit from there or right around there, or it's unclear?

You know, we don't budget for acquisitions. We just enjoy them as they happen.

Okay. All right, well, thank you anyway.

Ken Zaslow, BMO Capital Markets.

Good morning, everyone. In your CapEx, can you break it down into what you consider cost-cutting measures, kind of like -- I think you would be doing in the turkey business more versus growth initiatives, and can you define on what you think the return on invested capital would be outside of maintenance CapEx?

Boy, I can't do that in my head.

I'm just trying to figure out, like, you guys obviously have delivered a good year, but I think the longer term and figuring out what type of returns you get on some of this money going forward and how you guys think about it beyond that. And again I'm just trying to put some sort of back-of-the-envelope type of math to it. Whatever you can help me on and thinking about that would be great.

I guess I can probably provide you with a little more of a narrative than with the math. Clearly, in a business such as ours, we're always going to be spending money to support our plants to make sure they are state-of-the-art, modern facilities. We do find ourselves in a position where we need to make investments periodically related to food safety or employee safety that clearly will not have the financial returns that we would hold our other investments to.

We sometimes have made additions to facilities in general. We did that to Dan's Prize. We did it to Jennie-O. We did it at Rochelle not too long ago. Clearly, we added the whole Dubuque plant not too long ago.

And then Jody alluded to, regardless of bricks and mortar, there are times that even within our current plant facilities, you end up having to make a fairly major expenditure just on a new and unique product line. And all of these latter examples I'm giving you, though, we certainly would require our units to provide adequate cost of capital returns to our shareholders. And I think over time, we've done a good job of doing that. So it's kind of a blend.

This year's step-up in CapEx is really much more a product of what Jody mentioned, which is sort of the carryover just from a coincidental timing basis of a number of initiatives that got started in '11 rather than any one particular project that we can point to or a philosophy that's saying now, oh, we're now going to step up to the $150 million level on a regular basis. We have been kind of more at that $100 million level, and that is probably a more normal level for us.

But is there a way, of the $140 million to $150 million, is there like a general breakdown of maintenance -- it's going to be the cost savings initiatives and then the growth initiatives in this? Is it one-third, one-third, one-third? Just, again, not exactly an exact number, but just some sort of guideline?

You know what? Let me have Kevin get back to you on that because I don't have that information in front of me to even give you the [splits].

Okay. And then just the follow-up, which hopefully ties to this, is, how much of the turkey infrastructure costs are you saving? Obviously, everybody is talking about the corn and the feed costs going up, but is there a way to think about, on an ongoing basis, how much you can continue to cut on a cost basis and rejigger the operation there, and how long will it take you to get to that level?

In terms of specific targets for our teams, one of the commissions that we really not just ask Jennie-O, but we ask all our teams to do, is to find efficiencies within their facilities that offset as much of the plant-based inflation as possible. So, obviously, wages tend to go up; benefit costs tend to go up.

But our teams have done a very good job of making sure that our total operating costs are not going up at that level. But in terms of getting more specific to that on Jennie-O, I would have a hard time doing that right now.

Okay. Are you close to -- because, again, it just seems like you have done more than just offset the costs. To me, it seems like you're actually uncomplicating the dynamics of how it works. And it seems like this is an ongoing process that could take one, two or three more years, or are you there? I'm just trying to get some sort of flavor for -- it just seems like you are doing a good effort. I'm actually trying to ask somewhat of a positive question. I'm just --

Okay. Sure. No, I understand. I guess it's a similar answer to what I said earlier about, I think you can maybe gain something out of our guidance for Jennie-O for this year, that we do think there's perhaps a little bit of a slowdown in the opportunities on the cost side to keep making those large gains that we were able to do over the last couple of years.

It doesn't mean we're not going to still find other incremental opportunities. In the long run, though, the Jennie-O story will be driven by value-added sales. It will be -- it is still a protein that is quite underutilized, that on an aggregate protein basis has been flat for 20 years.

But, clearly, if you look at our growth, we have found value-added niche items that are connecting with consumers, but they are still at very low household penetration rate levels. Our ad campaign seems to be increasing those. And in the long run, that is what is going to be the driver for Jennie-O for years to come.

Great, thank you.

John Feeney, Janney Capital Markets.

Good morning. "Jenn-ay," a French company. We're going up market here. (laughter)

I wanted to ask about -- on the turkey supply chain, it strikes me that historically, you look over the sweep of history, this is a business that has averaged 8%. 8.5% type operating margins up and down. Part of what has caused significantly better results over the past 12 and 18 months has been certainly brilliant hedging and some very good market conditions and an unusual amount of discipline in turkey supply.

But then part of it is stuff that only you can control, which are taking out permanent supply chain and costs, and it seems like mixing the business to better margin.

So I guess what -- I'm trying to understand, how much has that midpoint, average, whatnot, margin for Jennie-O improved? Is this now an average 10%, 10.5% margin? Is it higher than that? I'm talking about over the next five years, what do you think is -- how much has that margin improved specifically?

Jon, I guess I would be hard pressed giving you an exact number to it, though I definitely would agree with the conception that we have hopefully moved that average up. And the other thing we really tried to do by keeping our supplies as tight as we have is to narrow the range of possible outcomes.

I mean, in some of these years with higher commodity markets, we frankly probably could make even more money those years by having surplus commodity meat. But we have seen the opposite effect of it in the years where that's plus favorable, and overall we want us to keep our team focused that you're raising turkeys to create value-added food items.

So that is still the game plan for 2012. We're keeping it tight based on the high-grade input that we're seeing going forward. And the general industry in turkey seems to have maintained a decent discipline, but obviously we're just one player in that. Others have to make their own decisions.

So, overall, I do feel that we have moved the average up. I guess at this time I don't have a new specific number to give you, but hopefully we have tightened that range.

Why is the turkey industry showing so much discipline?

Again, it's one player at a time. It's an industry, the dynamic -- there are three kind of larger players, and then there are a lot of other players in various parts of the segment, some more vertically oriented, some more based on the value-added items. So I can't tell you in general as to whether there's a specific answer as to why it seems to have, for example, behaved a little bit differently than, say, the chicken industry has.

The products are different in terms of how they behave in the marketplace. Absent Thanksgiving, turkey is not a footballed item. It's not the hot feature in the grocery store. It's a steady-Eddie performer that has a certain niche following that like the items. And so we're never going to be the lead item in the ad, but it has a good, stable following. And maybe that supports the outlook of how the different players look at their supply side. I don't know for everyone else.

Thanks. And just a detail question for Jody. I know the 8-K is not out yet, but can you tell us what role inventory valuation played in the quarter? I know it played a role last quarter.

Yes, and that was part of what impacted our general corporate expense if you look at it on a segment level. Traditionally, you think about that inventory reserve moving, increasing when pork operating margins are higher and decreases as pork operating margins decline. So we had less of a reserve this quarter and last quarter because pork operating margins were declining vis-a-vis the prior year.

Okay. So you have less of a reserve this quarter sequentially from the third quarter as well.

Right. It's probably more flat to the third quarter, but (multiple speakers) versus the prior year, yes.

Great. Okay, thank you very much. I appreciate it.

Ann Gurkin, Davenport & Company.

Good morning. Just wondering if you would comment on consumer purchase patterns or behavior during the quarter and what you're seeing as you go into calendar '12 for, like, consumer purchases, behavior, what Hormel needs to do to address those patterns?

From our perspective, they have remained fairly favorable. I mean, our three major areas in terms of the consumer items within our total portfolio would be grocery products, the meat products part of refrigerated and Jennie-O Turkey Store. And when I look at their focus items, we have a lot more items that are gaining share and are gaining volume than we have that are flat or declining.

So, again, I think our team has a pretty good recipe right now for where they're putting their pricing, where they're doing their promoting, and with the advertising support that we're giving the items.

The advertising focus for the past year was clearly on both the Hormel brand and Jennie-O Turkey Store. For 2012, we'll be adding a campaign that involves SPAM luncheon meat as well. And so we think grocery products will benefit from that. And then the MegaMex group also has advertised their major brands, and those continue to gain slottings in the stores.

Okay. And then within grocery products, can you guess at a -- or can you stay at the midteens to high-teens margin range for fiscal '12?

You know, we've talked before. The caveat I have to give you, Ann, is we're still kind of sorting through how we're going to handle in the long run these items that we're adding to the MegaMex portfolio. So, for example, thus far, Don Miguel and Fresherized show up on the equity and earnings line, but the sales are not in our sales numbers. That is different than the rest of MegaMex.

As we integrate those items, then we may have to reassess that. And so if they do get integrated in, on a percentage basis, that would lower our targets in terms of what grocery would deliver. If everything stayed the same, we would expect to sort of incrementally improve our results of grocery products from the level they were at in 2011, but it may not all stay the same.

That was very helpful. Thank you very much.

Eric Larson, Ticonderoga Securities.

Yes, good morning, everyone. Happy Thanksgiving. There's a lot of discussion on pricing this morning, and I know it is a very uncomfortable place for everybody to go. And this is just a very general question. Maybe it more specifically can be answered for the grocery products area. But when you look at your pricing strategies, or maybe you can maybe just give me what your pricing results have been, do you try to protect your dollar profits or do you try to protect your percentage margin?

I guess of the two, we tend to focus a little bit more on the dollar side. But again, it really does vary by the different categories. The retail consumer items are the ones that tend to move more slowly, that you have to give a certain notice to the retailer, that we really want to observe what you have. On the plus side, you have better data. You have the Nielsen data and so forth to really show you what the sales trends are.

At the other end of the spectrum are the items that are much more market-based, whole turkeys, hams, bacon, etc. Those move quickly. There again, you are just trying to preserve your -- I would say your dollar margin as best you can against what the cost inputs are. And then within the foodservice trade, it's much more customers specific. Some are on matrixes and some of them have certain notice requirements, but again, they are moving periodically to try to preserve a certain target margin range.

Okay, that's fair. So with that as a comment, you could see more movement in your gross profit margin percentagewise, and that would be a typical -- that would be something typically that we should expect as analysts?

Well, it's probably an item that we hone in on maybe a little less.

Okay.

You know what you're ultimately trying to bring home in dollars. You see what kind of pressures you are under in terms of cost and what that does to price, and the rest falls out in between there.

Okay, that's fair. Then just the last follow-up question is, I continue to see a lot of your advertising for Jennie-O in those turkey burger -- those campaigns that you have going out, where you stop in a certain city and you feed everybody turkey burgers and show them the quality and the taste profile of those products.

And it seems to me that would have -- should have very positive impacts on your volume growth, on your prepared turkey burger business. Do you have any results that you could share with us on that? I think you did a little bit in the last quarter. I think you had very strong volume growth in Q3. And I think you mentioned that specifically as one of the factors. Is that continuing?

Well, you know, we've -- really, we've been able to do this Make the Switch campaign starting in Q3, Q4 of last year, and then it was off air for a while, and then it was back on again in Q3, Q4 this year. We have seen sustained volume trends on both turkey burgers and fresh tray pack that have been, in burgers' case, solid double digit, and fresh tray pack ranging from high single digit to low double digit. So we're very pleased with that.

It seems to also have this kind of spillover effect we're looking to have on our other branded items. The whole concept of making the switch for health reasons to turkey isn't limited to burgers. We think that is a good carrier item. But clearly -- and frankly, I think the team did a really wonderful job of branding the spots. I think I might've mentioned in past conferences that our earlier efforts to really steer people on a healthful basis toward Jennie-O I think were good in terms of their message, but they weren't necessarily strongly associated with the Jennie-O Turkey Store brand. These new ads do a much better job of driving the brand, as we have shown much enhanced awareness numbers for the brand.

Operator, I think we have time for one more question.

Akshay Jagdale, KeyBanc Capital Markets.

Thank you for taking the follow-up. I just wanted -- this one is probably for Jody. Just in terms of divisional EBIT, what are your expectations for growth there? And if you could comment on the growth by division, that would be great, too.

And you mentioned that Jennie-O Turkey, you expect flat growth or flat profits next year. But any color there would be very helpful, because there is a lot of moving parts below the line.

Right. And you know, Akshay, you are asking for directions that I don't have to give you. And I would suggest you follow up with Kevin.

Okay, great. Thank you.

Operator, I think that is it for the questions. At this time, I would like to thank everybody for listening in, and the analysts for their good questions. And we wish everybody a happy Thanksgiving. If Tim Ramey is still on the line, he may have a wine recommendation to pair with turkey. He is probably not on the line any longer.

Happy Thanksgiving, everyone. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.