荷美爾 (HRL) 2014 Q4 法說會逐字稿

Good day and welcome to the Hormel Foods fourth-quarter earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Jana Haynes, Director of Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to the Hormel Foods conference call for the fourth 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 Investors section.

On our call today is Jeff Ettinger, Chairman of the Board, President, and Chief Executive Officer, and Jody Feragen, Executive Vice President and Chief Financial Officer. Jeff will provide a review of the operating results for the quarter and the year, along with our guidance for fiscal 2015. Then Jody will provide detailed financial results for the quarter and the year.

The line will be open for questions following Jody's remarks. As a courtesy to other analysts, please limit yourself to one question with one follow-up. If you have additional queries, you are welcome to get back into the queue.

An audio replay of this call will be available beginning at 11:30 AM Central Time today, November 25, 2014. The dial-in number is 888-203-1112 and the access code is 9752232. It will also be posted to our website and archived for one year.

Before we get started with the results of the quarter and year, 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 costs and availability of raw materials and market conditions for finished products. Please refer to pages 31 through 37 in the Company's 10-Q for the quarter ended July 27, 2014, which was filed on September 5, 2014, for more details. It can be accessed on our website.

Additionally, please note the Company uses non-GAAP results to provide investors with a better understanding of the Company's operating performance by excluding the impact of certain nonrecurring items affecting comparability. Discussion on non-GAAP information is detailed in our press release located on our corporate website.

Now I'll turn the call over to Jeff.

Thank you, Jana, and good morning, everyone. We are pleased to report a strong finish to fiscal 2014. Earnings in the fourth quarter were a record $0.63 per share, up 9% from a year ago on sales of $2.5 billion, also a 9% increase.

For the full year, the Company earned a record $2.23 per share, representing a 14% increase over last year. We also achieved record sales of $9.3 billion, an increase of 6%.

I will now take you through each segment. In addition to discussing segment results, I will also provide an operating profit margin guidance range for each segment, which is our estimate of margin potential over the next few years given our current business structure, product mix, and typical market volatility.

Grocery Products segment profit was down 21% in the fourth quarter, with sales down 3%. High meat input costs and related pricing actions hampered the growth of some of our brands including Hormel Chili and Hormel Compleats microwave meals. On the positive side, Hormel bacon toppings, Wholly Guacamole dips, and Herdez authentic Mexican foods grew during the quarter. For the year, segment profit was down 9% and sales were up 3%.

We continue to support our iconic brands. This year we increased our Grocery Products advertising spend by over 20%. At the end of September, we kicked off a national SKIPPY peanut butter advertising campaign after many years off air.

Effective at the beginning of fiscal 2015, we will integrate Fresherized Foods, the maker of Wholly Guacamole, into our sales and distribution systems to give this brand the full benefit of our consumer products salesforce capabilities. Going forward, we will report 100% of the estimated $200 million in sales in our Grocery Products segment revenue. We will continue to report only 50% of the Fresherized Foods earnings, net of tax, in the equity and earnings line of the Grocery Products segment.

Taking into account the addition of Wholly Guacamole sales to our Grocery Products segment revenue, along with the similar integration of our other MegaMex Foods joint venture businesses in recent years, we expect Grocery Products segment operating margins to be within a range of 12% to 14% going forward.

Refrigerated Foods fourth-quarter operating profit increased 10%, with sales up 9%. For the full year, operating profit in this segment was up a robust 45% and sales increased 9%.

Pork operating margins were a significant driver to the higher results this quarter. The Refrigerated Foods team showed impressive leadership by managing through especially volatile market conditions this past year and achieving excellent business results in the face of tight raw material supplies.

Our food service group continues to deliver growth in our Refrigerated Foods segment with innovative solutions for food service operators. These include products such as our Hormel Fire Braised meats and Hormel Bacon 1 fully cooked bacon, along with continued growth of Hormel fully cooked sausages.

On the retail side of the business, the reformulation and packaging updates of our Hormel side dishes introduced just under a year ago have led to restored sales growth. Hormel Black Label bacon and Hormel party trays also delivered sales gains this quarter.

Effective at the end of fiscal 2014, we dissolved our Precept Foods partnership by mutual decision with Cargill Meat Solutions. Sales of $115 million were associated with this business, but we do not anticipate a material impact to segment profit as a result of this change.

Given our current product mix and taking commodity volatility risk into account, we expect Refrigerated Foods operating profit margins to be within a 5% to 8% range over the next few years.

Jennie-O Turkey Store continues to build momentum, delivering increased segment profit of 45% on a sales increase of 11% during the quarter. For the full year, operating profit was up 23% and sales increased 4%.

Results at Jennie-O Turkey Store in the quarter were driven by continued growth in value-added sales along with high commodity turkey prices. Jennie-O lean ground turkey and Jennie-O Turkey bacon led sales growth this quarter.

We increased our Jennie-O Turkey Store advertising spend this year with a Make The Switch campaign that started early in fiscal 2014, featuring ground turkey tacos. We plan to continue this advertising campaign in new US markets early in fiscal 2015. We expect Jennie-O Turkey Store segment operating profit margins to be within the 13% to 17% range going forward.

Our Specialty Foods segment reported an operating profit decrease of 14% and a sales increase of 31%. Excluding sales of CytoSport products, sales were down 4%.

Full-year results for Specialty Foods showed operating profit down 20% with sales down 3%. Full-year sales, excluding CytoSport, were down 11%.

We are pleased with our team's initial integration of the CytoSport business as we have started to leverage Hormel Foods strength in operating efficiencies, food, drug, and mass marketing capabilities, and purchasing synergies to maximize the potential of this business. Excluding deal-related costs and acquisition adjustments, CytoSport performed in line with our expectations this past quarter.

We expect Specialty Foods segment operating profit margins to be within a range of 8% to 11% going forward.

International & Other's fourth-quarter operating profit increased 3% with sales up 13%. Higher meat input costs pressured International segment margins during the quarter. For the full year, our operating profit in this segment was up 19% and sales also increased by 19%.

Our International team continues to do an excellent job expanding our business in China. To support that growth, we are announcing the construction of a new Refrigerated Foods plant in China, slated to open in the back half of fiscal 2016. The facility will produce pepperoni, bacon, ham, and other refrigerated meat items sold in the food service and retail channels within China.

Our expectation for International segment operating profit margins is a range of 14% to 17% over the next few years.

From a total Company perspective, we anticipate operating profit margins in the 9% to 12% range given our current business structure, product mix, and typical market volatility. Moving into fiscal 2015, we expect to exceed our stated 5% sales and 10% earnings growth goals.

We look for pork commodity prices and pork operating margins to normalize as the year progresses. We anticipate commodity pork prices will exhibit some volatility in fiscal 2015, with PEDV still lingering in domestic herds, but not to the degree experienced in fiscal 2014.

Lower meat protein prices will eventually provide input cost relief for our Grocery Products segment but will lead to challenging comparisons for our Refrigerated Foods segment. We plan to increase pork production by 1% to 2% over fiscal 2014's numbers.

Lower corn prices should benefit Jennie-O Turkey Store throughout next year, offset to some degree by stubbornly high soy meal costs. We expect commodity turkey prices to normalize as fiscal 2015 progresses, down from the extremely high prices experienced in 2014. We plan to increase turkey production modestly in fiscal 2015 to support our value-added businesses, on the heels of no increase to our production level last year.

In our Specialty Foods segment, we continue to expect the CytoSport business to deliver earnings accretion of $0.05 per share in 2015, as disclosed in our acquisition call earlier this summer. We look for our China business along with our exports of SKIPPY peanut butter and pork products to drive growth in our International segment in fiscal 2015.

We will continue building our brands in 2015 with a double-digit increase in our advertising support over the prior year. We will focus advertising dollars on our Jennie-O Make The Switch campaign, REV snack wraps, our SPAM family of products, SKIPPY peanut butter, and Muscle Milk protein-rich products.

Late yesterday we informed our team that we will cease operations at our Grocery Products manufacturing facility in Stockton, California, effective the end of February 2015. This was a difficult decision but a necessary step given available capacity in other more modern dry grocery facilities in the Company.

We are also considering a potential exit from operations in Vietnam early in fiscal 2015, which have been part of a larger joint venture in the region. This business, which includes hog production, feed mills, and a processed meats facility, all located in Vietnam, has not delivered the results we expect from our International investment.

As a result of the closure of the Stockton facility and the potential exit from the Vietnam business, we expect nonrecurring expenses of $0.04 to $0.06 per share to impact our profits in the first half of fiscal 2015. We are providing details about these anticipated nonrecurring items to allow better visibility of our long-term operating performance expectation.

After taking all of these significant factors into account, we have established our fiscal 2015 non-GAAP adjusted earnings guidance range at $2.45 to $2.55 per share, excluding the expected nonrecurring charges. Our balanced model continues to benefit our performance, as evidenced by our track record of increased earnings in 27 of the last 30 years. We believe our strong brand and niche categories and our focus on innovation position us to continue to drive superior growth and shareholder value.

At this time I will turn the call over to Jody Feragen to discuss the financial information relating to the fourth quarter and fiscal 2014.

Thank you, Jeff; good morning, everyone. Net earnings for fiscal 2014 fourth quarter totaled $171.3 million or $0.63 per diluted share, compared to $157.3 million or $0.58 per share a year ago. Net earnings for the 12 months of fiscal 2014 totaled $602.7 million or $2.23 per share, compared to net earnings of $526.2 million or $1.95 per share a year ago.

Dollar sales for the fourth quarter totaled $2.5 billion compared to $2.3 billion last year, a 9% increase. For the full year, dollar sales were $9.3 billion, a 6% increase from last year.

Volume for the fourth quarter was 1.34 billion pounds, up 3% from fiscal 2013. For the full year, volume was 5 billion pounds, up 1% over last year.

When we announced the acquisition of CytoSport, we indicated that the acquisition would have a neutral impact on fiscal 2014 earnings, net of transaction costs. Besides the expected transaction costs of $4.8 million, we incurred a fair value inventory adjustment of $4.5 million which negatively impacted the results of our Specialty Foods segment.

The inventory adjustment was not included in our original guidance. As previously stated, we expect CytoSport to contribute approximately $0.05 per share to our fiscal 2015 results.

Selling, general, and administrative expenses in the fourth quarter were 6.5% of sales compared to 6.3% last year. For the full year, selling, general, and administrative expenses were 7% of sales compared to 7.2% last year.

We expect selling, general, and administrative expenses to be between 7.5% and 7.8% of sales for fiscal 2015. The growth over fiscal 2014 will come as a result of plans for the increased advertising Jeff alluded to, including the marketing associated with CytoSport.

Advertising expense for the fourth quarter was $22.4 million compared to $16.6 million last year. The increase over the prior year was primarily associated with advertising for CytoSport products in the Specialty Foods segment and the national advertising campaign for Hormel REV Wraps.

Equity in earnings of affiliates was $5.7 million in the fourth quarter versus $2.1 million last year. The increase is largely the result of improved earnings at our MegaMex joint venture.

Interest and investment income was $0.8 million for the fourth quarter compared to $2.5 million last year. Year-to-date, interest and investment income was $3.2 million compared to $5 million a year ago.

Interest expense for the quarter was $3.4 million compared to $3.1 million last year. Year-to-date, interest expense was $12.7 million, up from $12.5 million last year. We expect interest expense to be approximately $12 million to $14 million for fiscal 2015.

Our effective tax rate in the fourth quarter was 34.1% versus 33.9% in fiscal 2013. The year-to-date effective tax rate was 34.3% compared to 33.6% last year. For fiscal 2015 we expect the effective tax rate to be between 34% and 34.5%.

The basic weighted average number of shares outstanding for the fourth quarter and full year were 263.6 million and 263.8 million shares, respectively. The diluted weighted average number of shares outstanding for the fourth quarter and full year were 269.8 million and 270.2 million shares, respectively.

We repurchased 666,000 shares of common stock during the fourth quarter, spending $30.9 million. For the full year, we spent $58.9 million purchasing 1.3 million shares. We have 8.2 million shares remaining to be purchased from the current authorization in place.

Total debt at the end of the quarter was $250 million, the same as last year. During the fourth quarter, we repaid our line of credit used to fund the CytoSport acquisition.

Capital expenditures for the quarter totaled $47.3 million, compared to $38 million last year. For the full year, capital expenditures totaled $159.1 million, compared with $106.8 million last year. For fiscal 2015, we expect capital expenditures to be approximately $180 million to $200 million.

Depreciation and amortization for the quarter was $32.9 million, compared to $31.9 million last year. For the full year, depreciation and amortization was $130 million, compared to $125 million last year. We expect depreciation and amortization to be approximately $125 million in fiscal 2015.

We announced a $0.20 per share increase to the annual dividend, making the new dividend $1.00. This represents a 25% increase, after an 18% increase last year, and marks the 49th consecutive year in which we have increased our dividend.

At this time I will turn the call over to the operator for the question-and-answer portion. Operator?

(Operator Instructions) Kenneth Zaslow, BMO Capital Markets.

Good morning, everyone. Can I just talk about the guidance for a second? I was just surprised by the muted tone of it.

I guess when I think about it, if I strip out the CytoSport and I strip out some of the weather and issues that you happened to have last year, which I thought was going to recur, it seems like the internal growth is about mid single digits. First of all, I guess my question is, did I do my math right?

And then second, does that strike you as the right balance? Are you conservative on that? How do you think about that in terms of the internal growth? That's how I look at it.

Okay. Let me walk you through our thinking in terms of the guidance range that we've established for 2015. Starting with Refrigerated Foods, as we talked about earlier in the call we do expect processing margins to not be as favorable as they were in 2014. Notwithstanding this, Refrigerated Foods we would expect to still grow modestly due to their value-added sales momentum in food service and with their retail brands and due to improved generally efficiency. But it will be fairly modest growth in 2015 at a segment profit operating level.

This more favorable cost environment should help Grocery Products, so we do expect Grocery Products to rebound to more normal growth rates, plus the fact that they will no longer have the earnout as part of Fresherized Foods in their costs. The favorable costs will also help International. We expect International to achieve its fifth consecutive year of double-digit growth.

For both Grocery Products and International, there are certain lingering high costs in inventory that will continue to dampen their results in the opening quarter of the year. But as the year goes on, we will be working through that inventory.

Clearly Jennie-O Turkey Store, our expectation is to have another good year. They are in a more favorable grain environment plus they have great value-added momentum, and this should move them toward the top of the operating profit range that we just articulated.

That being said, there are some mitigating factors for Jennie-O Turkey Store. The grain benefit is partially offset by hedges. We have talked before about our hedge philosophy. The soy meal side of the grain formulas has remained stubbornly high, and we do have certain grain-based contracts with food service customers within that segment.

Secondly, we expect the turkey commodity meat markets, which have been at an all-time high, to not be quite as favorable in 2015.

And then third, we have approved an enhanced advertising budget for Jennie-O Turkey Store. The Make The Switch campaign has driven good results, and so we are going to be investing further there. In fact overall advertising spending, as we talked about, was up double digits in 2014 for the whole Company and should be again in 2015.

For Specialty Foods, by the fourth quarter the unit had recovered from the year-over-year Splenda change in business operations. Their results were actually up modestly in Q4 if you don't count CytoSport at all. And so we expect again modest growth of the overall Specialty portfolio in 2015, plus they should attain the $0.05 a share benefit from the acquisition of CytoSport.

So for us, this adds up to a range of $2.45 to $2.55, exclusive of the nonrecurring events. The midpoint of this range is a 12% increase over the year we just completed, on top of the 14% increase we generated in 2014. So that is our thinking, at least in terms of providing this kind of guidance range.

That's great. Then just a follow-up. Is the cost savings -- is there a greater initiative at Hormel to focus on cost savings?

I know, obviously, one facility you're closing down; you are thinking about Vietnam. Is there something that you are doing more broadly that we should be thinking about, maybe internal actions? And does it have to do with the retail environment, or are these just one-off that I shouldn't read anything into it?

Yes, I guess I wouldn't read anything into it. The timing on those types of decisions I mean, we've had the investment with our partner in Southeast Asia in the Vietnam operations for several years and have given it, we think, a good try there, but really feel we'd be better off focusing our attention elsewhere.

In terms of the Stockton plant decision, it is an older facility. We really had to make a determination: do we pour more money into that facility, or could we utilize the capacities we have available in more modern grocery facilities elsewhere in the US? And so we made that difficult decision for that reason.

Great. I appreciate it.

Farha Aslam, Stephens Incorporated.

Hi, good morning. I noticed you had a considerable step-up in your CapEx expectations for 2015. Is there something incremental that you are investing in for next year?

Sure, Farha; this is Jody. Jeff talked about the new SPAM production facility that we are going to be -- or SPAM -- Refrigerated Foods production facility that we are building in China. So a portion of that plant will impact 2015.

We had started the construction of additional SPAM lines domestically that will flow over into 2015 as well. And then we have several other initiatives that we are looking at to expand capacities for some of our product lines that are running at tighter capacity.

So, yes, it is a step up; and then we have just the general repair and maintenance type CapEx that comes with operating many facilities across the country.

Great. Then in terms of capital allocation overall, it looks like you have a net debt-free balance sheet. Could you share with us your uses of cash and your priorities in terms of how you look to deploy that capital going into next year?

Well, we certainly took a good step forward with the 25% increase in the dividend that we made this year. So that's obviously something -- a legacy that we are extremely proud of and would look to continue to do that going forward.

We've made several acquisitions, SKIPPY in 2013 and then more recently the CytoSport acquisition in 2014. So we will continue to look for opportunities there that fit with our strategies of brands that are number one or number two in the marketplace, transactions that can be accretive both from a margin perspective as well as overall profit.

Certainly looking for things that provide us a global footprint, and then more recently trying to look at things that fit more into a health and wellness type portfolio, appealing to younger consumers, addressing the snack area as well as our ability to add innovation to anything that we would purchase.

And then share repurchase?

You know, that's probably a little more opportunistic. We did do some this year, and I would expect that we will take a look at doing that a little bit in 2015 as well.

Okay, great. Thank you.

Eric Larson, Janney Capital Markets.

Yes, good morning, everyone. Thank you and happy Thanksgiving to everybody. I'd like to drill down just a little bit more on the cut-out margin. I think it's reasonable to assume that the cut-out margin would normalize a little bit more next year.

But demand has remained, I think, a lot stronger than what we would have all expected. Now I think there's going to be a lot more competition from chicken next year as well.

But can you --? Exports for pork have been particularly strong. Can you try to put some of the demand context into that, how you are looking at that cut-out margin?

Sure. I will give it a whale here. We certainly have seen some volatility in those operating margins in the first part of our fiscal year, in November here. They've been a little bit all over the board, certainly lower than they were last year at this time from that perspective.

We do expect to see hog numbers increase 3% to 3.5%. We are not taking our harvest up that high, but that should provide lots of availability.

The demand seems to be the equation that -- we'll see what happens with that. We would expect the cut-outs to come off the historical highs that they have been, and we have seen some of that come already.

So our balance is that they are going to go back more to a normalized range, maybe not as low as the five-year average. And that is what we have used in our assumptions.

Okay, all right. Then just one follow-up question on Jennie-O. Obviously, your ad campaigns have been very successful for your value-add products, and you are going to bump up your advertising next year. Is part of that reflecting the fact that you might have easier fuel comps in your fuel comparisons next -- this upcoming winter?

I mean, Lord knows what that will be; but is part of the thinking that you will just reinvest some of the positive variance in some of your operating costs in that division?

Well, we do pulse the advertising somewhat based on macro conditions. But clearly the Jennie-O brand has benefited from being on air and from emphasizing this Make The Switch theme. The most recent version has been the taco campaign, but we had a burger campaign and a bacon campaign in prior years as well.

Their plans right now are to roll into some new markets with that advertising, to support some product placements that we've been able to attain through our sales organization. So we will definitely be on air early in the year and we may complement that with more of a fall campaign as well.

Okay. Thank you. I'll pass it on.

Adam Samuelson, Goldman Sachs.

Yes, thanks good morning, everyone. Want to spend a little time in Grocery, if we could, and talk about the volume outlook there. I know they're down 5% in the quarter, and it's been really challenged for most of the year.

Help us think about some of the product categories. I know there's been a new -- a big focus on Compleats over the course of the year to right that. But maybe a bit of context in terms of the categories where -- that have struggled this year and some of the actions that you are taking or anticipating can drive an improvement in 2015.

Okay. Well, on the positive side, as we talked about, I mean bacon business had a fantastic year. We have two brands within the Mexican portfolio that are really on a roll in terms of double-digit growth: the Herdez brand and Wholly. Now the Wholly sales in 2014 were not being reflected in our results, so that would have changed the year-over-year results had we had those in there; and starting in 2015 we will have that.

Our franchises, our iconic brands of SPAM and SKIPPY had fairly flat Q4 results, but both have what we hope are good solid marketing campaigns going forward. And we expect growth out of both of those brands in 2015.

The areas where we've struggled a little bit more have been some of the other traditional canned meat items, the Dinty Moores and the Hormel Chili items; and then we've continued to have an up and down experience with our microwave meals.

We are going to market with a little bit different tactics within that category in terms of tiered pricing and new offerings, and we will see if that works. That's our game plan going into 2015.

Okay. That's helpful. Maybe that rolls into my follow-up on the 5%-plus sales growth target. I would imagine it was probably about 3% growth from CytoSport as that layers in; I think you are consolidating some different parts of the business that you haven't in the past.

But I would imagine that the commodity price environment in pork and Refrigerated as well as in turkey would be a little bit of a headwind. So I guess I am surprised that -- am I thinking about it right, that the 5%, it's really about acquisitions and consolidating different businesses as opposed to underlying -- with offsetting price declines in a more flattish volume environment across the portfolio?

Well, pricing is always a wild card. Our long-term revenue goal is a 5% goal. We actually expect to exceed that here in 2015, in part because of the Wholly brand coming onto Grocery sales.

So in general, if you look at our long-term track record, we've actually exceeded the 5% over the last five years. But that is definitely with some assistance from acquisitions such as SKIPPY and the Muscle Milk acquisition.

So in general, clearly when I look at the grocery store environment I think our perimeter-based items we do expect to be able to grow at that 5% clip. Center of the store, maybe not quite that robust; but we have had investments and acquisitions such as SKIPPY that have added to that portfolio.

And we think Mexican can definitely grow at that pace. Our food service group is done a nice job with that as well.

Our target, not counting acquisitions, is certainly in the 3%, 4% range. And then we have been able to round that up by virtue of finding the right prospects periodically.

All right. That's very helpful; I'll pass it along.

Diane Geissler, CLSA.

Good morning. Hey, I wanted to ask you about the normalized ranges that you provided this morning. It looks as if you've taken down the Grocery Products normalized margin by about 200 basis points; but you've improved your JOTS margin by 200 basis points.

So my question is really, in the Grocery Products segment, how much of the margin reduction is due to the fact that you will be rolling in 100% of the Fresherized Foods? And what percentage is just due to your ongoing outlook for whatever tighter protein markets which impacts that margin, or slower growth coming from the center of the store? Is there any way to quantify for us what's going on with your outlook on the Grocery Products margins?

Well, I can tell you for 2015 our expectation is that the net margin will be kind of equivalent to what you saw in 2014. So what you have there is the watering-down effect of a lot of the Fresherized sales coming in with only half margin being reported, but an expected improvement in terms of -- we said we had some very difficult operating cost challenges during 2014.

And we don't expect those to recur. So all together those two factors should cancel each other out.

I guess I would also point out that if you take away MegaMex you've got a great, growing business with great consumer franchises, but franchises that we're counting 100% of the sales and only half of the earnings -- and after-tax at that in some cases. The core Grocery Products portfolio, not counting MegaMex, we still look to be in the high teens in terms of their operating delivery. So we really don't feel we've seen a denigration in the portfolio; we just are seeing the impact of MegaMex rolling through there in terms of that range we just provided.

Okay, all right.

And I would add that MegaMex generally is growing at a little faster clip than our core portfolio is.

Okay. That makes a lot of sense. Then I wanted to ask about the new plant in China. I think you said bacon, ham, pepperoni, whatever. I am assuming that is going to be under a branded Hormel brand.

I guess if you could just -- a few more details about what your strategy will be in China. Do you expect to open retail outlets? Do you have partners there who will be providing the sourcing materials? Can you just give us a little bit more clarity on what your plans are when that plant opens in 2016?

Sure. Right now we have three plants in China. One of them is a SKIPPY peanut butter plant, exclusively for that production and so that will -- we won't count that right now. But our team definitely operates that in terms of the G&A efficiencies of the total operation, and it is a great sales vehicle for us in that and other markets.

We then have two other facilities that we have operated for more than a dozen years, one in Beijing and one in Shanghai, that produce these similar refrigerated-based items. Our team has done a very nice job growing that business over time; that's many times a 20%-plus growth trajectory.

So as we project forward with the kind of business we have, we needed new plant capacity and so the team has been working on identifying where that should be and how that would roll together.

So that production in terms of the sourcing, for the last several years we buy meat from approved suppliers within the Chinese market. We don't raise hogs ourselves, and we are not a basic slaughterer in that market; but we are confident that we have sufficient meat supplies to meet these growth needs that will go ultimately into that new plant.

Okay, thank you.

Mario Contreras, Deutsche Bank.

Thanks. Good morning. You had mentioned PED briefly. I just wanted to maybe get a little bit more of your thoughts on what you've seen so far, now that we are getting into the early months of the cold winter weather.

And then, how do you anticipate potential impact on profitability if prevalence is greater or less than maybe what you are expecting?

Boy, Mario, this is Jody. That certainly could be a wild card.

What we have seen in the industry is it slowed down during the summer months, as one would expect. The weather seems to be more conducive in the winter when it's cold and damp.

But we've also seen a lot of the producers really increase their bio-security, and I think that will have a positive impact on any further spread of the disease. So our assumption is that hog production should grow in the 3% to 3.5% for the industry as a whole; and that assumes that there is a lot less impact than there was last year on PED.

Okay. And then one additional question if I could on the International segment. I believe you'd indicated your volume was up 6%.

But if I back out the benefit from SKIPPY, China, and CytoSport, is it fair to say that core volume was down? Am I thinking about that right for that business?

I wouldn't want to do the math on the fly; I mean, it certainly was flattish. It wasn't the best quarter either for SPAM, in terms of we had high inputs and in some cases then had some deferred shipments to some of our export markets.

And we had an uneven quarter in terms of SKIPPY. We have a couple markets where it's going great, but a couple others where it receded somewhat.

But overall, the solid double-digit growth on a full-year basis for International last year and we expect strong growth heading into 2015.

Okay. I guess it sounds like maybe you view that as more of a one-off weak quarter with some timing issues, but stronger growth in 2015.

Yes, with the other caveat that I mentioned earlier: that from a margin standpoint International still will be -- SPAM is a major product line, for example, and the inventory carrying costs that they have from the spike in raw materials this summer will still impact them, certainly through Q1. But after that they should be in better condition.

Okay, great. Thank you.

Akshay Jagdale, KeyBanc.

Good morning and happy Thanksgiving. First question is on SG&A. You mentioned you expect an increase next year.

Can you address where you ended up this year? I believe -- came in a little bit less than what you were expecting.

So is part of next year's increase a timing shift? If you can just give a sense as to why this year's SG&A to sales came in lower than what you were expecting, that's my first question. Thanks.

Part of the driver for 2014 SG&A being somewhat lower was the timing of some compensation accruals we had last year but we didn't have this year. As far as 2015, the majority of that increase is really being driven by the increased advertising campaigns.

Okay. Then first, your long-term guidance on margins, very helpful. What time frame should we be thinking of that margin outlook to be?

And you have made a lot of portfolio changes, Jeff. So in general, where your portfolio is today versus where it was five years ago, do you feel generally better about expanding margins longer term as a whole? Or you feel better about the organic growth prospects of this portfolio? Thanks.

I guess we are probably putting these ranges out as reasonable for over the next three to four years. I mean, things can change both in macro conditions and in our business, and so we would want to keep an eye on those and update those as those things make modifications.

In terms of your other question, we certainly hope we've improved the portfolio over time. That has been the goal.

I think it depends on which segment we're talking about as to whether the expansion of margins versus growth is the bigger area of emphasis. Clearly within Refrigerated Foods, that team understands very clearly their mission is to expand margins. They had a very nice year this year in terms of moving upward and expect to hold that in 2015 and grow from there.

In other areas, such as Jennie-O Turkey Store or International, I think those are excellent growth opportunities. So the bigger those two pieces can become of our overall portfolio, the better off we'll be in the aggregate.

When we announced the CytoSport acquisition we conceded that at least on an onboarding basis it was kind of even with Specialty Foods' margins. But we do think that as we get our hands around that business and drive efficiency and growth going forward, that that can start migrating those margins up; and so that was why that range has an upside to it that is above where they are at today.

So it kind of depends on the area of the business.

That's helpful. I'll pass it on. Thanks.

Robert Moskow, Credit Suisse.

Hi, everybody. Just a few odds and ends questions. On Jennie-O, you said that you expected commodity turkey prices to be a little lower. Can you give me some of the drivers behind that?

I thought supplies had been tightened quite a bit. Do you expect supplies to increase?

Secondly, I think your competitor in peanut butter is taking a price cut. Are you going to do the same?

Then lastly, I am planning to visit your offices in January. Any wardrobe recommendations for visiting Minnesota in January?

Boots and a long coat.

All right; thank you for that.

Once you get inside, we will have you well taking care of. The roads are a different story.

No golf outing this year in January?

I might be able to find you a simulator somewhere. I don't know; that would be about it.

So let's start with Jennie-O. We have seen increases in egg sets and poult placements recently. We had a flat year in 2014 in terms of total pounds brought into the system; yet our value-added businesses keep growing and so we will be increasing our supplies somewhat going forward.

The market also seemed like it got an early jump last year when a number of entities had issues with propane and winter weather and so forth, and meat supplies tightened quite a bit. So we're expecting a more normal situation there.

We've taken steps to get our hands on more of the propane ourselves so that we are not quite as much at mercy of the marketplace for that. I don't know what others have done. But overall, they were at very high levels this year and we just -- our best outlook is that they'll still be strong levels next year, but not what we've benefited from this year.

In terms of the peanut butter equation, going into this fall and going into our fiscal year for 2015, we had not been looking at taking further price decreases. The crops certainly have been more favorable lately, and there was an overall decline in cost.

But relatively speaking that decline has not accelerated in recent months. It pretty much was already priced into the crop.

But when the leading share player made their announcement as to their strategy going forward, we huddled our group and really thought about -- okay, what is our reaction going to be to this? We are still pretty early on in the ownership of this brand. We recognize that we are at almost a 2-to-1 deficit when you look at market share in the US.

And we are not really asserting that SKIPPY is a premium peanut butter product. It's a mainstream product. So our assessment was, when the market leader has modified the price, that we want to in essence stay competitive with that price, and so we will be executing a price decrease in the marketplace.

We think that this should allow fewer promotional dollars to be spent in the category because the bases are lower and so the feature that needs to come off of that doesn't need to be as deep. So that will be our execution strategy going forward.

Got it. So that --

And a parka.

The parka, yes. But the price cut, so that didn't really affect your profit outlook for fiscal 2015 for SKIPPY? You think that the promo adjustment will balance it out?

I guess I don't want to give you a one-line item like that. In the aggregate of what we expect for Grocery Products, what we are spending our ad dollars on, etc., we are comfortable with the returns that SKIPPY will deliver in terms of the overall growth we are expecting for Grocery in fiscal 2015.

Yes, okay. All right. Have a great holiday.

Yes, you too, Robert.

At this time there are no further questions.

Okay, we will conclude our call. I'm pleased with the opportunity to announce another record performance this year. This has been the result of the hard work and dedication of a really talented team here at Hormel Foods, and we are looking forward to an even stronger fiscal 2015.

So on behalf of our team I want to wish you all a happy Thanksgiving and thank you for joining us today on the call.

This does conclude today's conference. We thank you for your participation.