荷美爾 (HRL) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Hormel Foods Corporation's second-quarter earnings conference call.

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

After the presentation, there will be an opportunity to ask questions.

(Operator Instructions).

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

Please go ahead, sir.

Good morning, everyone.

Welcome to the Hormel Foods conference call for the second quarter of fiscal 2013.

We released our results this morning before the market opened around 6.30 a.m.

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; then Jody will provide detailed financial results.

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

An audio replay of this call will be available beginning at 10.30 a.m.

Central time today, May 23, 2013.

The dial-in number is 800-406-7325, and the access code is 4617224.

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 28 through 35 in the Company's Form 10-Q for the quarter ended January 27, 2013 for more details.

It can be accessed on our website.

In order to ensure that everyone has an opportunity to ask their questions, please restrict yourself to one question, with one follow-up.

Now I will turn the call over to Jeff.

Thank you, Kevin, and good morning, everyone.

We announced second-quarter earnings this morning of $0.46 per share, down 4% from last year.

Sales were $2.2 billion, an increase of 7%.

Total volumes increased 4% despite a planned reduction in harvest levels at both our hog processing and turkey processing operations.

The addition of Skippy peanut butter sales and the consolidation of our Don Miguel sales in our Grocery Products segment were a significant contributor to the sales gains.

This will be the last quarter of comparisons to quarters without Don Miguel product sales.

I will now take you through each segment.

Our Grocery Products segment delivered a good quarter.

Segment profit increased 10%, and sales grew 49%, including sales of Skippy peanut butter and Don Miguel products.

We were pleased that sales by Grocery Products were up 4% even excluding Skippy peanut butter and Don Miguel products.

Sales gains in Grocery Products were led by Chi-Chi's and Herdez products, Hormel Compleats microwave meals and Dinty Moore stew.

Sales of our Hormel Compleats microwave meals increased for the second consecutive quarter, as our new cheesy pasta items helped drive growth.

Segment operating profit for Refrigerated Foods was up 3%, as overall improvement across most of the business modestly offset losses in live production operations.

Our affiliated business units, which include Farmer John and Burke, among others, showed significant growth.

Sales for Refrigerated Foods declined 2% in the quarter, primarily attributable to the planned reduction of harvest levels in our hog processing operation and from exiting our feed sales business.

We saw growth in retail sales of Hormel party trays, Hormel convenience bacon and Lloyd's ribs, and in Foodservice sales of Hormel Natural Choice deli meats, Hormel Pecanwood bacon and our new Hormel Fire Braised Meats.

We are excited about the potential growth that our new Hormel Rev snack wraps will bring to our Refrigerated Foods sales.

These products are arriving on shelf at retailers nationally and we will launch a significant advertising campaign starting in July to support this new product line.

Segment operating profit at Jennie-O Turkey Store declined 26% on a sales decline of 2% as we faced significantly higher grain costs and lower commodity turkey meat prices.

Increased sales of our value-added products in the retail and foodservice trade channels were insufficient to offset these headwinds.

Nonetheless, sales of our Jennie-O Turkey Store fresh tray pack items and turkey bacon remain particularly strong as we continue to benefit from our Make-the-Switch advertising campaign over the past three years.

Harvest levels at Jennie-O declined more than 2% during the quarter, which reduced our exposure to weak commodity turkey prices.

Our Specialty Foods segment achieved another strong quarter, with operating profit up 24%.

These results were attributable to significant sales growth, as the team has done a nice job expanding the customer base.

Sales grew 7% during the quarter, led by ingredients, ready-to-drink beverages, nutritional products and sugar.

The agreement allowing Diamond Crystal Brands to sell Splenda sweetener into the foodservice trade channel will expire at the end of June.

Our Specialty Foods segment will be challenged by the loss of these sales in the back half of the year.

We also regret to report that this loss of business will necessitate Diamond Crystal's closing of its Perrysburg, Ohio plant.

Diamond Crystal will be offering severance payments and priority status for employment opportunities at their other facilities to those impacted by this action.

Our International & Other segment continues to thrive.

Operating profit grew a robust 21% on a 21% increase in sales.

These results were led by increased sales of our Spam family of products, improved profitability of our fresh pork products and better results from our China operations.

We are excited about the benefit that the Skippy peanut butter business will bring to our sales and profitability in this segment.

The integration of international sales outside of China that were part of the closing on January 30 is progressing well.

We still expect to close on the sales within China and the operation located in Weifang by the end of our fiscal year.

We expect a strong overall finish to fiscal 2013.

In our Grocery Products area, we are seeing solid momentum in all four key product platforms, including our core canned items, our Mexican products, our microwave meals and Skippy peanut butter.

Regarding Skippy, we are pleased with the progress we are making in gaining new distribution and in attaining strong execution at the store level.

Our outlook remains bright for our International & Other segment, as well, as we start to attain the benefits of distributing our Spam family of products and our new Skippy line together.

We also expect continued sales growth and efficiency gains from our business in China.

At Jennie-O Turkey Store, we are looking for improved results in the second half, as pressures from higher grain costs and weaker commodity turkey prices begin to moderate.

We are encouraged by the continued strength of our Jennie-O value-added products.

For Refrigerated Foods, the processing margins in pork have been weaker than we had anticipated this year.

This segment has experienced some of the same challenges as Jennie-O in terms of higher grain costs in live production areas and weaker commodity pork prices.

However, we do expect the balance to eventually return to this area.

We believe the investment we are making in the Rev snack wrap rollout will establish the foundation for a beneficial new product platform for the Refrigerated Foods group.

After a great first half, our Specialty Foods segment will now be tasked with replacing the lost Splenda sweetener business.

We have a number of initiatives underway aimed at building their other businesses.

Taking all of the foregoing significant factors into account, we are maintaining our fiscal 2013 earnings guidance range of $1.93 per share to $2.03 per share.

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

Thank you, Jeff.

Good morning, everyone.

Earnings for the second quarter of fiscal 2013 totaled $125.5 million, or $0.46 per share, compared to $127.9 million, or $0.48 per share, a year ago.

The results for 2013 include nonrecurring costs incurred in the Skippy acquisition of about $9 million.

Dollar sales for the second quarter totaled $2.2 billion compared to $2.0 billion last year, a 7% increase.

Volume for the second quarter was 1.2 billion pounds, up 4% from the same period last year.

Selling, general and administrative expenses in the second quarter were 8% of sales, up from 7.4% of sales last year.

Selling, general and administrative expenses were higher due to Skippy-related transition and transaction costs in the second quarter.

We expect a minimal impact on selling, general and administrative expenses from the China closing of Skippy.

SG&A expenses are expected to be around 7.5% of sales for the full year.

Interest and investment income was $1.1 million for the second quarter compared to $2.3 million last year.

Interest expense for the quarter was $3.1 million, down from $3.3 million last year.

We expect interest expense to be approximately $12 million to $14 million for fiscal 2013.

Our effective tax rate in the second quarter was 31.5% versus 33.5% in fiscal 2012.

The lower tax rate is primarily due to settlements with various foreign and state tax jurisdictions.

For fiscal 2013, we expect the effective tax rate to be between 33% and 34%.

The basic weighted average number of shares outstanding for the second quarter was 265 million.

The diluted weighted average number of shares outstanding for the second quarter was 271 million.

We repurchased 200,000 shares of common stock during the second quarter, spending $7.9 million.

We have 11 million shares remaining to be repurchased from the current authorizations in place.

Depreciation and amortization for the quarter was $31 million, up slightly from $29 million last year.

We expect depreciation and amortization to be approximately $120 million to $125 million in fiscal 2013.

Total long-term debt at the end of the quarter was $250 million, unchanged from last year.

Capital expenditures for the quarter totaled $23 million compared to $28 million last year.

For fiscal 2013, we expect capital expenditures to be approximately $120 million to $130 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) Ken Zaslow, BMO Capital Markets.

Good morning, everyone.

Just one housekeeping question.

When you said Jennie-O's results will be improved in the back half, is it sequential or year-over-year?

We are talking year-over-year comparisons, so for the first two quarters, clearly significant drops from the prior year.

As we had indicated when we headed into the year, we knew last year had really strong commodity turkey prices in the first half of the year, and we were in a much more beneficial position in terms of those grain costs, both in terms of the actual daily cost and with our hedges from the prior year.

So we've dropped nearly kind of $18 million a quarter year-over-year for the first two quarters.

We expect that to improve significantly in the second half, getting back to even and then gaining as the half proceeds.

Okay.

And then my bigger picture question is can you talk about your input costs and your ability to price for the Grocery Products business, and how you think about that going into the back half of the year, but also going into 2014?

We don't have any 2014 pricing relating guidance yet.

We certainly -- it is sort of a franchise-by-franchise approach when it comes to the Grocery group right now in terms of costs.

I mean, it ranges anywhere from pressure we are getting in costs on beef and chicken-related items to, frankly, the pork side costs have been fairly -- have been fine.

We've had favorable avocado costs.

We are new to the peanut butter business, but we've had favorable peanut costs thus far.

In terms of announced pricing actions, I mean, kind of right before we closed on the deal, Unilever did follow a price decline on peanut butter, and so that is enacted in the marketplace.

There is no further pricing actions that we have at this time on that franchise.

We did take a price increase on Hormel Compleats.

That was the first one in several years.

We wanted -- I think as we've talked about in prior calls -- wanted to get that franchise humming again, get the right marketing support, get the right product mix.

And we are happy with what the team has done in that regard.

And so we just have now coupled that with sort of a catch-up price increase on that item.

But at this point, otherwise, we don't have any broad pricing actions in store for Grocery Products.

So you assume -- so the volumes should be relatively at historical levels?

There wouldn't be any dislocations with volumes throughout the next call it six to 24 months that we could see?

On Grocery, we have really great momentum right now in Grocery.

I'm expecting very solid results on both top line and bottom want for Grocery for the remainder of the year.

Great.

Thank you very much.

Christine McCracken, Cleveland Research.

Jeff, you said that you had really strong margins on your export business.

And it is a bit curious, given some of the trade interruption that we saw in the quarter.

And I am just curious if it was a delayed response, if that product had already been sold, or if those markets to Russia and China just are not a big deal for you.

It is more the latter.

We are really kind of a niche player when it comes to exports.

We tend to sell more of the offal-based items when it comes to fresh pork.

Clearly, Spam is also a major export component of our overall portfolio for International, and in that case, those margins, the sales have been solid contributors to the growth that International has been providing.

Are you anticipating any retaliatory action on this COOL legislation here -- I guess the deadline is today -- in terms of Canada and Mexico and what that could mean to the overall pork markets?

Well, I mean we've been supporters of the American Meat Institute and other trade associations' articulation to our government that we really felt that a modification to the country-of-origin labeling program would be beneficial, frankly, to us as well as the trading partners in North America.

It is kind of hard to read whether that is falling on deaf ears or whether there is going to be at least some progress in that.

But in terms of retaliation, I don't have any greater sense, Christine, I guess, than anyone else as to what might happen in reaction to that.

All right.

Thank you.

Eric Larson, CL King.

Thanks for taking my questions.

Good morning, everyone.

Jeff, could you give us a little flavor -- this is on the turkey side.

We've seen a relatively steady increase in sort of the production metrics for the industry over the last, let's say, four to six quarters in egg sets, et cetera.

And it looks it finally kind of started catching up on the commodity pricing in that sector.

Could you give us a little feel of where you think the production numbers for the industry will be, and why that should start maybe even getting better in the second half?

I think you are right in terms of sort of the long-term ramp that has occurred in the turkey business, but there has been kind of a reaction as things have moderated, as the commodity markets are less favorable, as grain costs have gone up.

And so our read of the industry numbers is we are looking at kind of down 2% to 3% numbers.

And of course, as we announced at the beginning of the year, in terms of what our production levels were going to be, we sought to put our production levels at about a 2% decline on a year-over-year basis.

So that is a fairly favorable outlook, heading out for the remainder of the year.

We know there is one new plant coming online starting next year, the far best organization in Indiana.

And so you may at some point see a tick up in egg sets in both placements related to the filling of that facility.

But otherwise, I think we are in a fairly benign environment for the balance for turkey.

Okay, thanks.

Just a follow-up on that.

Do you expect your harvest numbers for turkey to be kind of down that low single percentage range for your second half?

And then also, your harvest numbers in pork, what would be the second-half outlook for harvest numbers for that division as well?

I think we would stick with the full-year number we've given you.

We will admit it is -- we don't always hit it exactly on the nose.

I mean, turkey is a good example of that, and we talked about a 1.5% to 2% decline on an annual basis.

In the first quarter, the weights came in a little more favorable than we thought, and so we didn't -- it wasn't that steep a drop.

The second quarter was actually steeper than 2%.

But on average, we're still for both supply chains looking at that range.

Okay, thanks.

Diane Geissler, CLSA.

Good morning.

Could you tell me please how big the Splenda business is?

Obviously, it is material, if you had to close a plant, but I'm just trying to get an idea about revenue coming from that business and its contribution on an operating profit basis.

You know, we really don't do line-by-line either sales or operating profits.

In terms of -- we are trying to give you a little bit of a sense of magnitude of impact for Specialty Foods by virtue of our comments that here, there are really strong growth numbers that they've managed to deliver in the first half.

We are saying it is going to be much more of a challenge in the second half.

So it is significant, but I can't give you a precise number on that.

I will also add, though, that when it comes to kind of the bottom-line impact, our overall guidance and maintaining our annualized range is baking in everything we see coming in terms of the impact from the loss of that business for 2013.

Okay, and what is the ACV on the Rev product at this point?

You know, the reported ACV from the team is in the 70% to 80% range, but that is kind of the acceptance level.

I'm not sure that Nielsen, when you scan it yet -- there can be as much as a month lag sometimes from when a customer says, okay, I'm taking it to when it actually shows up on the shelf.

But those are the kind of numbers we expect to have in place here, I would assume by next month.

And for sure we want them in place by July, when the advertising kicks off, and our team seems very confident we are going to hit that.

How many SKUs are on that product platform and are the retailers taking all of the SKUs?

There are eight varieties and most retailers are taking all of them.

There are a few that have taken five or six versus all eight.

In many cases, we are getting double facings for each item.

And so we are very excited about where it -- for the chains that we already see it on-shelf and how they are executing it, it is in a good position.

And our repeat numbers, we've kept the test markets -- the three markets that we started last fall -- we've continued to have those markets in place with the product, and the repeat numbers are still very strong for that item, so that's very encouraging as well.

And the price point on that is what?

It is plus or minus from $2.00; you will see some in the high $1.00s, you'll see some in the low $2.00s.

Okay.

Terrific.

Thank you.

Akshay Jagdale, KeyBanc.

Good morning.

First question is just on Refrigerated Food volumes, and even Jennie-O Turkey actually, so it's two parts.

Can you break down the volume decline in terms of value-added versus commodity?

From what I understand, the hogs process weren't down -- I mean, they were down like 1% or something.

So just trying to understand the dynamics there, if there is anything going on on the value-added side that we need to be maybe concerned about.

I guess I'll take the Refrigerated Foods side.

We did see the reduction in harvest volumes, as well as some feed sales that we had been doing that we are no longer in that business.

So those would be the two big impacts on volume for Refrigerated Foods.

As far as the value-added franchises, obviously, the fresh pork business moves up and down with the harvest volumes, so you're going to see reductions there when the harvest is lower.

But we are excited about some of our value-added franchises in the Refrigerated Foods section.

We saw great results on our party tray business.

So we continue to look for those to deliver, along with the Rev products that will be hitting in the back half of the year.

For Jennie-O, clearly the total pounds processed were down, the total pounds sold were down.

But most of the drop in sales really came out in the commodity side of it.

Our value-added volumes were actually up for the quarter, very significant gains continuing on the retail side and solid gains on Foodservice, a little less so on the deli components.

So those are kind of our three go-to-market value-added components.

But overall, from a Jennie-O franchise basis, we are still in very good shape in terms of our sales volumes through to consumers.

Okay, and just one on Skippy.

Can you talk about sort of longer-term -- I know you haven't owned the business for that long, but for the time that you've owned it, what have you learned, like top two maybe positives relative to your expectations, and two, one or two to sort of negatives relative to your expectations?

Thank you.

Sure.

I don't have any negatives right now.

I guess that's a good thing.

From a positive standpoint, our team has done a great job of getting ahead of the curve in terms of the integration aspect.

So we had a five-month transition agreement in place with the seller that we ended up getting out of in three months, because we were ready to go, both from a plant standpoint and an order to cash standpoint.

The sales team is very excited above having this franchise.

They are working on a customer-by-customer basis to see if there were distribution voids or opportunities, to see if they can promote the product better.

In some cases, this is what -- we said when we announced it, this was going to instantly be our single largest Grocery Products franchise.

And so in some markets, we are finding this has really made us a much more major distributor and supplier to certain retailers.

So it really kind of elevates our game in terms of what we can talk about there.

One of the things yet to come in terms of the Skippy franchise is our assessment on the marketing and advertising side.

We are starting to study that, what would be a good proposition there, where would that rank compared to our other opportunities in the Company.

And we will certainly have some guidance and information on that as we head into 2014.

But that is a task for the remainder of the kind of middle and fall of this year.

Great.

I'll get back in line.

Thank you.

Farha Aslam, Stephens Inc.

Good morning.

First, just a quick housekeeping.

Skippy sales, are you willing to disclose what they were in the quarter?

We really don't do line-by-line sales.

We gave you a sense of those sales, though, on a kind of US and foreign basis when we closed the deal, and it's consistent with -- it is not a particularly seasonal product, so you can certainly get close to the number by looking at it that way.

Okay, that's helpful.

And then just following on to Diane's question regarding that Specialty Foods in the second half.

Do you expect operating profits to still be positive for that segment or do you think year-over-year we should build in some cushion and anticipate some downside risk?

Based on the announcement today, you can see there is an element of a rampdown to it, the business.

We end up leaving our facility and our sales organization at the end of June, so that takes this -- we still haven it for two periods the third quarter.

So I mean I think you could look at third quarter, there will be less of an impact and fourth quarter, there will be more of an impact.

Okay.

And then --

But just to clarify, the segment will be profitable.

Of course, the segment will be profitable.

But year-over-year, you expect profits in that segment, particularly in the fourth quarter, to be down?

I would expect that.

That's a fair statement, yes.

Okay, perfect.

And then just going forward on now that Skippy is largely integrated, looking at your balance sheet and cash flow and organization, do you feel like you are ready to look at incremental M&A opportunities?

And could you just share with us any color you can about that M&A landscape?

Sure, yes, we are very pleased with the domestic integration of Skippy.

We still have the International piece that will come later this year.

And we believe we have all the teams in place to get that done successfully.

So certainly a great testament to the people putting a lot of effort behind that.

And we are absolutely willing and able to take on additional opportunities as they present themselves, and we continue to look for things that fit with our strategic areas of focus, and we will continue to do that and I believe that we have plenty of capacity.

Okay, great.

Thank you so much.

Robert Moskow, Credit Suisse.

Hi, thank you.

I wanted to know if you are looking at the next couple quarters, maybe four quarters, you are guiding to higher turkey prices, lower grain cost headwinds, both in refrigerated and in turkey.

Can we add lower input prices for peanut butter in there, as well?

Certainly for the remainder of the year.

We really haven't frankly done a lot yet with 2014.

Okay, but it is possible it could spill over into 2014, like all of these factors?

Sure, it's possible.

All right, good.

Maybe just a follow-up on Refrigerated.

I don't remember the last time that increased grain costs showed up as a negative to profits in Refrigerated Foods.

Can you remind us what your live production operations are in terms of size, and what is the strategic value of holding onto those?

Sure.

Perhaps about less than 20% of our production comes from our live production units that are based in the western part of the United States, or contracts that we have with growers that include a grain-based component.

I would expect some of those grain-based contracts will end at the end of this year, but I do think that we will keep a component of those going forward.

From a strategic standpoint, we continue to evaluate all our operations and look to sustain those that provide the best shareholder returns.

So I don't have any specific comment on our live grow operations at this point.

Jody, what about the packing margins in the quarter?

Did you say what those were, whether they were -- how they were different versus a year ago?

Boy, the comparisons have become much more difficult with the USDA changing the mandatory price reporting, I think effective in April.

So we are no longer getting the comparable voluntary price reporting.

As well as the USDA changed the methodology used in building up that USDA cutout.

So year-over-year comparisons are a little difficult.

If I look at just our business and the way we do it, I would say it would be a net even to last year.

We do expect the industry to get back into some more moderating and normalized levels in the back half and that there should be some improvement.

But giving you a year-over-year is difficult at this point.

How do you feel about your processing capability there, the efficiency of your packing, the strategic value of doing that?

Do you feel like you are -- I've noticed very good numbers from Tyson in that regard.

Do you feel like there is a way for you to close that gap in terms of improving your efficiencies?

You know, we have two, three plants that basically do live harvest.

And we've looked at our Farmer John plant to really bring in the number of heads that equal the amount of value-added product that they need and they've done a great job of reducing costs in that area by doing that.

Sure, our Freemont plan probably could be a little more efficient because it is only a single harvest, but it better matches what we need for our value-added.

So I would say that having those processing capabilities to provide our own sole source of raw materials is valuable to us at this point.

Okay.

Thank you.

(Operator Instructions) Christine McCracken, Cleveland Research.

I just wanted to say, it was an awfully cold spring.

We had a snow, as you probably know, until late May in a lot of areas.

I'm wondering as you look at your grocery portfolio, curious if there is any effect on overall sales you think from the colder weather.

Boy, maybe in Dinty Moore.

Otherwise, of the items that we are carrying today, no.

I mean, Mexican really has very little seasonality.

We've learned that peanut butter has very little seasonality.

Microwave meals, if anything, skew to back-to-school and that kind of time range.

So no, I guess I really don't see that as having that kind of impact on our Grocery portfolio.

Okay.

And then if you think about the consumers right now, we are getting a lot of -- I think a pretty wide array of data points in terms of consumer strength, especially in the protein area, where prices have gone up quite a bit.

You obviously have record high beef prices, and I think turkey has had a bit of pushback from the higher prices.

Just curious, how would you -- can you put any color around what you are seeing in terms of buying patterns?

Are they going toward the value end of the portfolio, or has there been any pushback in terms of these price increases that you've needed to put through?

It really seems to vary item by item, and I suppose our items probably have different consumer targets or different consumers who frequent those areas.

So let's just take turkey as an example.

Our fresh tray pack items are still growing very solidly.

We have had to take pricing on them on a fairly steady basis, unfortunately, with not just this year's increase in grain costs but a multiple year increase.

And yet I think we've done the right things in terms of marketing that brand and appealing to the health element for that consumer.

And so that -- it is still growing great.

Behind-the-glass deli sales of turkey, those are softer.

And I do think price point is a factor in that, as you've had to -- as both the retailer and the manufacturer have unfortunately had to push those up some, I do think there has been some migration by consumers to other choices there.

So it seems to vary by item.

I just look at the overall franchises of the Company, and I'm just pleased that we have so many of them that are in solid volume positions.

And so overall, I'm satisfied with where we are at in terms of our pricing.

All right.

Thanks.

Tim Ramey, D.A. Davidson.

Good morning.

Thanks.

Jody, could you parse the 7% sales number into acquisition, volume and price mix, or anything like that?

I didn't see that you did that, but if you did, I'm sorry.

We split out the sales numbers on -- oh boy, you know what, Tim?

I don't have that off the top of my head.

Okay.

I see you did a lot of that in the segments, but just trying to avoid the math.

And also, on the Skippy one-time charge, is that a net of tax number, or was there a tax cost associated with that, or a tax benefit associated with that?

That is the before-tax number, so that is what would be included up in the segment.

Right, and so -- and a normal tax rate --

(multiple speakers) generally deductible from a tax standpoint.

Okay.

Terrific.

Thank you.

Ann Gurkin, Davenport.

Good morning.

Wanted to start with Skippy and the conversation about the one-time charge of $9 million in the quarter.

Should we expect any more charges in the back half?

I know you commented on China, but is there anything else to think about?

Nothing that would be substantial, so that would be the major portion.

And you know, a lot of that is banker and legal fees and due diligence fees, so those are already done even for the China side.

Okay, great.

And then any changes in anticipated synergies from Skippy?

No, in fact, we continue to reevaluate potential opportunities for synergies.

Okay.

And then if we could just walk through the outlook for the year.

You maintain your outlook, which includes the Skippy cost, I would assume, the lost Splenda sales.

So what is the offset for that lost Splenda sales, and can you walk me through the different components?

And what has maybe changed in the different segment outlook as a component of the overall Company outlook?

Okay, well, here is how we look at second half.

We see Grocery Products in a position to deliver very strong results.

They are really hitting on all cylinders in terms of their different franchises.

We have good MegaMex business.

The can business is by and large growing.

Microwave has now had restored growth, and then Skippy clearly will kick in a contribution to that as well.

The other segment that we are expecting a really solid second half from would be International.

I think historically, people have looked at our International and thought, oh, gee, that's kind of small and maybe doesn't have as big of an impact.

But I pulled the comparison just on a three-year basis for the first half.

So this year first-half segment profit for International is $32.7 million.

In 2010, it was $11.8 million.

So it has become a major contributor to us.

And we expect the growth in the second half for International to be every bit as strong as it has been in the first half.

They've got good Spam momentum, they've got good niche pork items.

China is doing well.

And again, Skippy will kick in; obviously, we don't have the sales in China yet, but for the International sales that are outside of China.

When it comes to Jennie-O and Refrigerated, we are looking at them being contributors to growth in the second half, but not barnburners.

In Jennie-O's case, that is a positive overall to our outlook, because, as I mentioned at the outset, obviously we had some fairly significant deficits year-over-year coming out of Jennie-O and segment profit for the first half of the year, as we had anticipated.

And so we should now be back in a position where Jennie-O can hold its own and grow a little bit.

And then Refrigerated Foods is kind of in that mode as well.

Overall, Refrigerated has probably been a little bit under our expectation for the first half, and so we are not seeing a huge gain out of them in the second half, but certainly a gain.

And so all those positives, obviously, as you point out and as we talked about earlier in the call, the event with Splenda in the Specialty Foods was not something we had anticipated when the year began.

But we now know it is coming and feel that the other four units are going to be able to more than cover any declines that are related to the loss of the Splenda business.

That is great.

That helps.

Thank you so much.

(Operator Instructions) Akshay Jagdale, KeyBanc.

Thanks for taking the follow-up.

Just on the Skippy, can you just remind us in terms of your guidance for next year, I'm assuming it is not changed from your previous guidance.

But more importantly, what type of assumptions do you have in there for peanut costs?

And are we -- like this quarter, I'm assuming we didn't see a benefit to their margins from peanut costs.

Can you just help me with that?

I can't do much for you at this point with 2014 yet.

We just really on a Companywide basis have not gotten into laying down our business plan, and therefore being able to compare, gee, how does that look versus the 2014 guidance we provided when the acquisition was announced.

I don't know of any material problem related to that range, but we have not updated it.

In terms of what is going on this year, those peanut costs have been favorable.

There was an element of that that was positive to the business during the second quarter.

But obviously, we had a lot of one-time charges in there as well that mitigated that.

But during the second half of the year, that will be beneficial to both the Grocery Products and International franchises.

That's helpful.

And just one for Jody -- a couple for Jody -- just on Skippy itself.

Your guidance for D&A, how much of that in 2013 is just related to deal-related amortization and sort of what should we expect on a full-year basis on deal-related amortization for Skippy?

We took the range up, I think, this quarter, and that would include any amortization related to Skippy amortizable intangibles and any additional depreciation.

We have not finalized finalized our purchase accounting, so there may be some adjustment in there.

But I feel pretty comfortable with that range I gave you.

But is it fair to assume that the change is related to the acquisition, or not necessarily?

Some of the change -- the majority of the changes related to the acquisition.

There is some other minor things, but that would be --

Okay, great.

That's it.

I'll pass it on.

Thank you.

Diane Geissler, CLSA.

Just a further question on the Splenda.

In terms of Diamond Crystal, is Splenda of the biggest component of Diamond Crystal?

I know you have other condiment businesses, et cetera, in there, but if you could answer that question.

Then the other thing is what exactly happened with the contract?

Was it just that you were so successful the owner of the property wanted to keep it?

Was it a failure to come to an agreement on the split in terms of the economics?

If you could give us some color on why it was a surprise and what exactly happened.

Sure.

I can't quantify precisely for you in terms of the segment impact, other than to tell you obviously it was significant enough in the total volume of Diamond Crystal that it prompted us to make a very tough decision in terms of the production facility.

And obviously, significant enough in terms of profit delivery that we are going to go from a year that has been very solid for Specialty Foods to a second half that is going to be more troublesome.

In terms of what happened, I mean, it's a franchise that we been involved with now for a number of years.

The owner of the brand had the right to bring it back in-house upon an expiration of a contract.

We had been in discussions with them with hopes to extend that contract.

And ultimately, the decision was made that they wanted to bring it back in-house and go their own route, and so we will now look for other opportunities.

That will be one of the things we outline in Investor Day here in June.

Don Kremin, who runs that area, will be one of the presenters and he will be able to outline for you kind of, okay, what does Diamond Crystal look like and what kind of things there will they be pursuing now that this contract arrangement is no longer in place.

Okay.

Eric Larson, CL King.

Thanks for taking the follow-up.

Just one quick question on your guidance.

I just want to find out what is in your guidance and what isn't.

Your $9 million or $0.02 charge for Skippy integration and those costs are in your guidance, I believe.

Is any severance costs for the shutdown of your plant with Diamond Crystal, are those costs included in your guidance as well, or will that be a separately disclosed item?

Eric, everything is baked into the guidance range, so we've included the nonrecurring costs related to the acquisition of Skippy, as well as any charges for shutdown of a plant and severance, including the lost business related to Splenda.

So everything is in.

Okay.

Thank you, Jody.

I appreciate that.

Thank you.

There appear to be no further questions.

Please continue with any other points you wish to raise.

Thank you, everyone, for participating in our conference call this morning.

Please feel free to follow up with me with any additional questions you may have, and we thank you for your time.

Have a great day.

Bye-bye.

Thank you, ladies and gentlemen.

This concludes the Hormel Foods Corporation second-quarter earnings conference call.

Thank you for participating.

You may now disconnect.