荷美爾 (HRL) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Hormel Foods Corporation second-quarter earnings call on May 21.

(Operator Instructions)

I will now turn over the conference to Jana Haynes, Director of Investor Relations.

Please go ahead.

Thank you.

Good morning.

Welcome to the Hormel Foods conference call for the second quarter of fiscal 2014.

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 investor section.

On our call today is Jeff Ettinger, Chairman of the Board, President, and Chief Executive Officer, and Jodie 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 open for questions following Jody's remarks.

As a courtesy to the other analysts please limit yourself to one question with one follow-up.

If you have additional queries, you are welcome to get back in the queue.

An audio replay of this call will be available beginning at 10:30 AM Central Time today, May 21, 2014.

The dial-in number is 1-800-406-7325, and the access code is 4679596.

The audio replay 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 to 35 in the Company's Form 10-Q for the quarter ended January 26, 2014 for more details.

It can be accessed on our website.

Now, I'll turn the call over to Jeff.

Good morning.

We announced record second-quarter earnings this morning of $0.52 per share, up 13% over last year.

Operating profit increased by 14% with four of our five segments registering gains this quarter.

In terms of the top line, we generated record sales of $2.24 billion, an increase of 4% over last year, with a 1% volume decline.

I will now take you through each segment.

Our grocery product segment profit increased 16%, aided in part by a favorable comparison to fiscal 2013, which included SKIPPY peanut butter acquisition costs.

Dollar sales were flat versus last year.

We have now lapped our acquisition of the SKIPPY peanut butter business, so we are no longer providing quarterly segment sales without SKIPPY peanut butter sales.

Higher pork, beef, and avocado input costs squeezed margins in our grocery products segment.

To mitigate these higher costs, we increased prices during the second quarter on our SPAM family of products, HORMEL chili, and Dinty Moore stew.

These products, along with HORMEL COMPLEATS microwave meals, all experienced year-over-year sales declines.

We also increased prices on our Wholly Guacamole products.

Sales gains in grocery products were lead by SKIPPY peanut butter, HORMEL bacon toppings, and the HERDEZ line of products within our MegaMex foods joint venture.

We are excited about our new SKIPPY Singles peanut butter items, launched this quarter.

These six-packs of single-serve, 1.5-ounce cups are offered in SKIPPY Creamy and SKIPPY Natural Creamy varieties and are excellent for on-the-go meals or snacks.

Segment operating profit for refrigerated foods was up 38%.

Higher pork operating margins and growth in our foodservice area more than offset margin pressures, due to higher raw material costs.

Sales for refrigerated foods increased 10%, lead by retail sales of our HORMEL BLACK LABEL bacon, HORMEL REV snack wraps, and HORMEL COUNTRY CROCK side dishes.

We also enjoyed sales growth in our foodservice business, including such items as our HORMEL FIRE BRAISED meats, OLD SMOKEHOUSE Pecanwood Smoked Bacon, and NATURAL CHOICE deli meats.

Segment volume was flat compared to last year, driven by reduced commodity sales as we increased internal utilization of raw materials in our value-added products.

Our foodservice team continues to focus on meeting the needs of our customers with our latest innovation-- HORMEL BACON 1 fully cooked bacon.

This product delivers a crisp, delicious pre-cooked bacon that performs and tastes like it was cooked from raw.

Segment profit at Jennie-O Turkey Store increased 2%.

As we discussed on our call last quarter, the unusually cold winter, along with abnormally high propane and natural gas prices, negatively impacted our live turkey productivity and margins.

Because turkeys average a 22-week growing cycle, these higher-cost turkeys were marketed in our second quarter and will continue to work through our system.

We have also experienced lower bird weights impacting volumes throughout our system.

The Jennie-O Turkey Store segment reported second-quarter dollar sales 1% lower than last year with a volume decline of 5%.

Other macro conditions, including lower corn costs and higher turkey commodity prices, along with growth in our value-added product sales, allowed our Jennie-O Turkey Store team to generate at least a modest increase in operating profit during the second quarter.

For example, our investment in the Make the Switch media campaign drove heightened consumer interest in the featured product, Jennie-O fresh Ground Turkey tray packs and Ground Turkey chubs.

Our specialty foods segment reported an operating profit decrease of 26% and a sales decrease of 12%, largely driven by the expiration of the agreement in July of 2013 allowing Diamond Crystal Brands to sell certain sugar substitutes in the foodservice trade channels.

Our specialty foods team was able to generate gains in our nutritional products business during Q2.

Our international and other team turned in another strong quarter.

Segment profit increased 34%, and sales grew 23%.

This is the first full quarter in which we are including our SKIPPY operations in China.

Strong export sales of SKIPPY peanut butter and fresh pork, along with growth in our China operations, drove the positive results.

Looking ahead to the second half, we expect elevated beef, pork, turkey, and avocado costs to continue to squeeze margins on many of our value-added products.

Pricing actions taken this quarter will partially mitigate margin pressures, but will likely impact sales growth.

On the other hand, the addition of the SKIPPY peanut butter business has added additional balance to our portfolio, moderating some of these overall input cost pressures.

We anticipate pork raw material supplies to tighten significantly later in our third quarter, impacting our refrigerated foods segment.

Our team has done a good job preparing for these potential raw material challenges.

Due to anticipated lower hog supplies, today we notified our Fremont, Nebraska employees that we will reduce our harvest operations to four days a week, beginning in June.

We will work closely with our employees and customers to keep them up-to-date on any additional changes that may impact them.

The overall impact of tighter pork supplies on our industry remains to be seen.

We continue to expect year-over-year sales and profit growth from our Jennie-O Turkey Store segment, but growth will be at more modest levels than initially anticipated.

Finally, we are enjoying significant growth in our international segment and look for this to continue going forward.

Taking all of these significant factors into account, we are maintaining our FY14 guidance range, of $2.17 to $2.27 per share, but expect our full year earnings to be toward the lower end of this range.

The elevated input costs, due to tighter supplies of many of our raw materials, are transitory in nature and will normalize over time.

Until then, we believe our experienced team will navigate these challenges and continue to deliver growth.

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

Thank you, Jeff.

Good morning, everyone.

Earnings for the second quarter of fiscal 2014 totaled $140.1 million, or $0.52 per share, compared to $125.5 million, or $0.46 per share a year ago.

Dollar sales for the second quarter totaled $2.24 billion, compared to $2.15 billion last year, a 4% increase.

Volume for the second quarter was 1.22 billion pounds, down 1% from the same period last year.

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

Selling, general and administrative expenses were higher last year, due to SKIPPY-related transaction and transition costs, totaling approximately $9 million, and primarily reflected in the grocery products and international segments.

For the full year we expect selling, general and administrative expenses to be between 7.3% and 7.6% of sales.

Equity and earnings of affiliates was $3.6 million in the second quarter, versus $7.2 million last year.

The decrease is largely the result of higher input costs at our MegaMex Foods joint venture.

Advertising expense for the quarter was $34.8 million, compared to $26.1 million last year.

The increase was the result of the new Make the Switch ad campaign for Jennie-O Turkey Store and advertising for HORMEL chili and SPAM luncheon meats.

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

We expect interest expense to be $12 million to $14 million for fiscal 2014.

Our effective tax rate in the second quarter was 34%, versus 31.5% last year.

The fiscal 2013 rate was lower, due primarily to the benefit of settlements with various foreign and state tax jurisdictions.

For fiscal 2014, we expect the effective tax rate to be between 34% and 34.5%.

The basic weighted average number of shares outstanding for the second quarter was 263.9 million.

The diluted weighted average number of shares outstanding for the second quarter was 270.4 million shares.

Depreciation and amortization for the quarter was $31.9 million, versus $31.3 million last year.

We expect depreciation and amortization to be $125 million to $128 million for fiscal 2014.

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

Capital expenditures for the quarter totaled $40 million, up nearly $17 million over last year.

For fiscal 2014, 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.

Rodney?

Thank you.

(Operator Instructions)

The first question comes from Farha Aslam of Stephens Incorporated.

Please go ahead.

Hello, good morning.

Good morning, Farha.

Two questions.

The first one, on your core business.

Could you just give us more color on the REV wraps now that it's been in the market for awhile, how it's performing?

And the second one is on, again, on your core business.

On the COMPLEATS side, it looks like your shelf-stable microwaveable meals just are soft.

And any actions you're taking to turn that around.

Okay, Farha.

In terms of REV, we're really quite pleased with the progress of that relatively new product line.

We're hitting just about the one-year anniversary of it being available, broadly, in the marketplace.

We've already hit our trial goal with the product, and we're very close to hitting our repeat purchase goal as well.

To give you a sense of scale of the product line, the IRI reported sales, whether you look at the last 13 weeks or last 4 weeks and extrapolate out on a full-year basis, we're at a pace right now of $50 million to $60 million.

So that's really a quite nice introduction.

As we've talked about in the past, it's not presently contributing to refrigerated foods segment profit in any meaningful way because this is an investment time for that brand, both in terms of advertising and slotting.

But we're very pleased with the progress thus far.

COMPLEATS is a slightly different story where we continue to see sluggish sales when it comes to that product line.

There are certainly some products within the line that are doing well, including our new COMPLEATS breakfast items.

But overall, I would say that is a watch out for us.

Our team is earnestly looking at different ways to either present the products in terms of the packaging or in terms of what should be in the product line, pricing strategies, you name it.

But we recognize that we need to restore growth in our COMPLEATS product line.

Great.

And then, as a follow-up, you have a very strong balance sheet, and M&A is very prevalent in the space right now.

Can you give us some commentary on what you're seeing in terms of transactions, what's of interest to Hormel, and any thoughts you'd have, in terms of international versus domestic?

Wow.

That's a lot of questions.

Let me try to answer them.

First of all, we like to look for acquisitions that would add to our strategic platforms.

Certainly, those that are in growing categories.

And we certainly like number one or number two.

We like them to be accretive to the segment profits as well as accretive to the Company as a whole.

And we're always looking for something where we bring more than just the checkbook to the closing.

Certainly, anything that offers the opportunity to expand in the international area would be equally, if not more, appealing.

So, that's some of the things -- if you look back at the SKIPPY transaction, that's really what we got with that, so certainly looking for some of that.

As far as transactions, boy, there's been a lot of them -- some expected, some unexpected.

So, I would say there's probably some divesting of orphan brands, like SKIPPY was, and then probably some consolidation -- so, a mixed bag there.

And anything that's of particular interest to you?

I have nothing to comment on right now.

Okay, thank you.

The next question comes from Robert Moskow of Credit Suisse.

Please go ahead.

Hello, thank you.

Good morning, Robert.

Good morning.

I'm just wondering if you, Jody, whether you feel like this is -- the cut in guidance -- is it going to be enough?

Because as I look at the back half of the year, the back half still requires quite a bit of operating profit growth in order to be delivered.

You've talked about the impact of the PED virus hurting your access to supplies, rising costs, and I think -- Jeff, I think you said that the price increases will partially mitigate the higher input costs.

So, it sounds like the back half is tough.

You have a very tough comp in fourth quarter.

What are the things that are going to help you deliver the back half?

Well, I think there are certainly some unknowns.

And we've done our best job of making estimates of what those impacts are going to be for us.

I will tell you that the macro industry conditions, relating to the hog supply, probably is hitting us a little later than we originally anticipated, but we've done our best job in factoring that.

We have a few levers we can pull, as far as making sure that some of the businesses have the appropriate investments to drive their business.

I guess, the only thing I could add is at a segment level -- to add to Jody's comment.

We think refrigerated foods is still in a position to be a strong contributor in Q3, given the delay and impact that we just discussed.

And then, by Q4, we expect Jennie-O Turkey Store to be in a position to be providing positive growth because they would, by that time, have worked through these weather-related issues that we've referenced.

Okay.

Is your outlook for Q4 for Jennie-O -- is it any lighter than it was before?

Or is your fourth quarter the same as it was?

Because, before, you were talking about fourth quarter being a very strong quarter for turkey.

The only remaining challenge that, that group will be confronted with is that the grain picture is not as positive today as it was when the year started.

So then, that all comes down to how successful they are at balancing that against other production costs or pricing actions.

But, at this point, we do expect it to be a very solid quarter for them.

And the spike in commodity turkey prices that happened recently -- is that a net positive for you in fourth quarter, or is it neutral?

It's a positive, but it's not a massive positive.

And we really don't sell a lot of commodity turkey meat in the scheme of our overall operation, obviously, with the focus on value-added.

But clearly, we would acknowledge that, that's a positive for the group.

Okay.

Thank you.

I'll pass it on.

The next question comes from Akshay Jagdale of KeyBanc.

Please go ahead.

Good morning.

Hey, Akshay.

Hello.

So first question -- just on SKIPPY.

Can you give us a little bit more color on how the business is performing in the US and internationally?

Sure.

We're very pleased with how SKIPPY's been performing.

The most recent quarter was a high-single-digit sales gain in the US, so that's very strong.

I think we're doing that on the basis of some of the distribution gains we've referenced in the past and having more effective promotions on the product line.

And then, we expect to complement that by fall with a new ad campaign to really, again, remind the SKIPPY consumers about this great brand.

In terms of the outside of the US sales, we're just now getting China online, in terms of, we really don't have the comps there.

Their non-China comps were up as well.

So, overall, we're pleased with where SKIPPY is, in both the US and international market.

And, just a follow-up to that and more broadly -- can you give us an update on your marketing plans for this year?

You'd started off with a pretty significant increase in marketing.

And, if I remember correctly, the budget last year was around a $100 million.

And you were expecting it to be up almost 30% this year.

But can you just give us an update and let us know if anything has changed, per se, in that particular plan?

Yes.

We do expect to still have a significant increase, year over year, in terms of our marketing spend.

It won't probably be at the 30% level.

It may be more like 15% to 20%.

For example, we'll be coming out a little bit later with the SKIPPY campaign.

We really wanted to make sure we got the messaging right.

And we think timing it to the back-to-school time is more effective than, say, an earlier summer launch.

So that is one budgetary change we've made.

But overall, we do expect to be in the, now, maybe $115 million to $120 million range, in terms of those expenditures.

But the only change here is you delayed some of the investments on SKIPPY.

It's a timing issue, correct?

Well, SKIPPY -- I mean, once we do come out with it, we'll certainly put a solid effort against it.

An effort that will then overlap into fiscal 2015.

So, yes, there is a timing change, at least in relation to SKIPPY.

Okay.

And on this commodity cost pressure issue and your view that it's temporary -- can you give us a little bit more color on what product categories and, more importantly, from a modeling perspective, where does that flow through?

It seems like grocery products is probably the division that's hit the most by it.

But you also have a significant value-added presence in refrigerated.

So, can you give us a sense as to where you're seeing more of the weakness from a segment perspective?

And then, just a little bit more color, in terms of what products are getting impacted and are you taking more pricing now.

And, as such, when that flows through, the margins should normalize?

Akshay, I would agree with the characterization that I think the grocery group probably has the most franchises that are impacted by what the cost pressures we're experiencing right now.

Our outlook would be that, when it comes to, say, the pork prices, that we do think this will be a several-month process.

But we don't think there's been a systemic change in the cost picture in the pork industry.

The beef price increases everybody saw coming and, certainly, is a little bit more of a systemic challenge.

I think, in the long run, they're expecting to build beef herds back, but that's not going to happen overnight.

We mentioned avocado pressures -- those are related to the drought in California, although we don't source significant avocados from California.

It is a global market, ultimately, and so when those supplies tighten up or are expected to tighten up and prices go up, we've experienced cost increases, even from our supplies in Mexico, Peru, and Chile as well.

We -- clearly, the value-added items within the refrigerated foods group are also being impacted by the cost increases.

Our foodservice team has been more successful to date in adjusting pricing to match up against the new cost reality.

But our retail meat products group is catching up and should be in a position to be back in a balance before the year is over.

So, just to be clear, what changed internally from an input cost and margin expectation?

Is it just that the cost escalated more than you were expecting and, as such, there's a lag?

Or is it that the pricing is not as effective and that it's not -- you're unable to pass it through?

It's really on the cost side.

We talked about the impact of our operations, in terms of the expected four-day work week in June in Fremont.

And so, clearly, from a hog intake standpoint, we're expecting the impact to our organization to be late third quarter, early fourth quarter.

But the price impact of what's going on in the country, in terms of pork supplies, was very pronounced during the second quarter and very sharp.

And that's always, probably, the hardest scenario is when we get a quick, steep increase in costs -- trim costs, belly costs, you name it -- they've rocketed up.

And those have been very difficult to price against.

Just one last one for Jody.

Can you give us a little bit of color into -- the cash balance went down pretty significantly this quarter.

It seemed like it was working capital related, but it was a little bit unusual, at least from my expectations.

Was that something you were expecting?

Or can you give us a little bit more color into what drove that?

Sure.

You're right.

Working capital was a big use of cash for the quarter.

We saw a pretty significant inventory build.

Part of that was driven by those rapidly rising costs that were going into our products, so not necessarily more tonnage, but higher costs.

And then also driven by, I think, some of the comments that we made about preparing for these potential holes in the hogs, where we're taking certain of our valued primals and having them be in storage so we have enough supply for later.

So, those would be the biggest drivers on the inventory.

We did see a reduction in our payables, specifically related to the timing of a tax payment.

So, that was expected.

And then, really, from a free cash flow standpoint, our CapEx spending is up year over year.

And that, as we'd messaged, even from the beginning of the fiscal year, we're making certain investments in productivity improvements.

We have a new vendoring operation that's the cost of doing business.

But we'll be much more efficient with that.

And then, adding some capacities.

Certainly, the new BACON 1 product resulted in some expenditures to get that product launched.

So, a mix of some repair -- not repair and maintenance -- but ongoing upgrades to existing facilities as well as some new expansions.

So, those would be the biggest.

I would expect, by the end of the year, that we will get our inventories down into more normalized levels.

But, really trying to work through these difficult times that we're expecting.

Thank you.

I'll pass it on.

The next question comes from Adam Samuelson of Goldman Sachs.

Please go ahead.

Yes, thank you.

Good morning.

Maybe, first, to dig in a bit more on the PED side.

Just trying to get a sense of -- is the impact the summer?

You announced the closing of -- or reduced work weeks at one of your plants.

If the impact is as you expected it would be, if it's been more pronounced and has a longer tail.

And characterize how the evolution of PED has shaped up, relative to your expectations.

Okay.

For our operations, Adam, it came a little bit more slowly than maybe we had originally feared.

But, clearly, we -- at this point, based on our conversations with the producers with whom we have contracts, we expect tightened numbers now, for the summer.

And that's what led us to go at our four-day work week.

Clearly, a number of other processors in the industry had already made that move.

There were other regions of the country where the impact of the illness had hit earlier, and so I think their tightening of numbers had already occurred.

The other thing that everyone in the industry is monitoring is the recovery side from it.

And I think everyone would tell you, at this point, it's not 100% recovery yet.

That's what you seek to accomplish when you have an outbreak like this, but the entities that -- once they've had the exposure to it and they get back into operation, they're not, in many cases, hitting the 100% level.

So, that's a little bit of a wild card for us, as we head into the latter part of the year or even early next year, in terms of what kind of numbers we might see.

Got it.

So it's, really, at this point, too early to think about how long this tail can be.

And the discussions with your suppliers, over the next few months will be the big determination on what the pork supply looks like in the first half of your fiscal 2015.

Definitely an impact into Q4.

But, yes, kind of early to tell for 2015.

Okay.

That's helpful.

And then, maybe switching gears, following up on Farha's question -- obviously, your balance sheet is a great asset and in a great position.

However, with the ownership of the Foundation where it is, it constrains you a little bit in your capital allocation.

Can you talk about any prospective repurchases of shares from the Foundation or if there would be any authority or interest in that regard to give you a more balanced, more flexible, capital allocation process?

That would obviously be up to the Foundation, if their interest is in selling any shares.

We certainly do have authorization that would allow us to do any repurchases of shares.

We'd made some small purchases during the quarter, and we continue to assess what our expected uses for cash flow are and balance that with what kind of ROI we get on the investment and our internal stocks.

So, I'm not in control of what the Foundation wants to do with their shares.

All right, fair enough.

I'll pass it along.

Thanks very much.

The next question comes from Diane Geissler of CLCA.

Please go ahead.

Good morning.

Hi, Dianne.

I wanted to ask about the turkey business.

Is there any way to quantify what you think the impact of some of these -- I guess, you call them -- one-offs.

You know, a really terrible winter and the propane prices spiking.

I'm assuming you had hedges in place but that maybe you came under like a force majeure, where your suppliers said, we don't have it.

And, therefore, you have to go on to the spot market.

Was that a factor?

And then, I guess, you said 22 weeks.

So should we assume it will impact your margins all the way into the first quarter of 2015, or do you think it will be limited to 2014?

Well, on the propane side, yes, we did have some forward positions in place.

And, yes, we did get impacted by force majeure clauses as they had pipeline issues and other issues this winter.

So that certainly exacerbated an already difficult situation when it came to just sheer market pricing because we don't forward buy all of it, clearly.

So we did have to scramble and cover some of that on the open market.

In terms of your second question on timing -- 22 weeks.

But the bite from the winter, really obviously, took place in the primary winter months -- December, January, February, even a little March.

So, no, we don't expect the impact from that to trail all the way into our fiscal 2015.

In fact, even by Q4, we should be in a better position when it comes to that impact.

Can you quantify the propane impact, in terms of if it had been delivered on a hedged basis versus you buying in the spot market?

I really can't give you that detail.

I can give you, in terms of overall for Jennie-O, we provided guidance at the beginning of the year that we really had expected and hoped that Jennie-O would be in a growth position really, frankly, quarter after quarter in fiscal 2015.

And you can see from the results that what's instead happened is, it's been basically flat.

It's not like we lost a lot of ground.

They still have really solid operating margins.

But, basically, propane's one of the deltas that have driven it from a good gain to flat.

But there's other ones, such as the feed not being quite as favorable as we had thought.

That has been a factor as well.

Okay.

Can I ask what you've actually communicated to your employees at the plant who are furloughed?

Like how long they should expect to be furloughed, or is it open-ended?

Okay.

So we just did that this morning, so we wanted to be on a consistent basis with public information, talking to them about an impact starting in June.

We talked about being closed on Fridays within that plant.

Depending on the hog flow in a given week, there may be opportunities to make up some additional hours on the Monday-through-Thursday schedule.

The summer, in the past, has sometimes been a time where people are looking to take vacation or you have some scheduling differentials anyway.

So, what we've said is, it's indefinite.

We certainly anticipate that it will certainly last at least a couple of months.

But we'll have to see, on a rolling basis, as to when we think we have the numbers back to be in a position to restore that plant to full hours.

Okay, thank you.

The next question comes from Eric Larson of CL King.

Please go ahead.

Yes.

Good morning, everyone.

Hi, Eric.

I have a very specific Jennie-O question.

And it relates to your energy issues up there.

I know that there are a number of natural gas pipeline projects going on in Wisconsin.

And I don't know if you're anywhere close to any of those gas lines that you could potentially put the CapEx into and convert your grow-out facilities from propane to natural gas.

Is there any distinct possibility that something like that could happen, where you wouldn't then have to be so tied into specifically propane?

It's a great question, Eric.

And indeed, the team is actively pursuing that.

We actually were pursuing it even before the propane shortage because natural gas was looking attractive, obviously, at a time even before that.

It's a somewhat gradual conversion for us.

It's a fairly in-depth process, so we're on kind of a maybe 20-farm-a-year schedule in order -- and looking at a conversion in that regard.

So it won't be an immediate solution to anything, but definitely, you have a good point there, in terms of a better long-term position for those facilities.

Okay.

Good.

Well, I'm glad to hear that you're actually within striking distance where you can actually do some conversions, which I think, over the long run, it's easier to hedge natural gas and everything else.

And I think it would be a lot more reliable supply.

The second -- the follow-on question that I have -- when you talk about the favorable turkey commodity markets -- and I know that you have moved a tremendous amount of your volume away from those commodity markets into your further value add -- is that still, in general, can that be a significant swing factor quarter to quarter as to the performance of the commodity markets?

Yes.

I mean, it's still relevant.

We certainly still sell a number of the dark meat items on a commodity basis, either in international marketplaces or, in some cases, to other manufactures.

So I don't want to discount and pretend that, that's not a factor at all.

It definitely can be a relatively big swing.

But, clearly, the emphasis for Jennie-O -- the 75% to 80% of the portfolio -- are the value-added items.

And we've really taken pains to match up our overall production within the system to those value-added items.

The fact that we were short weights this last quarter, again, dampened our ability to take advantage of those commodity markets on a more broad basis.

Because again, we needed to grab as many pounds as possible to make sure we were supporting the value-added items.

Okay, thank you.

The next question comes from Sachin Shah of Albert Fried.

Please go ahead.

Hello, good morning.

I just wanted to talk to you about your acquisition strategy.

There's been a lot of speculation out there -- what companies you may be interested in or not interested in.

So maybe you can highlight, maybe in a summary, of your acquisition strategy.

And what you guys are looking for to deploy capital.

I think Jody addressed that earlier.

We clearly have been active in the acquisition community over the last dozen years, completing over $2 billion worth of deals that have helped the growth of our Company.

We clearly are in a position -- we have the financial wherewithal and, I think, the team capabilities to do other deals.

In terms of general spaces, I mean, you can get online this afternoon and watch the Bank of Montreal conference and we'll have a slide in our deck that talks about different areas where we've made acquisitions in the past.

But we really don't provide any specificity about potential targets, going forward, and that's something that the team keeps on a proprietary basis.

Okay.

Any -- maybe follow-up comment on the deal activity in the space right now?

I've seen a few transactions already in 2014.

So maybe some color on your thoughts on what that means for the sector industry and you specifically?

I guess I don't know that I have a perspective that would be any better than an investor whose following the space.

Clearly, there have been some deals announced here, recently.

I've been in this job now nine years.

And there's been an ebb and flow of deals during that whole time frame.

There's been some fairly notable changes in the industry.

I think that's just part of what happens in modern business.

But, I guess, I don't have any specific perspective to offer you, at this point.

Okay.

Thank you very much.

(Operator Instructions)

There are no further questions.

Are there any other points you wish to raise?

No, thank you.

I just want to thank everyone for joining us on the call today.

And we will be holding a webcast later of our presentation today at 4 PM Eastern.

Thank you.

This concludes the second-quarter earnings call.

Thank you for participating.

You may now disconnect.