荷美爾 (HRL) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Hormel Foods third-quarter earnings conference call.

At this time all participants are in a listen-only mode.

Following the presentation we will conduct a question-and-answer session and instructions will be provided at that time.

(Operator Instructions) I would like to remind everyone that this conference call is being recorded today, August 22, 2013.

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

Please go ahead, sir.

Thank you.

Good morning, everyone.

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

We released our results this morning before the market opened, around 6.30 AM 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 for the quarter.

The line will be open 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.

If you have further questions, you can get back into the queue.

An audio replay of this call will be available beginning at 10.30 AM Central Time today, August 22, 2013.

The dial-in number is 800-406-7325 and the access code is 4632577.

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 the cautionary statement and risk factors on pages 31 through 38 in the Company's 10-Q for the quarter ended April 28, 2013, which was filed with the SEC on June 7, 2013, for more details.

It can be accessed on our website.

Now I will turn the call over to Jeff.

Thank you, Kevin, and good morning, everyone.

We announced third-quarter earnings this morning of $0.42 per share, up 2% from last year.

Segment operating profit increased by 5%, with four of our five segments registering gains this quarter.

Q3 sales were $2.2 billion, an increase of 8% over a year ago, on volume growth of 3%.

All five segments generated sales increases over last year.

I will now take you through each segment.

Our Grocery Products segment reported an operating profit increase of 32% and a dollar sales increase of 25% for the third quarter.

Excluding sales of Skippy peanut butter, sales for Grocery Products were flat for the quarter.

We are very pleased with the smooth integration of the domestic Skippy franchise into our Grocery Products organization.

Skippy peanut butter sales were strong this quarter, driven by improved distribution.

Sales of Dinty Moore stew, Hormel Mary Kitchen hash, and Hormel bacon toppings also grew nicely during the quarter.

Sales of our SPAM family of products and Compleats microwave meals were down in the quarter.

Segment operating profit for our Refrigerated Foods segment decreased by 26% as spiking pork input costs squeezed operating margins.

Refrigerated Foods sales were up 2%.

On the retail side we enjoyed strong sales of Hormel party trays, Hormel Natural Choice deli meats, and Hormel Cure 81 ham.

We are excited about our new Hormel REV snack wraps.

The REV products were rolled out nationally during the quarter, and a new advertising campaign began in late July.

This product meets the need for a quick, high-protein snack that can be eaten on the go.

Our food service team continues to outpace the industry, with higher sales in the quarter led by sales of branded products such as Hormel Pecanwood bacon, Hormel Fire Braised meats, and Hormel Natural Choice deli meats.

Our Jennie-O Turkey Store segment had a solid quarter with segment operating profit up 17% and sales up 4%.

Continued growth in sales of value-added products and an improved product mix offset higher grain prices and lower commodity meat prices during the quarter.

Jennie-O Turkey Store's foodservice and deli value-added products delivered sales gains in the quarter.

Retail sales of our Jennie-O Turkey Store bacon and ground turkey chubs also enjoyed solid growth in the quarter.

Our Specialty Foods segment reported an 8% gain in operating profit on a net sales increase of 5%.

The segment profit increase was driven by strong sales of sweeteners, nutritional products, ready-to-drink beverages, and ingredients.

The agreement allowing Diamond Crystal Brands to sell Splenda sweetener into the foodservice trade channel ended up being extended one month and ultimately expired on July 31, 2013.

Our International & Other segment delivered another strong quarter, with operating profit up 34% on a sales increase of 31%.

Higher exports of our SPAM family of products and fresh pork, improved performance by our China operations, and the addition of the Skippy business all contributed to the nice results.

We remain excited about the growth prospects the Skippy brand brings to our International group, both in China and in other parts of the globe.

We anticipate completing the acquisition of the China sales and the Weifang operation by the end of the fiscal year.

We believe we are positioned to bring a strong finish to fiscal 2013.

Our Refrigerated Foods value-added products should experience improved margins, driven by a decline in pork input costs along with the benefit of earlier pricing actions.

Our Grocery Products segment has plans in place to help drive sales growth of their traditional, microwave, and Mexican food products; and we also have solid momentum with the sales of Skippy peanut butter that is expected to continue in the fourth quarter.

Our Jennie-O Turkey Store segment began turning the corner in the third quarter and should maintain their momentum in the fourth quarter.

Specialty Foods will likely have a down quarter in light of the discontinuation of the Splenda contract, but the team is working hard to minimize the decline.

Our International & Other segment has delivered outstanding results through the first three quarters of 2013, and we expect similar performance in the fourth quarter.

Taking all of these significant factors into account, we are maintaining our adjusted fiscal 2013 guidance range of $1.88 to $1.96 per share.

The strength of our balanced business model should allow us to achieve another growth year as we close out fiscal 2013.

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

Thank you, Jeff.

Good morning.

For the third quarter of fiscal 2013, net earnings totaled $113.6 million or $0.42 per share, compared to $111.2 million or $0.41 per share a year ago.

Net earnings for the first nine months of fiscal 2013 totaled $368.9 million or $1.37 per share, compared to net earnings of $367.4 million, also $1.37 per share a year ago.

Dollar sales for the third quarter totaled $2.2 billion, compared to $2.0 billion last year, an 8% increase.

For the nine months of fiscal 2013, dollar sales improved 6% to $6.4 billion.

Volume for the third quarter was 1.2 billion pounds, a 3% increase over fiscal 2012.

Year-to-date volume was 3.7 billion pounds, also up 3% compared to last year.

Selling, general, and administrative expenses in the third quarter were 7% of sales compared to 7.2% last year.

Year-to-date selling, general, and administrative expenses were 7.5% compared to 7.4% last year.

We expect selling, general, and administrative expenses to be approximately 7.5% of sales for the full year.

Equity in earnings of affiliates for the third quarter was $1.3 million versus $9.8 million last year.

The decrease is due to lower earnings at our MegaMex Foods joint venture, which experienced a higher earnout expense on the Fresurized Foods acquisition, unfavorable exchange rates, and higher input costs.

Interest expense for the quarter was $3.1 million compared to $3.2 million last year.

Year-to-date interest expense is $9.4 million compared to $9.7 million last year.

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

Our effective tax rate in the third quarter was 35.7% versus 33.7% for the same period in fiscal 2012.

Year-to-date, our effective tax rate was 33.5%, unchanged from last year.

We expect the effective tax rate to be about 34% for the full year of fiscal 2013.

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

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

We repurchased 953,000 shares of common stock during the third quarter, spending about $38 million.

We have 10 million shares remaining to be purchased from the current authorization in place.

Depreciation and amortization for the quarter was $31.8 million, up from $28.9 million last year.

For the nine months of the year, depreciation and amortization was $93 million, compared to $88.6 million last year.

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

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 $36 million last year.

For the first nine months of the year, capital expenditures totaled $69 million, compared to $94 million last year.

For fiscal 2013 we expect capital expenditures to be approximately $110 million to $120 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.

Good morning.

First question on Refrigerated Foods, can you just give us a little bit more insight into the weakness?

This quarter tends to be historically one where you can have some of your lower margins.

But the cutout itself wasn't as weak as your results would imply.

I think you mentioned something about bacon.

Can you just help us with what part, components of maybe your cost basket went up, so that we can keep track of it going forward and be aware of it before it happens?

Just trying to understand what happened, because it definitely surprised us.

And it seems to be unique relative to some of your peers.

Okay, Akshay.

I mean, the weakness for Refrigerated Foods was clearly the most pronounced in the earlier part of the quarter, ending up prompting us to come out with our guidance adjustment that occurred mid-quarter.

At that stage, we were seeing some continued weakness in processing margins; but the bigger culprit had been the spike in some of the raw material costs, particularly bellies for bacon and trim costs for a number of our products, pepperoni and other items within the portfolio.

As the quarter went on, the team had an opportunity to, particularly on the bacon side, price against what the new reality of what the cost situation is.

Belly costs are still at historically very high levels, but they have moderated some from the peak.

And we expect now, as they head out of the summer season, they should start to return to more normalized levels.

Overall for Refrigerated, those are the big challenges.

It wasn't all bad for the quarter in terms of what we look at for their business performance.

Our large foodservice group for Hormel is part of Refrigerated Foods, and they really had a very fine quarter, growing sales at a solid rate and really doing a nice job introducing some of their newer products, their Fire Braised meats and their Pecanwood.

This half also does represent somewhat of an investment time for us with the REV brand.

We are very pleased with where we are at with that brand.

We've achieved the distribution goals that we had set for the team; we have the ad campaign kicking in; our early sales results are very promising.

But anytime you roll out something new on that scale, we are not going to be bringing bottom-line contributions for that brand to the team this year, and probably even into next year somewhat.

But we are heading in a good direction with that.

Just on that point, Jeff, can you help us understand where you are with REV?

Like ACV, number of SKUs?

Anything you can give us.

How do we parse out that positive from your results?

The volumes are obviously down, so it is hard to tell what impact REV has had even on the revenue side.

So maybe you can help us.

Because our channel checks also tell us that the launch, at least initially, has been pretty encouraging.

So maybe you can just give us a little bit of a sense of, one, how it is doing and maybe just talk about the impact it is having already.

Okay.

In terms of ACV, we are really in a solid shape with that.

We are in the 70% to 80% of the US that has accepted the item, and most of those stores are actively scanning it.

There are -- sometimes you will get an acceptance from a retailer, but in terms of their shelf reset time frame they just have certain windows they get those things done.

So we're still catching up on a few retailers, but we are in a good position to support our ad campaign.

In terms of number of SKUs, there are eight offered in the line.

Most retailers are taking kind of six to all eight, in that range.

We will be coming out with four additional items later this fall and heading into the winter.

In terms of just a sense of scale, we're not -- we probably won't get into reporting item-by-item sales.

But just to give you a sense of magnitude for the quarter, it was in the $4 million to $5 million range.

So it is still building.

Clearly our long-term expectations for the product would be -- are quite solid.

But that is about the size of it right now.

I guess, Akshay, I would like to follow up on the volume comment you made about Refrigerated.

Their volumes is really being impacted by discontinuing the feed business that we talked about last quarter.

So that is not all just retail and foodservice volume that is impacting the decline there.

Okay.

And just one on Skippy.

Are the lower peanut costs already flowing through your P&L, or is that still not flowing through?

And how are you managing that lower cost that might be flowing through relative to your investment?

Because it is still pretty early in this stage of owning that asset.

I just want to know like where you are in terms of your planning on investing behind that brand and perhaps how that is going initially.

Okay.

A decent amount of the lower cost would be flowing through right now, and the outlook seems favorable in terms of what we are seeing for peanut crops going forward.

In terms of investing in the brand I think I talked about that at the last quarterly call, and I think we talked about it a little bit at Investor Day that we -- when we bought the brand it was with the thought in mind of really rejuvenating it with the Skippy consumer in the marketplace.

So one of our approaches to potentially do that in the marketplace would be to anticipate an advertising campaign.

The earliest that would occur was next fiscal year, and so we will let you know probably on the next call, the November call, what our outlook is in terms of advertising support.

But the team is actively looking at those possibilities right now.

Okay, great.

I will get back in queue.

Thanks.

Farha Aslam, Stephens Inc.

Hi, good morning.

First of all, just a continuation of Akshay's questions regarding Refrigerated Foods.

Looking out into the fourth quarter, we have recently seen hog prices rally a bit.

So when you look at that, is that a net positive for your Refrigerated Foods business?

Because you do raise 15% of your hogs internally, and can you price for the hog price increase better into the fourth quarter versus the third quarter?

How should we think about that?

I will take that, Farha.

I would generally say that we would prefer lower hog prices, and we would expect hog prices in the fourth quarter to be lower than they were in the third quarter.

Still probably year-over-year an increase.

The live production side doesn't really play that much into it, since we take those values into our further process businesses at market.

And then going into International, that turnaround in that International business is pretty material.

Do you expect that China will continue to perform?

And your thoughts on that other business, which is becoming pretty meaningful in your P&L.

Yes, Farha, I am really quite encouraged by International.

Not only, as we mentioned, has it had all three solid quarters this year, but this will be the third consecutive year of really solid both top-line and bottom-line growth for International.

I think our strategy of focusing on the Asia-based markets has proven out well.

So we have good, solid business performance in Korea and Japan; our partnership with San Miguel in the Philippines; and then the more majority-owned China ventures.

China in particular, we do feel we have now gotten to the point where we have sufficient scale in that business that now it can generate a solid profit.

And the team out there is looking forward to bringing Skippy onboard, so that will be our third plant facility we will be running in China.

And we will kick that business well over $100 million once the Skippy contribution is in there, which we expect to occur in the next fiscal year.

So overall, International, I would agree with your assessment that it has become a more and more meaningful component of our overall performance.

And it is one that I think we have articulated in the past, we have solid expectations it will grow at a faster rate than our overall Company average.

Great.

Thank you.

Tim Ramey, Davidson.

Good morning.

I just was wondering about the supply of hogs as we think about the fall, this PED virus that seems to be impacting the hog supply.

Is that showing up in any particular way in your geographies, more or less than we are seeing from a nationwide impact?

Some folks are thinking it will impact the supply 2% to 3%.

Tim, this is Jody.

We are really not seeing any impact on the supply here in the Midwest.

Actually, looking at seasonally high numbers for this last quarter for us, so maybe it is not as impactful here.

That's good news.

Then I don't know whether you would be willing to think about further out in the fall, but historically at least the last two years you have run some pretty big margin numbers in Jennie-O Turkey Store.

Is there any reason to think that that seasonal pattern should change?

Or steady as she goes?

Yes, without giving a percentage target, our expectation for Jennie-O's performance is that this year's fourth quarter will have better segment profit results than last year's fourth quarter.

So that should support what you are saying.

Terrific.

I know you're not going to give first-quarter guidance, but that has been the big quarter; no reason to think that that would change relative to seasonal patterns the last couple years?

Yes, we are not really in a position to do anything really to 2014 yet.

But in terms of just sales momentum, the value-added items that Jennie-O has created, both the newer innovative items and some of their traditional items are connecting well in the marketplace.

And we don't have any reason to believe that that won't continue heading into next year.

Thanks, Jeff.

Ken Zaslow, BMO Capital Markets.

Hey, good morning, everyone.

Two questions.

One is, if you hold your current margins -- current situation or current environment steady, how much would your margins move up in the Refrigerated Foods with the new product innovation?

Well, I mean that is one contributor certainly.

As we innovate, the team's goal is always to have margins that are accretive to the overall division.

And certainly the targets we have in place for the REVs and the other items that they have been introducing do meet those requirements.

Refrigerated Foods has really a significant opportunity, frankly, just to get back towards some of the performance levels that we enjoyed a couple of years ago.

I mean, we had two consecutive years of around 7% nets, and these last couple years have been more like 5%, with this most recent quarter even dipping below that with the struggle we had in periods 7 and 8.

So we think there are some things on top of the innovation as we head into a different environment that will be favorable for Refrigerated Foods.

But what about just innovation?

Would it add 100 basis points?

If you just kept everything stable, how do you think about that?

Because you have a lot of new products coming out, so I just was figuring out if the REVs and the new products, is it 100, 200 basis points of just contribution just from the new products, or how do you think about that?

Separating the environment out from what you guys can actually do yourselves.

I would be really speculating because I really haven't looked at it from that standpoint.

I look at it from the standpoint that clearly, whether it is the foodservice group, the meat products group, etc., within Refrigerated Foods or even some of their subsidiary organizations like Farmer John or Burke, our expectation is that they grow their top line commensurate with our 5% target.

And then to the extent that the innovative items are contributors to that, that those should be better for margins than the traditional items.

But I guess I don't have it reduced back to the algorithm you are looking for.

My follow-up question is on turkey.

How bound are you to your turkey margins at the high end of 15%?

Because it seems like the commodity meat business is probably at the bottom.

You are seeing 10% cuts; and then obviously the corn curve -- and soybean meal, for that matter -- should all be encouraging.

So is 15% a real boundary?

Or does it just kind of -- that was just a comfortable number to start with and we will see where they actually go from here?

Yes, that number really -- I mean, I think what we did historically in the old days, if you will, we were looking at Jennie-O in sort of the 8% to 10%, 7% to 11% range.

We reassessed it based on both the improvements they have made to the branded portfolio and a lot of the efficiency gains that they have made in the total system, and came out with the new longer-term guidance range of 11% to 15%.

But, no, that is not necessarily viewed as a ceiling.

We will certainly give a little more specificity related to what our expectations are for Jennie-O when we get to the November call.

But it is not -- I wouldn't take that as the absolute max.

Great.

Thank you.

Diane Geissler, CLSA.

Good morning.

I wanted to ask you, just first off, have you quantified what your expectations are for increased grain prices in fiscal '13 in JOTS?

Just on a year-over-year basis in absolute terms.

No, we really haven't given a specific number related to that.

Obviously, you've got timing; you've got hedge positions will affect that.

We have indicated each quarter thus far this year clearly the total feed cost of the system for Jennie-O has been up every quarter year-over-year.

We are starting to get into a mode.

We are all still waiting to see where this crop ends up.

If you look at, based on futures markets, if that turns out to be the reality then clearly we should start heading downward in terms of what the feed cost impact would be to Jennie-O.

But even then there (multiple speakers) some delay to that effect.

Well, I guess my point is that you guys have had a pretty good year in operating profits in Jennie-O despite the fact that grain has just been really out of control.

I am just -- I know you're not in a position to talk about '14 yet; but obviously I would have to think about it.

So I am just trying to understand the magnitude of that.

Maybe you can help me with this, because I know that -- it seems to me that the holiday Turkey business has pretty consistently been a big business in the fourth quarter; and I think there is a little carryover into the first quarter.

So anything that is marketed now would have old grain prices in it, in terms of the cost basket.

Is that not correct?

That is correct.

Then if -- could you just tell me as a percentage of sales roughly how big that business is today?

Because you have done so much work on the value-added side, I am assuming that is a smaller and smaller percentage of your total sales.

Is that accurate?

Right, it is not a huge percentage of the sales and it is certainly not a huge percentage of the earnings.

I mean, the whole bird business has never been a big moneymaker for either the manufacturer or the retailer.

There is an impact to the first quarter of any year for Jennie-O related to whole birds.

Frankly, there's -- probably be a bigger impact to the fact that franchises such as our fresh lean ground turkey franchise often will leap out of the gate in January, people with New Year's resolutions and so forth.

And that is a peak time of the year for that very solid product line for us.

In terms of trying to get back to what you mentioned about grain impact, we are pleased with where Jennie-O is for the year.

But it is true that for both the first two quarters I think their year-over-year adjustment was around $18 million down each quarter.

And that was part trying to catch up to the grains and that was part that the commodity turkey markets were not as favorable.

To one of the earlier questions, at the moment those both look -- the outlooks for both of those things look more favorable right now, heading into next year.

But that is something we will be in a better position to quantify when we provide earnings guidance in November.

Okay.

Then I wanted to ask on your commentary on the lower contribution from the affiliates for MegaMex.

You cited three things.

I think it was higher payout for the Fresurized Foods; currency; and then higher input costs.

I am assuming you detailed those in the order of impact.

If so, is that payout to Fresurized Foods, I am assuming it is kind of one-and-done in the quarter and you are completely free of the terms of that agreement.

Is that correct?

Diane, this is Jody.

The Fresurized earnout goes for three years, so it ends in fiscal 2014.

The way we handle it from an accounting perspective is we evaluate their performance against the earnout criteria and make adjustments on a quarterly basis.

The great news is that the Wholly Guacamole brands have really outperformed, so we have this short-term impact to that business because of recording the expected payout that will be made in 2014.

So --

Okay, so it's the (multiple speakers)

-- we will see an impact still.

-- what you recorded in the third -- sorry, I was talking over you.

We will see impact in the fourth quarter, too.

Hopefully they will have other parts of their business that are able to overcome it; but this quarter was a little bit of a catch-up.

So are you accruing today for a payment in '14, and then once '14 rolls around you are done?

Or do you have to accrue again in '14?

There will be some accrual in '14, but it won't be -- well, depending on how the business performs, we will see where it goes.

But I would expect it to be somewhat less than 2013.

This quarter ended be up being a bit of a catch-up.

It was a catch-up?

Okay, terrific.

Thank you.

And then it's totally done by the end of 2014.

Totally done in 2014.

Okay, thank you.

And then they also --

Robert Moskow, Credit Suisse.

Hi, thank you.

I wanted to dial in a little deeper into the expectations for fourth quarter.

Because if you do the math here, it looks like operating profit needs to grow like about 15% to hit your guidance.

Then when you look at consensus, Jeff, for fiscal '14 -- I know you don't want to get into guidance.

But it is -- the expectations are for a very strong year.

And as you go down the list of all the other food companies that have reported, they are talking about weaker volumes at retail, again a weak consumer environment.

So maybe you can just dial in a little bit more about what the drivers for fourth quarter are going to be even if the consumer environment is rather weak.

Then maybe you could just touch a little bit on fiscal '14, because I think it is rare that consensus has such a high bar already set for you.

And then in the context of a weak consumer environment, is it achievable?

Well, first of all, in terms of our best read on a consumer is around products, I guess.

And throughout the more challenging economic times of the past few years, that has been somewhat mixed.

Obviously in the aggregate, we have enough products that are connecting with enough groups of consumers that we have been able to drive our business forward both on a top-line and bottom-line basis.

That is our current picture as well.

There were elements of the business in terms of retail sales that were a little bit softer this quarter.

But I don't put a lot of stock, frankly, in one quarter.

I mean, I've seen things go up and down, quarter to quarter, in the past on certain businesses.

Overall, I think the portfolio of items that we have that we offer for sale into the retail channel, whether they are through Jennie-O or Grocery Products or Refrigerated Foods, are in a good position to be able to continue to generate growth, both in the fourth quarter and beyond.

And then on top of that, obviously, we have foodservice and other commercial-type sales that also are contributing to our overall results.

So overall, the way we see making the numbers for Q4 is as we have outlined from a segment standpoint, that we would expect somewhat of a dip from Specialty -- albeit Specialty is one of the smaller units in terms of total contribution to the Company.

So our expectation right now is that all four of the other units are in a position to have a good, solid quarters and that then adds up to our ability to support the range we provided here a couple of months ago for the full year.

Okay.

Then the follow-up on Refrigerated, just for fourth quarter.

Again, the drivers here are -- you have taken the pricing that you needed to take especially in bacon.

And are you saying that you think that the input costs might trend sequentially lower in the quarter, and that might provide a bit of a benefit?

Because there has to be a big sequential benefit in order to hit the guidance.

Yes, that definitely is a part of it.

We are seeing it somewhat already on bellies, we have seen it much -- on a more pronounced basis in pork trim, and the key input for some of the items.

So that definitely should be a part of it.

Got it.

Okay.

Thank you.

Akshay Jagdale, KeyBanc.

Hi, thanks for taking the follow-up.

Just two follow-ups.

One on REV, it was very useful to get a sense of how big it is now.

But Jeff, can you just give us a sense of your optimism about this product?

Could it be like a Compleats type of a product, where it went from zero to a couple hundred million in a short period of time?

What kind of expectations do you have for this product?

It seems pretty unique because it is in the lunchable aisle and it is really differentiated product that took probably years to develop.

So can you just help us frame what would be the best-case scenario for this and perhaps over what period?

Okay.

Well, I think we have talked about in the past our innovation track record, and even in achieving our $2 billion challenge, has been achieved mostly through a lot of incremental gains.

Some of our better new product franchises have been in even the $50 million to $100 million range, although you cited Compleats correctly as being higher than that.

Given the kind of advertising we are putting against it, given the capital investment we made, I think it is certainly fair that we at least expect this item to be in that type of range.

But I would not at all put that as the ceiling.

We just have to see what consumers' reactions are to the items.

We think over time, assuming the initial REV wraps connect as well with consumers as we think they can, that this can be a platform for other types of products that are more oriented toward a younger audience, toward on-the-go, immediate consumption-type items.

So we could have a very significant franchise in this.

But I really don't have a number for you that is beyond that number I just gave you in terms of what historically has been a bigger product for us.

No, that's very helpful.

Just -- I get this question a lot, so I am posing it to you.

I feel like your Company every year keeps moving away from commodity products, if I may, and more towards value-added.

Can you help us understand from your perspective, like, what percentage of your sales or earnings are what you would call commoditized today?

And how much has that really changed over the last few years?

The reason I ask that today is because you obviously prereleased a little bit about -- and lowered the bar because of the commodity piece of your business, or at least relatively commoditized piece.

And kind of surprised me, the magnitude of that sensitivity there.

So can you just help us?

Again not trying to get into like numbers exactly, but just give us a sense of how you think about that dynamic.

Well, we are clearly over time -- I would agree with your assessment that we are trying to create a portfolio that is less vulnerable to certain commodity movements.

So we still do have a hog supply chain; we still do have a turkey supply chain.

Frankly, even if you get to the point where you sell next to nothing of the meat on a commodity basis you still could have some cost-related inputs that can fluctuate fairly significantly.

But in doing that, between portfolio diversification, buying into a category like peanut butter that has a different raw material, like guacamole, like salsa -- we think those things have helped us.

And then the more you develop products that are not, frankly, just a piece of meat but are a meal, that have other components, that are a REV wrap, etc., again your vulnerability to any one commodity moving on you becomes less.

So I do think we have over time improved the portfolio in terms of its vulnerability to these kind of things.

But as you correctly point out, it is still out there.

Bacon would be a good example.

If you are in -- if you process hogs, you are going to -- you have bellies off the hogs.

Bacon is actually a very on-trend, popular item with consumers.

By a large if you are just talking about a pound of raw bacon, that is never a high-margin big moneymaker for the manufacturer.

There is a lot of competition within that category.

That 1 pound of bacon is not particularly differentiated.

So quarters like this last quarter, it hurt us that that belly costs spiked as much as they did, and it took us more time to catch up to those.

But that is never an area that in the long run we are looking to drive results.

Now, flavored bacons like Pecanwood or Applewood, or precooked bacons, or bacons for a particular foodservice application, then that can be a contributor to the kind of higher margins we are looking for.

So in terms of that percentage, I think we have said before, when you look at both the pork and turkey supply chains, we are probably in that 75% to 80% of the volume goes out in a value-added form.

You're always going to have a little bit of a mismatch with some of what comes off the animals in terms of what the American consumers are looking for.

But the goal beyond just -- is it in any kind of value-added form, is just keep moving up the value ladder and keep finding more innovative ways to direct it to consumers.

That's helpful.

Just one follow-up for me.

Why is Jennie-O turkey much more stable than, let's say, a pork portfolio?

Because the percentage from value-added is similar in both cases.

Can you -- it just seems like it is more value-added and it is more differentiated in turkey.

But is that -- can you put a finger on why your turkey business just continues to march up in margins, and on the pork side every now and then we tend to get these negative surprises?

Well, I mean Jennie-O Turkey Store, whole birds would be one example, certainly a category that is a supply chain-based category.

And we mentioned they are a little bit lower margin.

But otherwise if you look at turkey products sold in the US, it tends to be more of a specialized niche, one that the team up there has done a really nice job of developing the right products and of being the only one out there advertising these products to the consumer.

So I think that has provided them with some insulation versus, say, a pork supply chain in terms of their ability to deliver more consistent results.

That's helpful.

Thank you so much.

Diane Geissler, CLSA.

Hi, thanks for the follow-up.

I forgot to ask on the foodservice.

So your group is up pretty good growth in an environment -- I think if you listen to the restaurant companies when they reported their second quarters, the traffic trends have been pretty bad at both casual and QSRs.

So congratulations for outperforming that.

But I guess the question is really, what are you hearing from your customers?

What are their expectations for the second half of the year?

Do you think that there is some pent-up demand on the customer side?

Because really the restaurant guys have struggled here over the last year, so we should expect to see improvement there and maybe improvements for Hormel?

Or what are you hearing from consumers about where they are shopping, retail versus dining out?

Okay.

On the QSR side, at least on the domestic basis, we tend to be less of a player with QSRs.

Part of that is maybe by design in terms of we just have found our model of creating unique items that are designed for given operators less what a really large chain is looking for.

But it is in part, I think, also, if you -- there's been a little change in this, but by and large the fast food channel is chicken and beef focused, and we are a turkey and pork supply chain business.

I think our leader of the group articulated at Investor Day their strategy to also really work on the noncommercial side of the foodservice business.

So they've had some very nice success in the college and university environment, in the healthcare world, and so forth.

So they are seeing better growth through that segment than what the overall industry is experiencing.

That being said, we are -- I think the secular comments we are hearing is a little bit of optimism coming out of them for the upcoming quarter for the segment as a whole.

And our group feels it is well positioned to continue to have a really solid quarter in Q4.

Okay.

Thank you.

Robert Moskow, Credit Suisse.

Really just more of a comment.

I wanted to (technical difficulty)

He disconnected, I guess.

We will have to go on to Jonathan Feeney.

Okay.

If he disconnected, that's fine.

An unworthy substitute, I must admit.

Thank you, guys, for the question.

Thank you guys very much.

I wanted to dig in a little bit more on the Turkey Store business.

As Akshay said, it just seems to hang in there and it seems to be so much -- is it just dramatically less of a commodity business right now because of the branding and value-added you have done?

Specifically, how much has the mix of business changed from five years ago versus -- from what you would consider near to that whole bird business commodity mix back then, say just five years ago, versus where that is today?

If you could give me a ballpark estimate for thinking about that; and then I had one follow-up.

Sure.

Yes, clearly the predominant results driver for Jennie-O Turkey Store are their value-added branded products that they sell at the retail deli and food service.

The mix has -- I don't have the stats for you; maybe Kevin can follow up with you on that.

But clearly it has changed over the five-year time frame.

Not only have we changed it by virtue of those items, but I think if I am remembering correctly, I think there has been two occasions over those five years that we have actually tightened our basic processing within the Turkey business to make sure that we are staying fully in balance and that we are just supporting the value-added items and not throwing off a lot of additional commodity meats.

So that has improved the percentage as well.

And then on top of just sheer not having as many numbers, the team has done a nice job at driving other efficiency gains that have led to those results.

Right.

It doesn't sound like it is dramatically different.

It just sounds like of the value-added business then you have just gotten -- been more effective at it.

Is that a fair characterization?

Yes, and the advertising has helped.

This year is a little bit less significant campaign; but the last two years prior to this we've -- $20-million-plus a year in terms of trying to drive business, with really nice results.

The past campaigns have featured burgers and turkey bacon, and both of those over the long time frame are way up, well into the double-digit increases.

My follow-up question, Jeff, is a while back you used to have this great -- like 10 years ago in your presentation you used to have this great pyramid where at the top of the ladder you had high value-added items and you sort of -- the idea was to push people up that pyramid in terms of margin structure.

Across the Refrigerated Foods and Turkey business, could you differentiate?

Have those margins at the top of the ladder just gotten bigger in the value-added space and that is why?

Or you have done better across-the-board?

Or is the mix of business in both Refrigerated and Turkey just so much less in that commodity piece than it, say, was five or even 10 years ago, that you are sustaining these higher margins?

Thanks

I think the biggest impact would be the move -- if you viewed that pyramid as having different floors, if you will, we have moved more items up more floor levels.

The percentage of the portfolio that is a higher level of value-add, that has the higher differentiation and therefore more defensible margin position is greater in both the Refrigerated Foods group and in the Jennie-O group.

Okay, great.

Thank you very much.

Robert Moskow.

Credit Suisse.

Hi.

Can you hear me now?

Yes, sorry about that.

Don't know what happened.

Yes, sorry.

This is actually a question for Kevin Jones.

Kevin, is this your last conference call?

It is.

Kevin, I want to thank you for many years of assistance.

You have been a great Investor Relations contact for us, and thank you so much.

Best of luck in retirement.

Thank you very much.

We will miss him.

We definitely echo your comments, Robert.

Appreciate it.

Bye-bye.

(Operator Instructions) There are no further questions at this time.

Okay.

Thank you very much, everyone.

For your participation.

We appreciate it.

Feel free to get back in touch with me and [Jenna] after the call for any follow-up questions.

Thank you.

Ladies and gentlemen, this concludes the conference call for today.

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