Hormel Foods' CEO Hosts 2013 Investor Day (Transcript)

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Hormel Foods Corporation (NYSE:HRL)

2013 Investor Day

June 26, 2013 10:30 am ET


Kevin C. Jones - Director of Investor Relations

Jeffrey M. Ettinger - Chairman, Chief Executive Officer and President

Jody H. Feragen - Chief Financial Officer, Executive Vice President and Director

Steven G. Binder - Executive Vice President and President of Hormel Business Unit

Steven J. Venenga - Vice President of Meat Products Marketing

Donald H. Kremin - Group Vice President of Specialty Foods Group

James P. Snee - Group Vice President and President of Hormel Foods International Corporation

Glenn R. Leitch - Group Vice President and President of Jennie-O Turkey Store

James M. Splinter - Group Vice President of Grocery Products


Ann H. Gurkin - Davenport & Company, LLC, Research Division

Kevin C. Jones

Good morning, everyone. It's my pleasure to welcome you to our Hormel Foods 2013 Investor Day. I want to give a special thanks to those of you who traveled from afar to attend here personally. I'd also like to welcome all of those who are watching via webcast. And I welcome each one of you who have come from out of state to sunny Minnesota, where the sun is almost always shining and it only rains when the corn needs it. And in a few moments, I'm going to talk to you about forward-looking statements and the cautionary about that.

Before I start the presentations, I want to go through a few procedural issues with you. First, please turn off your cell phones or at least mute them, if you do have them on. Second, we will have an opportunity for question-and-answer following each presentation. The one exception to that is when Steve Binder and Steve Venenga jointly present on Refrigerated Foods. We'll wait until both of those 2 gentlemen are done before we take questions. And please wait until we get you a microphone before you ask your question. Ideally, you would raise your hand and we can quickly bring a microphone to you. That way, those who are listening via webcast will be able to hear the question as well as the answer.

We plan to break for lunch at about 11:15. Lunch will be in the ballroom right next door. We will come back at about 12:15, and I'll come up here before we break for lunch and clarify the exact times.

As I mentioned, there will be forward-looking statements made today on our presentations. Please understand that actual events may differ materially. And it's now my pleasure to introduce to you to kick off our Investor Day, Mr. Jeff Ettinger, who's our Chairman, President and Chief Executive Officer. I'd like you to give him a warm welcome.

Jeffrey M. Ettinger

Well, thank you, Kevin, and thanks to all of you for coming to Investor Day. I was trying to remember if this is my fifth or sixth Investor Day I've been CEO of this company. This is my eighth year. And I vividly remember Mike and I were talking about that in the hall earlier. I did at least one when I was the head of the Jennie-O organization that was based here in downtown Minneapolis. But thank you all for coming.

I'm fresh off of a trip to visit our folks in our Asian outposts. We went to first to Tokyo, Japan. I was part of a consumer products international forum there. And then Jim Snee, our Head of International, who you'll meet in a little while, and I had the chance to work with our local team in the market. So the picture on the far left is Chizuru Yukita and Jack Shao, who are our managers in Tokyo. We played hooky from the conference for one afternoon and really wanted to see what our products looked like in the market, where they're showing Skippy. So the complex Skippy transaction that we talked about, Japan is serviced from Little Rock, Arkansas. So those are sales that we already do manage on an active basis and where we manufacture the product.

We then moved on to China, first to Shanghai and met with our local team in Shanghai. We then went to Weifang, where the Skippy plant is. The plant is still owned by the Unilever organization, but they were nice enough to allow us since we were in the market to have a chance to see the plant and visit with the team and start laying the groundwork for bringing that group onboard, which we still expect to happen this fall. We then went to our Beijing plant. Jody's going to have some slide here later that talks about the capital investments we've made in a number of our business operations in the domestic part of the business. This would be an example of a capital where we've supported one of our foreign operations, about a $3 million investment in that plant that has really allowed them to be positioned perfectly for Jim's strategy of really going after the foodservice trade and specific fresh pork retail items.

And then while we were in the market, we obviously go to grocery stores. While we're there, we saw impressive displays in both Beijing and Shanghai of our Hormel branded Refrigerated items. And then we also saw a very nice display of SPAM, this particularly good one here, but really in several stores. And that's a product line that we're in the process of developing in this market.

So overall, our long-term story is about growth. Clearly, one of the less favorable things that occurred over the last couple of weeks were the phone calls back-and-forth that Jody and I had in collaboration with our senior team to really discuss where was the business heading in the short run and ultimately ended up with us putting out the guidance adjustment that we put out last week. We still feel the same level of confidence, however, in our long-term objectives and our ability to meet those. And hopefully when you emerge out of the other end of today, you'll have that level of confidence as well.

We've been very specific and public about our goals of looking at growing our company at least the 5% clip on the top line and a 10% clip on the bottom line. And if you look over the last 10 years from a top line basis, we were about a $4 billion company in 2003, well over $8 billion, we exceeded that last year and clearly we'll be at a higher level this year. And really that growth, as I've talked in past conferences, has come relatively evenly from 3 sources. From doing a better job with our existing product lines, and you'll see some of those efforts today of whether it's a SPAM or Hormel Pepperoni or Cure 81 ham that Steve Venenga will talk about, the items that have been part of our portfolio for many years, but they're still great growing items for us. We grow through new product innovation, and I'll have a specific slide on that in a moment, as well as some of the other presenters. And then we have had the opportunity to grow through acquisitions. So really kind of all 3 of those sources have contributed to our ability to not only hit but exceed that 5% goal over the last 10 years.

And on an earnings basis, our goal is higher. It's a 10% goal. And if you look over the last 10 years, even with the adjusted guidance that we provided last week, we're at about an 11% clip. And we do feel we have the ability to have that kind of leverage, to grow the bottom line at a faster rate than the top line. There's 2 really significant drivers to this. First of all is this moving up the value ladder, enhancing the mix on a regular basis within all the units, emphasizing the products where we really feel we can get better returns for our shareholders. And then secondly, it's doing a better job of taking that growth that you just saw on the sales standpoint but not growing the G&A and the infrastructure at that same clip. Clearly, we have to add folks every once in a while in certain areas to be able to support the business. But as we've doubled the business from a sales standpoint in the last 10 years, we've done over close to doubling what our G&A exposure is against the business.

So I'm going to talk to you at a company-wide level at what we see as some of our growth keys. And then you're going to be able to dive in and get very specific with each of the business units about their own precise strategies. The areas of growth to me that really count on a company-wide basis include: our balanced business model, and we'll talk about that for a minute; our position as a leading branded player in the marketplace; our ability again to grow through innovations and acquisitions, as well as through traditional products; and then we really do feel we have the benefit from a really experienced and outstanding team.

So in terms of the balanced business model, I mean, those of you who have been to past conferences have seen a very similar slide. I do think it's still worth emphasizing that we're a little different in this regard that some of you follow protein companies, some of you follow packaged food companies, some of you follow both. And we're really one of the few that has a very strong overlap into both, that is still deeply in the protein business, when you look at our pork or turkey supply chains but clearly have the packaged foods mentality. And even on the meat side items, as Steve Binder and Steve Venenga will talk about, just because they have a meat source or protein source doesn't mean we don't have a packaged food mindset to that.

We're balanced in terms of retail and foodservice. Over $2 billion of company-wide sales come from the Foodservice segment. We're balanced in terms of having -- yes, we have these deep supply chain investments in pork and turkey. But in other regards, whether it's buying beans for the chili operations or cans or meat, beef for some of our entrée items, either in Compleats or Hormel entrées, those are procured assets. And then we have this kind of dichotomy of being physically very conservative. Jody will talk through those numbers for you. We still recognize in terms of our balance sheet, we're definitely on the conservative side. But we counterbalance that with a culture that has prided itself in innovation for many years.

I wanted to take a minute with this slide and talk to you in terms of the Skippy acquisition because I think it's instructive in terms of both what we saw in Skippy and what we're already enjoying in terms of the benefits of Skippy is in large part because Skippy helps augment this balanced model. All else being equal, if you look at kind of our sales, we're probably a little bit heavier on the protein side, so the 3 big segments -- of the 3 big segments, Refrigerated and Jennie-O, protein and the other Grocery Products group is a significant sized segment. So all else being equal, we were happy to get another grocery-based franchise. We think that added enhanced value for us. However, it was a grocery-based item that brings a new element of protein to the portfolio, a nonmeat protein, which we also think is a good on-trend way to play it.

Skippy, surprisingly maybe for American-based consumers, is actually in both the Foodservice and retail segment, much less so in the States. Although it's in convenience stores and within some of the grab-and-go outlets, you will see the Foodservice side of it. But as we get into the international markets, for example, when we were talking with the team in China, over 50% of Skippy sales in China are to the Foodservice channel.

In terms of this balance of supply chains, we like the fact that in this peanut-based business, we're not going to raise peanuts, we're not going to shell peanuts. So we don't have to have that deep investment that we do maybe in some of our protein-side items. We also frankly like the fact that it's a different commodity. So we're able to spread our bets. As we got into the salsa business with tomato, as we got into guacamole with avocados, now we have exposure to peanuts. And the other, some volatility, certainly has been some in the last couple of years to that commodity. But again I think as we have maybe a few others to counterbalance that against, that actually puts us in a better position.

And then lastly, we really are banking on Skippy being a great innovation platform for our company, both in the U.S. and outside the U.S. Right now based on the portfolio, especially in the U.S., is exclusively peanut butter in a jar. That's the entire product line. Yet when you think of the kind of items that maybe you consume on a regular basis, I mean, peanut butter as an ingredient is an all sorts of items. And so I think our team is going to look at opportunities to take peanut butter out of the jar and find the right products to really push that Skippy brand, which is a well-known, well-accepted brand, into new categories.

One other way that our balanced model plays out is in terms of from a business segment standpoint. You're going to get a great opportunity because you're going to hear from all 5 of the leaders of these 5 business segments today. But as you look at our past track record, I mean, it isn't that every single one of them every single year hits exactly the 5% and 10% goals. There can be different challenges confronting different businesses at different points of time. But over the long haul, we've been in a good enough position. We think we have enough strength going on with our branded value-added franchises that we should, most years, year in and year out, being in a spot, where 4 out the 5 of them are growing nicely and that propels us forward ultimately in the marketplace.

Whenever you're looking at Hormel Foods, there's always -- as I go out on the road, there's always a lot of questions and a lot of dialogue about pork cut even margins and the hog supply and corn and turkey commodity markets and all those things. And they're important. There are certainly things that we have to keep our eyes on, that we have to manage as an organization. But I'll just tell you, I mean, our focus is here. Our focus is on branded, value-added items and developing those items. And it's ever more important than the marketplace to have items with a really strong share position. And we're blessed to have a large number of those items and have brought on yet another one with the Skippy being added to that lineup of great brands in our company.

The other area I want to touch and Steve Bender is going to talk about a little bit more in his presentation about Foodservices, we really view our pitch to the marketplace in the Foodservice channel as a branded pitch as well. Now it's not branded necessarily to you, as the consumer. Very rarely are you going to see a menu mention of a specific product that comes from a manufacturer. But in terms of our true customer within that market, which is the Foodservice operator, the kind of confidence that they can get that we're bringing them items that have great flavor and provide them ultimate convenience so that they can handle labor better within their facilities. To us, that is a branded proposition. And indeed, within the Hormel Foodservice group, it literally is supported by a direct sales force that really adds on to that message.

In terms of the brands on a consumer level, clearly we have an obligation to support our brands in the marketplace through advertising. You're going to get a chance to see a couple of the ads here that are blended within the segments from the other presenters. But I can tell you just in the aggregate, I mean, we've been in that kind of $100 million, a little bit more, spending rate in terms of true media to support our brands. And over the last couple of years, there's been times we've had an emphasis on the total Hormel brand, featuring such items as Pepperoni and Compleats and Natural Choice. This year, we've really kind of honed that message in, and Jim Splinter has that within his segment, about the Hormel Compleats and in particular the Cheesy Pasta line that has led to that group's now having restored growth within that segment. And so one of the print ads you will see here really supports the mac and cheese item in that line.

We've been supporting SPAM from an advertising standpoint with our new character, Sir Can-A-Lot, here in the U.S. and with market-specific opportunities within the international marketplace. Glenn's going to talk to you about the Make The Switch campaign and his latest version of that. But that's really been a great catalyst for the Jennie-O brand, and it's gone -- whether he's featuring burgers in a given year or bacon in a given year, the spillover effect to his entire brand has been very substantial. And I think he'd even tell you it's really spilled over even into the Foodservice and other segments that we sell at, that our customers see that we're supporting that category, that we're giving consumers ideas about turkey in a different way.

Our MegaMex operation actually has several brands, so not only Herdez but La Victoria, CHI-CHI'S, Wholly, et cetera. Herdez probably has gotten the lion's share of their marketing dollars this year as part of that joint venture. And by the way -- and their spending, which is usually around the $10 million range, is not part of our ad line because it's in a joint venture and we end up with the equity and earnings but not the line items there. So that's an added spend that we're involved with to support that product line. And then we're very excited about our new product, Hormel REV. Steve Venenga has quite a bit of that on his presentation, so I don't want to steal his thunder. But that will be an advertising focus for us for the remainder of this year and I'm sure into next year as well.

And then one of the things that we're going to be assessing this summer is Skippy. I mean, when we brought the product line on, we certainly looked at it as, gee, this is an important consumer product item. It's one that maybe have not seen the light of day as much lately in terms of advertising to consumers. And so if we can find the right message point and the right item to feature, I'd certainly would anticipate either next year or the year after that we would have an effort against the Skippy brand as well.

We take pride in growing through innovation. We've had these challenges out there over the past few years. First, it was the $1 billion challenge, where we tried to have $1 billion worth of sales in the 2000 decade by 2009. And we were able to achieve that 2 years early in 2007. So we upped the ante and said, "Okay, we're going to continue to measure these same items, but let's see if we can get to $2 billion with them and new items by the end of 2012." And so we were very pleased when we achieved that as well at the end of last year. And we've now introduced a new challenge.

And I get questions sometimes that, "Okay, you're really counting items that were introduced in, say, 2002 as a new product still as we now head toward '13, '14, '15 and '16." And we really feel that's the right measure because food taste change very slowly. We see success, like when we introduced the party tray. Party trays are still growing double-digits. I mean, they're in year 9. But it takes a while for consumers' behaviors to change. But as you get a good item out there, I mean, you're planting a tree and you're hopefully creating some new tremendous base business, and the innovation that we've enjoyed then since 2000. And we have these great legacy franchises, the SPAMs and Hormel Chilis and Cure 81s and so forth. But our team has now created some of the wonderful new bases. They are all kind of $50 million to $100 million, maybe even more, including our Hormel Refrigerated Entrées, our Natural Choice items, our party trays. Up at Jennie-O, their newer burger items or newer tray pack items, in the grocery division with the newer Hormel Compleats items. So these are really now great, strong platforms for us that add to those legacy and we'll continue with the REVs and others to add to that hopefully as well.

Another way our business has been successful in growing is through acquisitions. I'll often get asked when I'm on the road with all of you, "Okay, what are you looking for in acquisitions?" Obviously, you want to know what I'm looking for tomorrow in acquisitions and we're usually not in a position to obviously be able to talk about that. But from a fanatic standpoint, I mean, I think if you look at the track record, it kind of falls within certain areas. It seemed to me at least to be within sweet spots for the company, within areas that we bring something to the party beyond just our checkbook. And so whether it's the Jennie-O Turkey Store acquisition that really doubled down on that business and really allowed us to add to that within Refrigerated Foods and Steve Binder's portfolio, ranging from Farmer John, a strong brand out in the Western United States, to the Burke pizza toppings that's a great complement to our pepperoni business. We filled out our refrigerated convenience meals platform with our acquisitions of Lloyd's and Country Crock that are sold right there, right next to our Hormel entrées. We're very excited to bring Skippy on board in terms of a traditional grocery item. We've had several Mexican acquisitions, some of which occurred before the MegaMex venture was formed and several which have occurred afterwards. And then our Specialty Foods group that Don Kremin is going to talk to you about today really was built in many ways from acquisitions on top of the legacy private label and specialty products group that we always had at Hormel.

The one thing that was new frankly from this standpoint, and this would be another element, it wasn't on the balance slide, but in the long run, I'd like to see us have more balance, is that the Skippy acquisition was the first of all of these in the last 13 years that brought any international component onboard. And we really would like to continue to do that. We recognize that when we look at our peer group, we're still very U.S.-based. We have an Asia-based focus. Maybe a secondary focus that we're starting to look at a little more would be Latin America. But clearly, Asia is the lead horse there. And so that was one of the things we were excited about with Skippy. We like that it brought a third China plant for us. We like to have local-based production. And the Skippy brand was in over 50 countries.

So it is my pleasure today to be able to not only speak myself because I often come to these conferences and I'm the sole speaker. But that's one of the unique and fun things to me about Investor Day. It's great that we have such a broad audience from sell side, buy side, et cetera, at this kind of an event. And it's also especially fun that I get to share with you the platform here with the full team. And you really can get a better sense of who's running what part of the organization and what are they thinking about the business, and you'd be able to have those questions for them.

So the 4 folks listed on the top of the slide, if you were here at our Investor Day presentation 2 years ago, they were also on the dais with me at that presentation, so they're part of our experienced senior management group. And then there will be kind of 3 new presenters here this year. So Glenn Leitch, running our Jennie-O Turkey Store operations. We were fortunate to bring Glenn onboard for our overall organization when we acquired the Turkey Store in 2001. So he's been part of our organization now for 12 years and has been the leader at Jennie-O Turkey Store for the last 1.5 years. Don Kremin came out of our consumer product sales organization. He headed up our Walmart team in Bentonville before I asked him to come back to the corporate office and take over for Specialty Foods. And he's been running that group for the last 1.5 years. And then lastly is Jim Snee, who was in the pictures with at the beginning and who's running our International organization. Jim came out of a very strong Hormel Foodservice group, has had stints in purchasing and ran the affiliated foods group under Refrigerated Foods before moving over to the International group also about 1.5 years ago and has been leading that group through this year.

So with that, I'd be happy to take any questions anyone has for me at this point. I will give you the preview though that I am back up at the end. And so you have another shot at me then, and so you don't have to feel that you need to jump on it right now. But I'd be really welcoming any questions anyone has.

Question-and-Answer Session

Jeffrey M. Ettinger

Go ahead. And if you would wait for the mic, that would be terrific.

Unknown Attendee

Just on your comment relative to international acquisitions or acquisitions that have an international component, are there specific geographies? You've obviously gotten some penetration into China. But it seems like there's some opportunities as well in South America and some of the other developing markets. I'm curious, how do you rank those as you think about the growth opportunity and what the potential might be?

Jeffrey M. Ettinger

Okay. I think our internal ranking of opportunities of markets would put Asia first. And you're right, it's not just China. I mean, we have a very strong presence in Korea, a growing presence in Japan, including the island of Okinawa. We have a strong partnership in the Philippines. So we have interest in Asia beyond China, though China is certainly an appealing market as well. I think Latin America to me probably would be next. We were invested a number of years ago in Europe. We were a part owner of the Campofrio entity in Spain, really just didn't see that business heading the direction that we wanted it head. We were a minority owner and decided to get out of that. And I haven't seen anything lately that really has me just overly eager to plunge deeply into Continental Europe. We have some business up in England. That was a SPAM franchise, and we've added STAGG and some other items within that marketplace. And then I think for us, the Middle East or Africa are pretty early plays. India doesn't really fit our protein model real well. So I guess, I would steer you toward most likely being Asia, second most likely being the Americas. Yes, please?

Unknown Attendee

Your growth algorithm hasn't really changed over the years. It's been 5% per annum and 10% EPS. But the economic environment in the U.S. has changed. General Mills today reports numbers and U.S. retail sales continued to be kind of stagnant. So when you look at the backdrop, how has that influenced your ability to deliver that long-term kind of growth algorithm? And do you feel like you have to do it more through acquisitions than you normally would?

Jeffrey M. Ettinger

I guess, at this stage, I don't feel any different about it. I mean, maybe the group that would be probably be the most analogous to the situation you mentioned with General Mills or some of the other American retail players would be Jim Splinter's grocery group. So okay, he's got kind of center-of-the-store legacy franchise. But I think as he's going to walk you through, I mean, he's got some really exciting things that we think are going to be able to grow at better than 1% and 2% rates. He has the whole microwave meal section, which is starting to build out a better section, where he's adding to the portfolio. He has Mexican food, which has been growing at a better trend than 1% to 2%. And we've been growing at a better trend than the industry on that. He now has Skippy onboard that we think within the first couple of years, we have a pretty good opportunity just by virtue of the focus we're going to place on it to gain back some share for Skippy. And then ultimately, we do think our innovation can kick in and they can get into some different categories with that brand. And his fourth pillar would be kind of the legacy canned meat items. And we've grown at a better rate than those low single-digit rates with the Chilis and SPAMs and so forth. But even if we kind of bought the proposition that says, "Okay, maybe over time, that's going to be harder to grow those at a 5% clip," he has enough other things going that we think he's going to be able to do just fine against that kind of a goal. Then you look at the other segments. I mean, International, our expectations are far higher than the 5% level. Jennie-O, we think turkey is still a very underdeveloped protein and they're clearly the lead player in terms of bringing these branded solutions. Within Refrigerated Foods, these innovative items of Natural Choices and the REVs and so forth, we think are going to be able to allow us to hit our 5% growth goal. So we really aren't backing off of it nor do we bank on major acquisitions to achieve it. Okay, [indiscernible]? And then Ann, you'll be next.

Unknown Attendee

You mentioned your rationale for the Skippy transaction. And now that you have the assets and you have been working with it, could you be a little bit more specific about what Hormel brought -- is bringing to the table right now as far as -- like I see the overlap with protein. How is that? Is there a merchandising difference in the way that's going to go to market? You look at the operation overseas adjacent. Does that result in superior execution versus -- what's different now for Skippy than it was under its prior owners because of Hormel?

Jeffrey M. Ettinger

Okay. I'll answer that question if I could in kind of -- with the 2 markets. So let's start outside the United States. Jim Snee will have a slide for you that really talks about our ability to leverage the Skippy distribution network and how complementary it potentially can be in multiple countries with the SPAM opportunities. So these 2 iconic American-based brands that are going out there and already have an audience in multiple countries in the world, but we now can be a more important player with those distributors. They already were growing in both cases at high single-digit rates in those markets. And so we really feel that, that combination will be helpful for us. In terms of the domestic market, probably a little less opportunity that when you're going and making that sale of Skippy peanut butter into that aisle, that the spillover effect from the other items has that pronounced an effect. We really think in the short run maybe the bigger opportunity for Skippy in our portfolio is just the attention and focus. We've seen certain markets, for example, in the United States, where even given the share position, we're the #2 brand here in the U.S., that the disparity in terms of phasings between the #1 brand and our brand is far out of proportion to where it should be. And I think a lot of it just had to do with emphasis. I mean, we have brands in our portfolio that we kind of say, "Look, I mean, we're just not going to spend the time on this." And we think that's really where Skippy was in terms of its previous owner. So we've had great dialogue already. We've had some great successes already in terms of getting better placements, getting better features. And so we think that can drive growth for the item here. And Ann was next.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

I just wanted to talk about one of your sales drivers, which is innovation. If you could elaborate a little bit more. As we look forward, do we think about larger platforms, line extensions? And then in the past several years, have you gotten the same kind of return on innovation, the sales lift? Are they meeting measures? Or does it take more kind of rapid pace innovation to kind of keep that momentum going into sales? If you could just comment.

Jeffrey M. Ettinger

Okay. I had a conversation, kind of it in the break before here, where we were chatting about the company. And it was characterized back to me as having had success hitting singles and doubles. And I think that's a particularly apt analogy for innovation. I mean, if you look at our innovation track record, even the $1 billion and $2 billion challenges, there really are no 1 blockbuster $0.5 billion items in there. It's a lot of singles and doubles. It's a lot of just gradually getting our way into these bigger franchises. We created a corporate-based innovation group about 3, 4 years ago that our hope was to complement the efforts of each of the business units that are already looking at opportunities within the area. And I think that group is starting to pay fruit. The REV project that Steve Venenga is going to talk to you about, that emanated from that group. It was looking at a broader consumer insight, moving away from -- it's maybe a little further away from a typical line extension. At some point, obviously, the innovation group doesn't have a P&L. They don't have their own sales force. They have to hand that product off to one of the business units. And I think the handoff's been very successful for the meat products part of the Refrigerated Foods group. And I think REV will be an example for you of an item that we think probably can accelerate maybe a little faster than our previous ones. We certainly -- in terms of speed to market, I will give that credit to our consumer sales organization. And then in terms of how many stores we've gotten in, we've gotten in a lot faster in that 70-plus percent rate already and a lot faster rate than perhaps some of our earlier product launches. So we're hoping to maybe once in a while hit a home run or have a bigger item. But we're not abandoning the singles and doubles strategy that has served us well. In terms of kind of receptivity in the marketplace, I guess, I don't see it being different. If anything, when I look at kind of a longer framework in my career, I remember when I was first up at Jennie-O kind of in the late '90s, early 2000s, to me at that point, it seemed like nobody was innovating. There really just wasn't very much of any interest or excitement in the marketplace that I was noticing. I think a lot of companies have done a better job with that lately. And hopefully, we're one of those. And I think -- I know that the retailers are receptive to what they see that as a growth vehicle if you can find a new way to connect with consumers. So I think we're probably in maybe an even better position in terms of receptivity to innovation than maybe we were 10 years ago.

Unknown Attendee

Jeff, could you talk about Hormel's go-to-market strategy in terms of your distribution? Are you happy with the mix of retail versus Foodservice? Are you focusing on any particular retail channels to build Hormel sales?

Jeffrey M. Ettinger

Okay. I'm very happy with kind of where our position is for the core, kind of legacy, long-term retail operators who've been in the marketplace many years. I think we do quite well with the Supercenter format. On the Foodservice side, we have various approaches to go to market. But I think our teams do a nice job with those. I think the channels that are maybe interesting for the future that maybe we're less developed in and our team is starting to really kind of work on figuring out if we need new strategies, that would include club stores. Do we need to be offering items that are a little more specifically geared to that channel? We have a specific effort in terms of convenience stores that we've now placed on within the Refrigerated Foods group under our Foodservice team. But Don Miguel brought us some foods -- some c-store expertise. They already had significant sales in that channel. And we think this kind of whole grab-and-go, meal-on-a-run mentality lends itself to that segment. And so our REV item, for example, is not only going to be sold in traditional grocery but will be sold in c-stores as well. Other channels would include the dollar channel. That's a channel -- our grocery group does a pretty good job in the dollar channel. We're kind of just getting started selling refrigerated-based items, and they're starting to expand refrigerated presence within that channel. And then one other segment that's kind of a wildcard in this marketplace would be online. Jim and I -- Snee and I were at the global conference I mentioned to you in Tokyo, Japan. And in those markets, I mean, online food is accelerating pretty quickly in China and Japan and Korea and some of those markets. And it's been a harder goal here. I mean, there's been people trying to do these home delivery-based solutions for almost 20 years now. Are we at a turning point? Amazon's starting to do more with it. I think it's still a little problematic maybe for the refrigerated or produce space items. But for shelf stable items, there are potential opportunities with that. So that would be another channel, I think, we need to learn more about.

And maybe I'll go ahead and introduce Jody Feragen. As I said, I'll certainly be available at the end of the presentation as well if you think of other questions. But thank you for your attention.

Jody H. Feragen

Good morning, and welcome to balmy Minnesota. You never would figure it'd feel like the tropics when you come to the Twin Cities. But we're delivering that for you today.

I thought we'd start by talking a little bit about where we ended the first half of our year. Our sales were 5%, certainly hitting on target with the goals that Jeff talked about, really driven by sales increases in 4 of our 5 business segments. Grocery was led by SPAM and Compleats. We had a little bit of a dip in the Refrigerated Foods area as they had lower harvest levels, coupled with exiting a low-margin feed business. Jennie-O was able to deliver year-over-year results by having sales increases in all 3 of their value-added businesses: retail, Foodservice and deli, which more than offset the lower commodity sales. As far as Specialty Foods, they continued to deliver, and then we saw excellent results in our International area driven by exports of SPAM as well as fresh pork.

From earnings per share, we were even with last year. Certainly, 4 of the 5 business segments again delivered with them able to offset the reduction that we saw in Jennie-O, really driven by the lower commodity prices, as well as higher grain costs. And in those earnings also included about $9 million of nonrecurring costs related to the acquisition of Skippy. As Jeff indicated, we had lots of conversations a couple of weekends ago regarding where the business was at. And we really felt it was important that we give you the current view of our business today. So last week, we reduced our guidance from $1.93 to $2.03, down to $1.88 to $1.96, really driven by major factors within the Refrigerated Foods segment. We're seeing lower-than-expected pork operations results, coupled with higher input costs, and then some softness in the retail demand area.

As Jeff talked about, we will have Steve Binder and Steve Venenga up here to talk about those impacts. Our expectations have not changed for our Grocery Products segment, for our International segment. We do see them delivering extremely strong results this year. We see improved -- our expectations haven't changed for Jennie-O to see improvement in their business as we get towards the end of the year. And then as we talked about on the second quarter call, specialty will be challenged with the loss of the SPLENDA business. But that was included in our previous guidance. So we are moving forward.

Hormel has consistently generated strong free cash flow. The past several years have been down a little bit from 2009, really related to inventory levels and higher valuations. But we continue to expect that will generate cash flow in those levels. So the question is always, "What are you going to do with cash on your balance sheet, Mrs. Feragen?" Our cash flow priorities really haven't changed. We want to invest in our business. And certainly, you're going to hear about a lot of opportunities that we've taken advantage of to invest in our businesses. From an internal perspective, we invest through acquisitions, as Jeff had indicated. A certain portion of our growth in the past few years has been driven by that. And then we also have a commitment to returning cash to our shareholders through dividends and share repurchase.

As far as internal investments, a lot -- it really starts with our strategic planning processes. The businesses get together, decide how they're going to meet our 5% and 10% growth goals. And then do we make those investments internally? Or are we going to go and look on the outside for an investment that would fill that niche? Some of those investments that we've made internally, and you'll hear more about them today, we've put in a line to do the FIRE BRAISED Meat that our Hormel Foods refrigerated Foodservice group sells. We've invested in new technologies that enabled us to launch Cheesy Pasta Compleats. Obviously, REV has been a great, new excitement for the company and we've invested internally to get that line up and going. And then we've added capacity for Jennie-O in the fresh ground turkey area, as well as some improvements in the turkey bacon side. So great investments, just a small sampling. Jeff also talked about international opportunity that we took in investing in Beijing.

Not to be redundant with what Jeff said about acquisitions, but beginning with the turkey store acquisition in 2001 up through our Skippy acquisition more recently, we've invested over $2.5 billion in buying businesses that fit. What we look for when we're considering acquisitions is really what's the category, what's the growth trends, what's the category look like, and then what's the market share. We want to be #1 or #2 in those markets. Can it meet our growth hurdles? Can it meet our margin hurdles? Does it provide us an opportunity to get scale, scope or maybe a technology or a skill level that we don't have internally within the company? And then what are the synergies that we can bring? And how can we execute on integration? I'm pleased to tell you that as we've indicated before, we're extremely pleased with how Skippy has rated on all those factors.

We also return cash to our shareholders. And certainly, the legacy of 47 years of consecutive dividend increases is unparalleled and the increases in the last 5 years have been at a 13% compound annual growth rate.

We've returned nearly $1 billion in the last 5 years to our shareholders through the dividends, as well as opportunistic share repurchases and it's about delivering results, but also being wise stewards of the capitals that our shareholders entrust us with. So our goal is to have our return on invested capital be on the top quartile of our packaged food peers. And we're certainly hitting on all those targets as well.

Total shareholder return, Hormel, over the past 5 years, has delivered shareholder return in excess of the broader market, as well as our packaged food and meat peers. I think what you're going to hear today from our business unit leaders will give you the confidence that we will continue to deliver results that will generate those type of returns going forward.

And with that, I would entertain any questions.

Unknown Attendee

Could you just clarify for me what is -- what's your thought process for the lower end of the range versus the higher end of the range? What's built in, in particular with your pork cutout margins? Just trying to get a handle on that because I think the pork margins have actually snapped back a bit this week. I'm just trying to understand how conservative your guidance is.

Jody H. Feragen

If I could ask you to hold that question until Steve and Steve have made their presentations? And if you don't get it answered through their presentation, we'll be glad to have a further conversation. But I don't want to step on what some of the things that they're addressing.

Unknown Attendee

And Jody, I was just noticing that to have a goal, to be in the top 25% of ROIC of your peers, it makes sense. But does it mean that you wouldn't make a transformational kind of acquisition that would kind of reset that base, maybe even below your peer level?

Jody H. Feragen

We certainly have the balance sheet to do a lot of things. I would not say -- I would say that, that's more of our longer-term goal. And if we were given the right opportunity that we would make investments that we felt would be able to get us back into that same range. So longer-term goal, that would always be where we'd want to be.

Unknown Attendee

Jody, you highlighted internal investments. Have you made any changes as to how you determine how to allocate capital? Have you made any changes in hurdle rates or expectations or measures you used to determine who gets the capital to invest in innovation or plans or whatever it might be?

Jody H. Feragen

Sure. There's always a certain amount of capital that you need to spend just to keep your operations running efficiently and effectively. And even though they might not have a positive return on investment is the way we look at them, they do often provide us some efficiencies. And then we do put together a capital budget every year, and it's kind of who has the best returns and how can we allocate that capital amongst the businesses, kind of we've modeled that our expectations are that our capital expenditures, without any 1 significant items, such as the new plant that we built and that you could probably be in the same range as our depreciation and amortization levels.

Unknown Attendee

Jody, could you talk about acquisition fire power? How much do you think Hormel can borrow where you're comfortable with and your willingness to do -- to use equity to do a deal? And kind of the size of the transactions you believe Hormel is kind of best suited to do.

Jody H. Feragen

Well, I think I'll start with it backwards and hopefully go to the beginning of your question. We used to be in the mode of doing this smaller $150 million transactions. And I'm finding that those take every bit as much work as the $700 million acquisition of Skippy. So I would see the size go up. I don't know that there's any defined sweet spot from the perspective of looking at our balance sheet. Certainly, we have the capacity, and I know I have some of my bankers in the room here. So I'll be a little bit careful. But we feel like that we have a $2 billion debt would not take us out of the investment grade level, providing it, provides good returns. So I think I answered most of your -- as far as equity, I think right now given today's interest rates, and obviously, those are subject to change. The debt would be a better play, but we'd certainly look at anything if it was the right return.

Jody H. Feragen

Well, thank you so much for listening to me, and I'd now like to introduce Steve Binder, Executive Vice President and President of the Refrigerated -- or Hormel business units, excuse me.

Steven G. Binder

[Indiscernible] this morning to be able to update you on the growth initiatives for Refrigerated Foods. As you look at it, I am going to focus my attention on the Foodservice business, and then Steve Venenga, our Vice President of Marketing for our Meat Products group, will come up and talk about the retail initiatives that we have. And then of course, as was mentioned, I'm going to -- before I get into the Foodservice, I will be talking about some of the challenges that we faced here in our pork operations.

When you look at Refrigerated Foods, the goal here for us in terms of working together is taking our Meat Products, our retail business, working with the Foodservice Group, taking our affiliated group all of the businesses that are in the affiliated business group and our operations group, where our hog production and our live operation is at and getting those units to work together and to optimize the returns on upgrading the raw materials that come off of our harvest operation, as well as improve the overall capacity utilization that we have in those shared assets that we have. And then as Jeff had mentioned, it's taking it and taking the value added, climbing the value ladder with our products and maximizing determine -- in terms of getting the mix shift.

As you look over the results that we've had, the top line has been positive, and we're meeting that 5% target that Jeff has laid out. The bottom line, we've had some challenges on those trends. In 2010, if you look, we benefit, as well as in 2011, some higher, historically, high pork operating margins. 2012 actually came back and hit us in the opposite way when we had historically low pork operating margins.

And so as we look at that business, we're looking in saying, 2013, the current year that we're in, is more similar to that 2012 with regards to having lower-than-expected pork operating margins. And as we look at it, higher raw material inputs for our further processed items.

So let's kind of go over some of the dynamics that we see taking place within the industry that's causing some of those thing. First of all would be pork cold storage. Pork cold storage for the year is up 4%, and it's up 18% over the 5-year average. And the primary reason for that has been the pork exports. Pork exports have a very strong trend, but most recently, with Russia and China's ractopamine certification requirements, we've seen a drop off and more domestic product is shifting on to the -- more product is shifting back onto the domestic market. And that's causing to depress some of the values. And so during the first half, our pork operating margins were not anywhere where we thought they would be in terms of our expectation. The other factor -- and that was one of the factors that led to our change in our outlook. The other factor is the rapid increase that we saw in our -- in the latter part of June here, the escalation of the hog cutout, the hog prices and the cut-out values. We did not expect to see that run up and didn't expect as big a job. We expected a seasonal increase as normally would take place during that time. But once we saw this, it really puts pressure. So the 3 factors that we saw in the change in our outlook, 1, was the weaker pork operating margins that we saw in May; weaker pork operating margins we saw at the beginning of the month; and then the escalation because the escalation of the values has certainly, will impact our further process items, especially in the categories of belly and bacon, as bellies were the big driver of that increase. So as we look at that, this is the reasons that we had, the change that we had with regards to our outlook.

So let me talk a little bit about Foodservice and talk about the Foodservice business and our growth initiatives, focused in on the Foodservice. And we have -- a results pyramid is what we referred to this as, and we missed the slide here. But when you look at the results pyramid for Foodservice, we have a number of things that I'm going to cover off on here. And that would be the focus segments, the high-growth categories and innovation. And this is a balanced approach to our growing our Foodservice business as we go forward. And I'm going to go through each one of these segments.

To give you some perspective, we're turning to Technomic and give you an idea of how the industry is performing in Foodservice by segment. And if you look at restaurants and bars and taking their projections in 2013 would be 3.8% increase. And in 2014, a 4.1% increase in restaurants and bars. That's about 60% of the Foodservice industry.

If you adjust that for inflation, you would have a real growth of about 1% in 2013 and 1% in 2014 for restaurants and bars. And hotel and lodging, you're looking at about the same real growth, about 1% in '13 and 1% in 2014.

So what I want to call your attention to is colleges and universities, hospitals and senior living, which we lumped together as what we referred to as health care. And if you look at those growth rates that Technomics is projecting, you will see that there are almost twice the rate of that end, our restaurant and bar segments. So it should not surprise you as we talk about focused segments that colleges and universities and health care are 2 of our biggest targets that we had.

We also have the convenience channel, Jeff mentioned it, that's a big focus for us as we look at combining our grocery meat and our Don Miguel in terms of the acquisition and really approach the convenience store business and national [ph] Cubs, the emerging, what we target as, the emerging national regional accounts. These may not be the top 10, but these are accounts that are growing and that are on trend. So one of the ways that we do this is kind of a multi-pronged approach. We really do on the colleges and universities and the hospitals, focus on the independently -- independent operations, the independently run Foodservice facilities versus the contract-managed businesses. And when you do that, it gives you a little bit different opportunity as you look at it. And we approach it in a multi-pronged approach. We start at the national level where we're participating in associations like NACUFS and AHF. And we have NACS down there, which is National Association of Convenience Stores. We're working with these national organizations and engaging leadership at this level.

We also approach it from our local direct sales force. So our people that are in on the street target specific accounts that they're working with sampling products and building relationships, so that they can build programs, and that's very, very important to us.

And finally, we're sponsoring what we referred to as in front of the future symposiums. And this is both at the college and university level, as well as the health care level. And what this is, is it's educational opportunity for those independent operations to send their Foodservice directors to participate in an educational form that would be more discussing challenges and doing sharings of best practices. And we're participating and understanding some of those pain points that a number of these operations phase and are able to also develop solutions to those pain points.

Another program that we have is the culinary enrichment and innovation program. And this was an opportunity for Hormel to give back to the Foodservice industry by providing 16 chefs an opportunity to do continuing education. And what we do is we participate and partnered with the CIA, the Culinary Institute of America. And they have an 18-month program where these chefs will participate in a 5-module curriculum and be able to expand upon their education. And then also as we're participating and the CIA is running it and the campus would be on 1 of the 3 campuses for the Culinary Institute of America and the culinary institutes' own chef instructors that are conducting it. But we're participating with this group of chefs and again, understanding some of their challenges, understanding where we, as a company, could maybe address some of those challenges. But on the innovation front, these chefs become a sounding board for a number of initiatives and programs that we have in place that we're looking at trying to develop and get some immediate feedback for them. So this has been a very important program for us in another way that we approach the businesses.

The next level of the results pyramid would be the high-growth categories. High-growth categories -- again, we want to surprise you that a number of these categories are aligned very closely to the focus segments that we're approaching. So you have the hormone Natural Choice product, which is all-natural product, no preservatives and clean ingredient statement really has great appeal to colleges and universities of students participating in their food selection, as well as at the health care level. You have something like always tender natural pork. And this is a great item that again all-natural product, fully cooked, usable in terms of having a lean protein that's juicy and tender and able to fit on the menu, an easy way to menu pork.

Also have the -- and we'll talk a little bit more about old smokehouse. It's been a great platform, we have the original flavor of old smokehouse. We have the applewood-smoked flavor. Flavored bacon is really on trend, and it separates the operator by offering something different. It allows the operator upscale a menu by having a different type of flavor on their menu. And believe it or not, when you look at colleges and universities that are competing with Foodservice operations that are off-campus, where you look at hospitals and nursing homes that are competing sometimes with those other options in the Foodservice. A way of differentiating your menu is extremely important in the Foodservice arena.

And then finally, the Café H, again the unique flavors of pork carnitas, beef barbacoa, chicken tinga, those types of products are really on trend and fit nicely into the college and universities, as well as in the convenience channel for those Foodservice to-go operations.

And finally, the pinnacle of the results pyramid for the Foodservice Group is innovation. And innovation is just -- it's extremely important, it's strategic. And as I laid out what we were doing with the site program, it is using operators to really develop the products that fit and provide solutions within the industry. And we see this as a strategic advantage. We see innovation as a door opening, a door opener because sometimes it's hard to go in and talk about products that have been around a long time. But if you have something new, the operators tend to say, we want to talk to you about it. So one of the items that we're going to talk about is our FIRE BRAISED Meats. And at the National Restaurant show, it is something new. It's something that draws operators in to discuss what new types of items can fit on the menu.

So as we looked at this, there's a number of things that we have done over the course of time. So it's not a one-trick pony. It is a pipeline of innovation that we have been able to bring in meaningful innovation so that you have credibility with the operator, so that when you say you have something new, they know it's new. It's different, it's special, and I said, probably has some application within their operation.

So in 2008, we introduced Hormel Natural Choice, a line of deli lunchmeat. We've expanded that to include bacon and to include sausage. And this has been a great platform, and we'll continue to add items into that.

We had, in 2010, always tender, oven roasted pork. Again pork that's fully cooked, tender and juicy. What's the number 1 complaint on pork? Dryness. When you serve it, it's too dry. Now you're able to menu pork because all you're doing is re-therming it. You're not cooking it. It's already fully cooked. And it makes menu-ing pork, very simple, very easy, doesn't take the culinary skill that would normally -- that would normally be necessary to make sure that pork is done correctly.

In 2012, we introduced OLD SMOKEHOUSE® Pecanwood Smoked Bacon. So now, we have the applewood, and we introduced the Pecanwood Smoked Bacon. And this is an outstanding product, a craveable product that is -- it's just outstanding. It's hard to ignore, it's very impressive. And when you put Pecanwood on the menu, it's different than just saying, "Hey, I have bacon." It says something special, and it also allows the operator to increase the menu price and to get a better return on that because the experience is going to match it.

And finally, FIRE BRAISED. I mentioned FIRE BRAISED we're very excited about this new initiative in 2013 that we've introduced. And FIRE BRAISED is something that when it sounds really simple -- but when we talked to operators, it's one of the things that they wanted to do, but it's very difficult to do within a kitchen, and especially, smaller operations.

So what is FIRE BRAISED? It's taking meat and exposing it to flames and getting those charred notes on the outside and searing in the juice and then we braise the meat until it's tender. And this is a versatile product, can fit anywhere on the menu, hard to duplicate, but has great attraction and flavor. So when you look it, we have a line right now of chicken thigh meat, pork shoulders and St. Louis ribs. You certainly could use your imagination, understand that we could go into a number of different proteins, but this is our first launch of this. And this product, based on the sales rates that we're currently experiencing, will be the most successful launch that we've had in Foodservice. So we're very excited about this category and what it means to the Foodservice Group.

Finally, I want to just talk about the people because all the strategies I talked about could not be accomplished without an outstanding sales and marketing force that we have within the Foodservice Group. And these individuals are results oriented, they are driven. When you have a direct sales force, you have clarity, you have alignment. They know when they get up in the morning, they have one thing to do, and that's sell Hormel products and be out there. And so you have their attention, and they know that delivering the results in our group this year has a theme called, all in. And I can tell you, our sales force is all in. And it differentiates us in the marketplace because of the products that we can deliver, because of the segments that we're focusing on, because of the innovation that we can deliver. The direct sales force is the right way to go to market, and it's very effective with delivering the results.

So with that, I will be back for questions. But I want to bring up Steve Venenga, the Vice President of Marketing for our Meat Products Group.

Steven J. Venenga

All right. Well, good morning, and I want to take our time this morning and walk you through our high-level strategy within Meat Products, which is to be a consumer focused, brand driven, growth-oriented division of both Hormel and Refrigerated Foods.

So this morning, I want to walk you through some examples of how you can see the strategy in action. I'm going to briefly touch on some of our business results to date that Jody referenced. And then at the end, I am going to introduce you to our big new item in Hormel REV wraps, we're very excited about. If you didn't get a chance to try them on the way in, I certainly encourage you to try them on the way out. We think they're fantastic. Hormel REV wraps is one that really embodies this strategy. So I'm excited to get to that portion of the presentation as well.

Jeff mentioned this as well and within Meat Products, we have a portfolio of leading brands. The majority of our items have #1 and #2 shares in their respective categories, which is great. Obviously, that's a good thing for business. But what's exciting for us is if you'll notice within Meat Products, almost all of them with the exception of the exception of our Lloyd's brand, has the Hormel mark. So that's a great common element that we can use to drive consumer behavior. So a big piece of what we do with our consumer promotions, along with our grocery counterparts, is to try to continue to drive people into the franchise based on that strength.

So the results, what we've seen so far is that the strategy has been working. So if you look, we can see over time over the last 5 years, we've been able to get consumers deeper into our franchise. We've got more people buying 2 or more categories, in 3 categories, in 4 categories and even 5 categories. And all those, we've been able to grow households in all these different ways. So that's one way we've been able to leverage our brand strength for growth.

Within meat products, we have a very diverse portfolio. We have a mix of high value and supply chain products. So our high-value items would be our pepperoni, our party trays and those types of items. And then we also have some supply chain products, whether it be retail hams, the behind-the-glass deli hams, some of our retail bacon products. We have quite a diverse mix of product line. So what we want to make sure we do, as a division, is to make sure that we're growing our high-value items faster than our supply chain items. And I'm pleased to report that we've been able to do that over the last 5 years. We've got high-value growth of 7%, supply chain growth of 4%. So a big part of our mission is to make sure that this trend continues going forward. And we're very, very focused on that.

Here's an example of how we use consumer insights with one of our brands to drive growth. And this is one of our legacy brands in Cure 81. Well, about 2, 2.5 years ago, we were starting to notice that consumers weren't having -- our product was not meeting the performance expectations that they had in this category. And likewise, I would tell you that our sales results were indicating that. So we spent a lot of time with consumers that deep dive into the category and really understood the consumers were looking for in the product lines. So if you look at the bullets on the left, you'll see some of the flavored things they were looking for, whether it be a sweeter, smokier ham, maybe a little more fat on the product. And also some things with the appearance that we wanted to take a look at, with the [indiscernible] exterior, less process, less uniform.

So we used these insights and really, we transformed our product, as you can see on the right. Now, I will tell you that the product did enter the era of color before we made the change, I did this for dramatic effect. But you can see, we did really alter the products. So we used the insights, transformed the product and launched it into the marketplace. And since the new product's been in the marketplace with the same level of distribution so far, we've seen a 15% increase in sales on the product line. So it does work. When you listen to consumers, make the change, put it in the marketplace, we've had good results. And this is in the category that's been flat to declining over the past 5 years. So we're very excited for that.

And then the timing of it couldn't have been any better. We launched this new product into the marketplace as we celebrated the 50th anniversary of the Cure 81 brand within Hormel. We augmented this celebration with a few events that you'll see listed up here, what I was happy to be a part of was the one on the top. Each of our Cure 81 labels is signed by a Cure master. And over the past 50 years, we've had 7 Cure masters, 6 which are still living. We brought all the Cure masters to Austin, celebrated the product line, celebrated the success we've had and really, it was a fantastic day. And it just really speaks to the culture within Hormel Foods. It's one of the neatest things that I've been a part of. And I've only been with the company for 17 years, which relatively speaking, isn't very long. So a bit of a rookie, but it was a fantastic event.

So switching gears then to our current business, we do have pieces of our portfolio that are performing very well. And I want to highlight some of those for you today. And all of these fall within that high-value piece of business that I talked about earlier. One is Hormel Pepperoni where we own over half of the retail pepperoni business across the United States. We continue to use consumer insights to drive this business going forward, whether it be the insight that was used to develop Hormel Pepperoni Minis, that's now a very stable part of the portfolio, to use the baseball analogy that we talked about earlier. It was probably a double, which is fantastic, and it's now established itself.

We continue to use the consumer behavior around the impulse purchase of the buying [indiscernible] around this product line to develop secondary displays and to continue to drive our business going forward in that way. So Pepperoni is a very healthy part of our business.

The second would be Hormel party trays. So this is using the insight around casual gatherings that there's a need for consumers, have a lot of these casual gatherings where parties just happen. It happens in our office all the time. Every time we put out a party tray, there's always a gathering of people. It's also using the insight that consumers are looking for convenience to some extent. So we've taken something that's relatively difficult to do in a hassle. And we've made it easy for consumers, and that continues to be the case. We've grown this business with core item distribution gains. We still continue with our seasonal party trays, seasonal promotions. We actually have a snack tray, which you'll see out in the lobby. It's a smaller version of the party tray. We've been able to ramp up distribution on that item that's fueling part of this growth. And then lastly, we want to leverage this insight around casual gatherings into a line of dips that we're launching this fall.

The third would be our Natural Choice lunch meat. So this is our offering that was developed around the insight and the desire that consumers have for all natural, no preservative lunch meat, and this item continues to perform well. The growth has been fueled by again, core item distribution. It's really carved its way into a very competitive set and has now stabilized, so that's fantastic. And now, we've been able to expand on that with new flavor items and those types of things. We're also seeing some retailers across the country that are getting behind this natural initiative and actually creating all-natural sets, of which this brand is a great fit. And we've been able to share in that success as well.

So while we have a lot of good things going for us, and we still believe our strategies are right and intact, we do have some headwinds. So I want to take a minute and talk about those. The first being Hormel bacon, our retail bacon. Last year at this time, the belly market was trading as low as $85. And as of yesterday, it closed -- closer to $182. So clearly, we've seen a big jump-up in the belly markets recently. And what you're seeing in the category is that the volume has declined over the last 12 weeks to the tune of about 2%. But volume is -- dollar sales is up about 5%. So what you're seeing is pricing action is taking hold in the marketplace right now, which is slowing the volume, and we expect that to continue going forward.

I will also tell you that based on the record highs that we've seen here in the last week or so, that the current retail bacon pricing does not reflect the market levels that we're seeing. So I don't think that the category, in general, is reflecting those high prices yet.

Our convenient meal portfolio consists of our Hormel entrées, our Hormel Country Crock Side Dishes and then our Lloyd's Ribs and our Lloyd's Tub's. This is a category that we just haven't been able to get all 4 of those elements hitting at the same time on the same cylinder as of yet. We've got pieces of it growing, pieces of it declining. It's something that we're working through. But I will tell you that there's a couple of bright spots in this. One is that it's still on trend with consumers. Consumers haven't magically learned how to cook, they haven't magically gone back to scratch cooking. Convenient meals is still a need that consumers have. So we believe we need -- that our products are still relevant. And 2, that the category itself is growing. The unfortunate part is that we're not participating in that growth, but we've had a lot of competitive activity in the set, and we do have plans in place to right the ship and get this corrected.

The last headwind we're facing is in our behind-the-glass deli business. And what we're seeing so far is that our business has been declining along with the category. So we are going to need to get creative with our retail partners and with our product offerings to attempt to right that ship. We will continue to push our Di Lusso Deli brand in our superpremium segment of the Deli category to stem this. And then also we're going to leverage our party tray business wherever we can. These party trays are also sold through the deli. So those are some of the headwinds that we face.

We've talked a lot about innovation this morning already, Steve Binder mentioned it a lot in Foodservice. And then actually, the question came up about the singles versus the home runs and those types of things. I just want to take a minute and kind of share with you how we, a very simple way of how we look at our innovation.

One, we want to make sure we have a balanced pipeline, so that we've got initiatives coming. We've got initiatives that we've started today that might not come to market for another 4 or 5 years. So we want to make sure that we have a pipeline of big ideas that can hit the market and also line extensions. So that's one of the things that we do is make sure we have a good balance in our portfolio.

The next things are consumer insight. So certainly, we want to make sure that we're in touch with consumer needs with anything that we do. So the consumer needs, for example, could be portability, which we'll talk about a little more in the REV launch. We want to make sure that we're really focused in on that occasion, like I referenced the casual gathering occasions. So now that we understand that occasion and the needs within that occasion, we can be very targeted with our innovation.

We want to make sure that we capitalize on trends. Mr. Binder also mentioned the bacon trend right now. If there are consumer trends out there, we want to make sure that our innovation can capture the spirit of what's going on with the consumers.

And then lastly, we want to make sure that we're in tune with our retail partners. So as we go forward with any innovation, we make sure that we're on trend. And then we also make sure that we've talked to our retail partners and make sure that it makes sense for what we're both trying to get accomplished.

So with that, I'll start to introduce you to Hormel REV, which is real meat and real cheese, flat-bread wraps, packed with 15 grams of protein or more, ready whenever, wherever. And I'll talk about that a little bit more in a second.

So I mentioned the consumer need is part of our innovation process. What is the consumer need? Well, the need here is this desire for whenever, wherever food, and it's bigger than ever. 37% of all food consumed has no prep, no mess and takes no time. That's a really big number, 37%. And I think you can evidence that, that's correct when you look at the right, and you see that yogurt and bars are the food of the decade. Eight of the 10 fastest-growing foods are eaten cold. 90% of all snacks are eaten while doing another activity. So clearly, this is on trend with consumers.

Snacking has become the fourth meal location. We've got some proprietary research here where we've taken some pictures throughout our process, and we've got quotes from some young teenagers. One of them says, "If I do not snack, I die. I mean I'm really active between school and sports and I have to snack or I run out of energy." So that's a direct quote from one of our consumers. Snacks are life and death for me. So clearly, we've pulled out some of the more extreme examples here to give you a sense of just how important the snacking occasion is. And since it's become so important, consumers are expecting more out of the snack. We talked about the protein earlier and how protein is becoming an important part of everyone's day.

This slide is based in some of our proprietary research, overlaid with some national eating trends. So I'd start with the, on the right, what consumers tell us and they understand that protein has these benefits. Protein is clean and simple. Protein is affordable health. It's functional nutrition. These are the kinds of things that we hear back when consumers think of the benefits of protein.

And then when you look at the left, you can see the amount of protein consumed by day part. That's in the blue line. And then the red line across the top is some work that we had done internally with a group of dietitians. And what dietitians will tell you is that the protein should actually be balanced throughout the day, which is what you get on the red line. So if you look, you can see a gap between how much protein should be consumed during the snacking occasion and how much is actually being consumed now. So we think that there's a great opportunity here for protein snacks.

We also think there's an opportunity with retailers. So if you look at the lunchmeat case right now, what you find is a lot of products that are on trend, which is fantastic. It's a very highly penetrated category of the store. Right now, what it is lacking is the teen snacks. There's no really teen-targeted snack in the category right now. So what can we do to help retailers grow this section of the store? Well, we think we can fill this gap, help grow the category with this product line by offering this relevant solution that has this proprietary science, that which allows us to offer a complete solution in the wraps. So the wrap itself, once you open it up, it is fully done, it is complete. And this complete solution then offers real ingredients, real protein for the sustaining energy that those teenagers are looking for based on the insight that I showed you earlier.

So the initial feedback that we've gotten so far is that the product line has very broad appeal. When you look at the consumer, our initial bull's eye in a lot of our work was done around these teen males. But what we're finding, as the product's been through test market and now it's been in market for 10 weeks, is that we're finding it has even broader appeal. It's guys, gals, kids, teens, adults. I know we sell them in our corporate office, and there's plenty of non-teenagers eating these items as well. It's just a great, quick, protein-based snack for lots of consumers.

The other thing I'd call out is if you look on the far right, we talked about that there's need for an immediate food consumption and then also this eat and cold. While we've learned that the product line is even more immediate, and it's eaten cold even more than what we expected, which is really opening up some great opportunities. So the occasion while we had targeted maybe this after-school snacks, we're finding that it's being consumed all throughout the day because it is just so easy. So whether it's after a workout, whether they're studying, relaxing, this product line fits wherever they're at. And it's even more affordable than ever. It's one that kids can throw in their backpack and then eat after school. It's on the goal at working class, and the car is kind of taken everywhere. And one additional insight I'd share is we did some work on college campuses, and what the college kids told us was they loved it because it's quiet food. You can eat it in class, and it doesn't wrinkle. You can open it up and no one notices that you're eating it. So some great insights.

The initial results that we have from our sales is positive as well. We've been in market 10 weeks. As we launched this item, we certainly went through the diligence of setting up the sales rates, the targets that we have, the hurdles that we think we see. And everything we've seen so far is positive. Our sales rates are above the average category benchmarks, which is important for us to stay on the shelf, which is fantastic. We have been expanding the category. Where we've had the item, the category has grown. So it's not like we're just stealing shares. So this is a great story with retailers as we talk about expanding the set. Our trial-and-repeat numbers are in line with our expectations. And our repeat numbers have even exceeded our expectations, which is always worrisome when you launch new products, but the repeat is there.

And we have national distribution in place as we plan for our media launch, which I'll shift to you now. We do intend to launch this product with a major media campaign to drive the trial and awareness. And given I just shared with you the repeat numbers are good, we firmly believe if we can get consumers to find the product and try the product, they'll come back and buy it again, which is great.

So the big idea around Hormel REV is for those who are hungry. So what we want to do is take advantage of that double meaning around hunger, that certainly, there's the hunger, the need for food, but also hungry that they have a strong desire or craving to succeed. And clearly, that resonates well with our target audience and quite a few people. You can see an example of our print campaign on the left where it reads, "Hungry doesn't need an audience." And it shows a young man training in the early hours by doing pull-ups on a field goal.

We also have 2 TV spots that we are going to use to launch this product line. We just finished filming these TV commercials last Thursday. I was able to push and get one probably 80% of the way there for today. So I'd like to show that to you. I apologize to the people online. You won't be able to see this. But what I'm going to show you is the field goal spot, and hopefully, you'll get a sense of how we intend to see this brand and create this brand and build this brand with consumers. If you want to show the spot.


Steven J. Venenga

So again, that was a little bit longer than the 30 seconds that we're allowed. But when we finish our editing, we'll have it down tight. So that is the first of the second spot. The second spot is a young lady who aspires to swim to Alcatraz, which should be quite a feat, and Hormel REV Wraps provides the sustaining energy to keep trying. Or it would be if you get a REV Wrap, but it doesn't make you -- make the field goal. It is just gives you the energy to keep trying, and that's the message that we want to make sure we get across.

Meat Products, with our -- within Meat Products, we don't have great distribution across C-Stores, Campuses or Drug Stores. Again, that's just within my division. But this is a product line that we believe can -- as a company, that we can expand to other areas. And we're working very closely with our other business units to make sure that this product line is available and positioned correctly so that we can expand this into other areas and offer consumers many opportunities to buy this product.

So with that, hopefully you've got a sense of our strategies. I did indicate that we have had some short-term headwinds, but we believe that our strategies are right in place, and we can get past those and continue to grow.

So with that, I believe it's question-and-answer time.

Unknown Analyst

So I'm just going to ask you the same question I asked Jody, which is what was baked into the guidance, the reduction in guidance, in terms of the range? And have you seen an improvement, support margin improvement that we've seen this year on a spot basis? Is that something we should consider as we move through the rest of the fiscal year?

Steven G. Binder

Yes. As we looked at the year, as we put our plans together and expectations, we anticipated that pork operating margins would be much better than they are today and what we've seen so far this year. And so the recent change here certainly is an improvement over those pork operating margins. But our expectation is that the general dynamics haven't changed in the industry and that we'll not see pork operating margins that are better than a year ago. So with this impact that we have, we don't see that improvement even with the short-term improvement that we've seen in last week.

Unknown Analyst

Just to follow-up on that, is that a supply issue, your outlook, or demand issue? Because if you look at the supply of hogs, there's plenty of hogs around. So I'm curious, do you think it's just the export demand you talked about?

Steven G. Binder

I would say it's primarily demand. We're seeing the same thing. Supply seems to be in pretty good shape, and we anticipate a stable supply going into the fall months that's coming. So primarily demand.

Unknown Analyst

And then just a follow-up on that, on the demand side, because you did mention that bacon demand at retail, you thought, was a little softer because of the run-up in prices or you anticipate that the Foodservices has been on fire. And I'm curious, is this an issue where when you moved away from pre-cooked bacon, did it change your competitiveness in the bacon space? Or maybe you could elaborate a little bit more on why you're not seeing the benefit in Foodservice?

Steven G. Binder

Yes. I think we are seeing good bacon sales in Foodservice and in precooked as well and the categories and the areas that we're targeting in terms of our business. We're not chasing some lower-margin opportunities that may have some higher volume aspects to it. But our bacon business and Foodservice is generally in good shape.

Unknown Analyst

Can you provide a little more context on that chart that you showed that pork operating margins were so good in 2010 and 2011 and then they kind of went back to it. Would you consider 2012 like a normal margin for pork? And what do you think -- what were the main reasons '10 and '11 were so good? Was it because of a competitor closing a plant which improved supply-demand fundamentals?

Steven G. Binder

Yes, I think that's the key to it, to trace back to pulling some of the capacity out of there. And I would just say general discipline over that period of time. And we haven't seen in the last 1.5 years that type of discipline, and that also goes into our outlook because we don't anticipate right now or don't see or expect that, that discipline is changing for any time in the near future.

Unknown Analyst

And then just a follow-up. You kind of mentioned about deli's prices are -- bacon's prices are going to go up again. Is that -- are you highlighting that as kind of a risk to the year as something that might cause guidance to go to the low end of the range?

Steven G. Binder

That certainly is the short-term impact that we're talking about. So as that's gone up and as Steve has mentioned, pricing hasn't caught up yet. So as we're trying to pass along pricing, those markets have gone through. So those pressures will -- there is margin compression in that bacon category until you can get your prices up to a point. That reflects what the current market is in raw materials.

Unknown Analyst

If you think that supply is there for hogs, why can't we imagine a pork margin that's positive? Because I believe in your guidance, you have negative pork margins baked in for the rest of the year from now until October.

Steven G. Binder

Yes, we don't anticipate that they're going to be any better than a year ago.

Unknown Analyst

So you're saying they're not -- they're just going to be equal to a year ago?

Steven G. Binder


Unknown Analyst

And were pork margins negative from now until October of last year?

Steven G. Binder

No. If you look at the last quarter, actually, it was up fairly good quarter a year ago. So what you're going up against, September was a particular period that was very good. So you had a fairly good back half of the year. And we're just anticipating that we're going to be more aligned with that than exceeding any of those numbers.

Unknown Analyst

And then in terms of pricing, how long does it generally take you to pass along the higher input cost in bacon? And how long do you think it's going to take this time around because of the level of pricing that you have to pass on?

Steven J. Venenga

On the retail side, it generally takes about 30 days for us to get that pass-through. I mean, we've been stair-stepping as the markets have gone up. So we need to keep a close eye on where they -- where we close yesterday and see if it's going to stay there and then we'll need to implement another round of pricing.

Unknown Analyst

I have 2 questions, one on the deli business. If you can talk about the competitive landscape for the deli business, not behind the glass but the packaged business. I know a number of competitors are making package changes and stepping up brand support and innovation. So how are you approaching the marketplace as you look at the next year? And then you talked about capacity utilization across your business. Are there any other areas where you need improvement in terms of capacity utilization?

Steven J. Venenga

So with the deli piece, I assume you're referencing the -- like the semi-rigid pack that you see in the delis. We have been keeping an eye on those trends. And right now, we're really evaluating that with our Natural Choice brand. We think that there's ways to expand that line with some new offerings and potentially take it to the delis as well. And that's something that we're working on right now. But you're right, we have seen a lot of action in that area.

Steven G. Binder

And in terms of utilization, I think some of the categories that Steve mentioned that were a little bit softer are some of the areas where we have the opportunity to improve capacity utilization.

Unknown Analyst

You said bacon has already taken 5% pricing and seen a 2% volume decline. Is the issue here really the -- I mean, is that in line with like -- you said 30 days the pass-through pricing, but is what's going on here that the consumers are a little bit more elastic than they've been historically you're thinking about? Or I mean, how does this compare with times when you've seen spikes in delis before the pass-through pricing, that consumer reaction, how you're thinking about that for the rest of the year in light of the elasticity we apparently are already seeing?

Steven G. Binder

Well, I think it's interesting that you -- we called out bacon is just a phenomenal craze that's been happening this year and has been happening in the past. So as markets have gone up, demand has stayed high, and we need to price it -- we need to price it accordingly. So what's going to happen, I'm not sure. I mean, if you'd asked me this question 5 years ago, I would tell you that the pricing we're at right now, I would have expected a lot more than a 2% volume decline. I would have expected much more than that. So consumers are still interested in bacon, and we'll see how high is higher, I guess, depending on the markets.

Unknown Analyst

So you're saying the actual elasticity is better than you would have saw?

Steven G. Binder


Unknown Analyst

This is a question with regard to the convenience foods category. You said that there's growth in the category but you're not participating in it. So just to expand on that because it's in product lines that you don't participate in, so there's nothing you can do about it or some...

Steven G. Binder

Yes. So when I mentioned the category is growing, as we look at the category, we look at it as the aggregates of the sides, the Lloyd's, the LLOYD'S Ribs or the entrées, so the entire set. So that set is growing. So consumers are there. But with the competitive pressures that we've seen in some of the businesses, we haven't been participating in that growth. So I do believe that our product line is still on trend and right. We just need to get our game in line here and get the growth back on our product lines within the category.

Unknown Analyst

This is kind of an odd ball question because you didn't really bring it up. But that whole rotisserie area has been really hot with the driving chicken demand. And I know you guys did some things on the Jennie-O side. But why couldn't you introduce some of those Foodservice kind of fire-braised products into the front of the store where you're having so much success with the party trays and things?

Steven G. Binder

We can't. I would just tell you, the fire braised is so new. I mean, we just launched it, and our opportunity initially is in the Foodservice area and getting it launched properly and making sure that we have the right ramp-up and everything. But we do see opportunities for that line, and that whole idea of the fire braised, the flavor and everything participating in other areas.

Unknown Analyst

I just wanted to ask about barriers to entry on some of your recent product launches. So if I think something like party trays, it doesn't seem like there would be large barriers to entry. And yet you continue to dominate that category and really have the retailers sort of seething some of their back -- their backroom preparation to you. So just given that, I'm thinking about your REV launch and some of the players that are in that category, in particular like an Oscar Mayer with Lunchables, which is your -- your product seems to be like a product oriented at maybe a little bit older audience. So what gives you confidence? And maybe if you can talk about kind of how you've kept your share in party trays and how that expertise will benefit you in the REV launch? Because like I said, I mean, it doesn't seem like the product is really hard to duplicate, but maybe I'm missing something from a technology perspective.

Steven J. Venenga

Well, I think on a couple of fronts, if you look at the party trays, certainly there's a benefit to being there first, to having the insight, to developing the item, to establishing the product line with consumers and with retailers. That's the biggest advantage that we've had. And we've been able to support it and grow it along the way. So there's really not -- the category is really not big enough for 2 different players. So that's why we've been able to continue to grow that business and stay on top of it. In terms of REV, I think you're absolutely right. It's a competitive category. I'm fully expecting that will have competitive threats going forward. That's not an area of the store where -- or space where consumers are just seated. So we will have a competitive threat. I will tell you that -- I mentioned that we have some proprietary science around the product line that I think will give us a good head start where we can continue to push forward. We do have a patent pending on some of the technology. So we think that can insulate us a little bit. But that's also a big reason why I wanted to make sure I got a commercial edited as close as I could here for you this morning to give you an opportunity to see how we want to create the space for the consumers that we can own.

Unknown Analyst

Just going back to the convenient meals. You said that you trailed competitors. Is it that you're trailing on innovation? Are you trailing on promotions? Could you share with us sort of the plan to fix it and how long it will take to fix?

Steven J. Venenga

I'd say right now, we are -- part of the reason is just fighting for that promotional space. So I think that's accurate. That's been part of it. There has been a lot of competitive entries into the set, which has caused us to look at our business a little bit differently. When you look at the product lines in aggregate, we're still leader in the category. So we're still expected to grow, which we will. In terms of the plans, I'm afraid I can't share with you too much because as I just highlighted, it's a very competitive space. And this fall, we do intend to put corrective action in place. But I'm afraid I can't share with you too many of the details. Anything else?

Steven J. Venenga

All right. With that, we'll bring up Don Kremin, our Group Vice President of Specialty.

Donald H. Kremin

Good morning. I'd also like to extend my appreciation to everyone for taking time out of your busy schedule to attend today's event.

With the limited time I have, I really want to accomplish 4 things. I want to give you an overview of the Specialty Foods Group. I want to kind of update you on that second quarter announcement that we made concerning our SPLENDA business and what our next steps are. And then I want to kind of talk about how we're looking at our business a little bit differently and some of the results that we have been able to achieve, and then lastly, leave with you with how we kind of grow this business long term.

Quick rounding because we're probably one of the least understood parts of the Hormel Foods businesses. Specialty Foods Group consists of 3 operating units: Diamond Crystal, which also has under it, its Diamond Crystal business; Specialty Products, which is a private label manufacture. We produce a lot of private label products for retailers. We also produce ingredients that other manufacturers put in their finished goods. And then we have our Century Foods International business. At Century Foods International is a contract packager primarily focused around nutritional dry mixed products. And the sole intent and purpose of our group's being beyond just driving top line and bottom line growth is to provide the company with diversification against the protein markets and also to help utilize excess capacity within our production facilities. That not only helps us drive our top line and bottom line, but it also helps other parts of the business be more profitable by absorbing that capacity.

You heard Jeff Ettinger talk a lot about the balanced business model. Well, we're part of the balance in that model that makes it work. And over the last 18 months, we've been really kind of thinking about our business a little bit differently than we have in the past. Instead of kind of operating its 3 independent business units that really didn't have a lot of communication with each other, what we're doing now is we're acting as 3 independent business units, but with an intense amount of collaboration against 3 channels of trade: Foodservice, Retail and then Industrial. And Industrial is broken up into 2 businesses for us. It's our Contract Packaging business, and it's our Ingredients business. This has given us an opportunity to leverage our internal scale with our suppliers. It's also made us more important aggregately with our customers. There's been some logistic savings that we have been able to generate here. Our R&D facilities in the past operated separately. We had 3 R&D facilities. We're now talking to each other, collaborating with each other in an attempt to spur innovation and new item growth. And we are very happy with our initial results. We have been able to deliver to the Hormel Foods Corporation 6 consecutive quarters of segment profit growth.

If you look at our performance in fiscal year 2012, it's an all-time record year for our business unit. We delivered over $920 million in revenue, and we generated about $83 million in segment profit for the company. We hit our financial goals. We helped the company diversify against the protein markets. We also helped sweat other assets that help make other parts of the business more profitable.

We made an announcement at the end of the second quarter that our relationship and our contract with Johnson & Johnson to be the exclusive supplier of SPLENDA for the Foodservice channel was going away. At that announcement, we told you that the business would be going away at the end of June. Johnson & Johnson has asked us to continue that contract another month. We've agreed to do that. We have also made a decision to close a plant with the SPLENDA business going away. We will be closing the Perrysburg, Ohio plant at the end of July.

And I also kind of want to clarify that -- our relationship with Tate & Lyle. Tate & Lyle owns the SPLENDA brand for ingredients-based products. Johnson & Johnson, they own the tabletop for SPLENDA. So when you go on a restaurant and you see that SPLENDA in the container, that's Johnson & Johnson. When you go to the supermarket and you buy one of the private label puddings at one of the retailers that we supply and you see on there SPLENDA, that's Tate & Lyle. We have a great relationship with Tate & Lyle. It's a long relationship. We're going to continue that relationship.

It's unfortunate that we were unable to come to an agreement with Johnson & Johnson that was mutually beneficial. A lot has changed in the sugar sub market over the last 10 years. Patents have come off. And with one door closing, we think there's 3 more doors that offer pretty big opportunities to us that are opening. We're going to continue to produce and sell pink and blue sugar subs under our brand, the sweet thing, CAFE' DELIGHT. We're also going to expand our presence in terms of producing private label products for our Foodservice customers. A big opportunity for us, one that we're really excited about is the opportunity not to only be a sugar but a full sugar sub supplier to our Foodservice customers and also our retail customers. Those were things that were not open to us with our past relationship with Johnson & Johnson.

And to give you an idea the size of the price, if you looked at just dry sugar subs within the Foodservice category, and that will include Equal, that would include SPLENDA, it would include Sweet'N Low, it will include all the private label, it's $150 million piece of business. Now if you throw in flavorings, you throw in liquid sweeteners, you throw in natural sweeteners, things that were close to us in the past, that category is a $400 million category, just in Foodservice, not counting the opportunities at retail. So as we look to the future, we think there's a lot of opportunities for us in that space.

I'll talk a little bit about our channel focus. And when we started to look at our business this way, we also determine how we would grow each one of these channels at trade. And when it came to the Foodservice part of our business, we wanted to be more efficient, and we also wanted to grow that business through innovation. Putting all the plants under one person. We have 12 production facilities within the Specialty Foods Group. Those are now under the direction of one person. That's helped us balance our capacity across the Specialty Foods Group. And if we have one business unit that may be at capacity and aligned, we have other facilities that we can continue to aggressively pursue business and utilize capacity within our own space.

It's also, again, put us in a position where we have a little bit more leverage with our suppliers. And to give you an example, last year, just by kind of combining Century Foods, Diamond Crystal and Specialty Products, buying sugar, we were able to bring over $2 million to the bottom line. This year for 2013, we're now coordinating our buys around dairy, sugar. And we think the savings are going to be well over $4 million this year, and we think we can build on that as we start buying other products like gelatin. These are real savings, savings that have been generated just been looking at our business a little bit differently.

And you've seen -- Steve Venenga and Steve Binder talked about innovation, the Hormel Foods Corporation, I mean, we're obsessed with innovation. That's no big secret. It's also the same for us in the Specialty Foods Group. We have a number of customer segments that are really screaming for better-for-you-type items, centered around health and wellness. And we're answering that need. And it's put us in a position where it kind of really differentiates us from some other competitors that we have in our space within the Foodservice category.

Nursing homes and hospitals. We have a line called Hormel Health Labs. I'm sure there's a number of you who don't really know what those products are. Those products are positioned against very specific needs like dysphagia and swallowing disorders. And our primary market is in nursing homes and hospitals. But we're expanding that line to include some high-protein purées in addition to the ones we have, some new items like high-protein shakes that not only are we offering through our distribution channels and our GPO channels, but also, these are items that are going to be expanded through an e-commerce basis with certain retail partners.

Schools. We're collaborating with, particularly around the K-12 area around better offerings for you. We have a line of high-protein puddings that are coming out. We already have in the marketplace that we launched a couple of months ago, some better-for-you dipping sauces that have been met with great enthusiasm.

And then colleges and universities is a big business for us. And just as an example, one of the items that we just launched, we have a very big stuffing in business that we are known for within the Foodservice business. We're coming up with more healthier alternatives and flavorings, and one of the items is the low sodium that we just launched about a month ago that is doing very good for us in the marketplace.

One of the big opportunities we have within the Specialty Foods Group around our channel focus is really in the retail space. We have a very good relationship with our retail customers. That relationship comes from the fact that we do a lot of their private label for them in a number of different categories. And when you do private label and they're putting their name on there, that's a real special relationship. They are now collaborating with us as we kind of showed them what our capabilities are and how fast we can move the market around innovation. They want to collaborate in categories that Hormel has not traditionally competed in to help drive sales in those categories.

We may have been a private label manufacturer in that category, but they're not coming to us and saying, "Hey, can you help us kind of invigorate these categories?" And you know what, we don't think it's a private label. You already got a private label business. We think it's a mid-tier brand. So we're going to be launching some items here in the near future around our capabilities, a lot of those items we're taking over from the Foodservice channel over to retail.

And when you look at the Foodservice business, it's a little different than retail. Speed is very important. We're now using our R&D capabilities to take some of these concepts that are starting out at Foodservice and bringing them over to retail. The benefit to us is the margins are better. It puts us in more control of our destiny versus just being a contract packager and a private label manufacturer. Again, these are our branded business. It puts us in a position where we can continue to deliver sustainable growth to the company.

Another part of our business that's probably not very well recognized is our Contract Packaging business and our Ingredients business. We are going to continue to grow our Contract Packaging business with blue chip customers. And here's my definition of a blue chip customer. A blue chip customer is someone that recognizes our state-of-the-art capabilities, understands our focus around innovation and appreciates our passion for food safety. Those are blue chip customers. We're going to continue to grow that business because they recognize what we bring in terms of value, and they're willing to pay for it.

On the Ingredients end of the business, this is a business that really kind of stems from our meat production capabilities. We're very big in the stocks and broths area. We may be this much of one of our customers' product, but we're an important part of their overall flavoring. We're going to continue to grow that business. That's a business that's been growing very nicely for us from the top line and the bottom line basis. We're going to grow that business organically. We're going to grow it through the right joint ventures. And we're going to grow it through mergers and acquisitions, if the right ones come along.

And the reason we like this business so much is, one, we're in it and we've been successful. It's a big category. It's a growing category. It's got international opportunities for us. And probably the most important reason we like it so much, we think we have a very defendable business model. Our customers recognize that what we give them is value added. A lot of these flavors that we give them are proprietary formulas that we own. We have a customer service element that we work with our customers to help them identify opportunities. We have an R&D team that works with them to help make their end product even better. That gives us a little bit of isolation from competitors. And the businesses that we look at are going to kind of meet that business model. But it is a business we like a lot. It's a growing piece of business, and we're just going after this end with a lot of enthusiasm.

And then organically, here's the way we're going to grow our business with the Skippy brand. A lot of the customers that we supply dairy ingredients to right now have asked us to supply them with peanut butter. There is a lot of concern around having a safe supply of peanut butter. They recognize our track record in safety, and this is an opportunity for us just to expand our current Ingredients portfolio through this very, very recent acquisition. We're very excited about it. And again, we're going to be collaborating with blue chip customers, customers that recognize what we do. It's not the customers that call up and say, "How cheap can you get it to me?" We'll leave those customers for someone else.

In conclusion, we're going to continue to exploit our channel strategy because it's working. And we'll probably even look at other opportunities where we can create leverage internally within other parts of the Hormel Foods Corporation. And how we grow this business, it's like every other business within Hormel. It's an obsessive focus on innovation. Innovation accounts for a lot. Innovation is the reason our customers always want to take the phone call when we call. We're going to continue to focus on being more efficient in what we do. And again, we're going to grow our business with the right acquisitions and any type of strategic partnerships that we think makes sense.

Thank you for your time. I'd be happy to answer any questions. There's got to be one. All right.

Unknown Analyst

A lot of your strategies now seem to really butt against Grocery Products. And so how are you going to design what kind of your retail strategies, what products go into retail and what goes into Specialty Foods, especially with the Skippy product?

Donald H. Kremin

Yes, yes. That's a really good question. And this morning, kind of as we're having breakfast, someone else asked me that. And it's really kind of an opportunity for us. Jim Splinter, that runs our Grocery division. Him and I collaborate quite a bit. And I would think of it this way. Look at the categories that we're the dominant player, and just the canned meat. There's a lot of categories. But canned meat. And I think the approach that we have with -- again, with our retail partners is we got the #1 brand. We can create efficiencies by also doing private label within this category where you can take out other suppliers. There's efficiencies by doing that. So that's where we kind of worked together with our counterparts in Grocery Products, and it's working very well. Now I talk about these new items that I'm coming out with. These are items that -- or categories that Hormel's not currently in. These are categories I would think of like the desert category, I would think of as a savory category. I would look at those type items, and I'm not going to give you any -- very specific items. You'll see them in the marketplace soon enough. But these are -- this is all green space for us. These are new opportunities for us. Again, taking what we do in Foodservice within our Specialty Foods Group and bringing it over to the retail end. Retail end, you can demand a little higher margin. You have the opportunity to kind of promote these items. Again, these are under our brand, too. So not competing with them, certainly collaborating with them. Any other questions? Thank you.

Kevin C. Jones

It's now nearly 11:30. So we're going to break for lunch at this time. And if you could please try to get back here by 12:20, we'll try to get started about that time. So thank you for your patience, and thank you very much for your good questions.


Kevin C. Jones

Yes, if I can get everyone's attention, we'd like to get the show on the road again. Okay. There's a laptop and a red notebook that was left in the lunchroom. If anyone wants to claim that, it will be in the back of the room. And okay, so at this point in time, again, I'll remind you, if you would please, to turn off your cell phones. And we will have a Q&A following each additional presentation. The next presentation is Jim Snee, and I'm very pleased to introduce him. He's a group Vice President, and he is the President of Hormel Foods International. Jim? Thank you.

James P. Snee

Thanks, Kevin. Well, good afternoon, everyone. It's my pleasure to have the opportunity to share with you some of the great things happening in our international business that have contributed to the fine year we're having this year, but also some of the things that are really going to set us up for the future growth that is expected of us. And as great as it is to be here today, it's even better to be back in the country after our 2-week trip. I've had the good fortune of being out of the country 3 out of the last 4 weeks. So even with the rain, even with all the soggy comments, it's good to be back in Minnesota.

As Jeff mentioned in his opening comments, the role for our international business is pretty clearly defined and the expectations are also pretty clear, is that our goal and our mission is to deliver accelerated growth to the Hormel Foods Corporation. The good news is, on the top line, we've been able to do that, both on a historical basis and also, in fiscal 2013.

On the bottom line, our story is much the same. So we've had a 17% CAGR over the last 5 years. And this year, we've been able to even accelerate that growth rate with a 29% segment profit growth year-over-year in the first half of this year.

As Jody mentioned in her opening comments, the even better news is we like the outlook for the second half of the year and think we'll be able to maintain our pace. So how have we been able to do this? If we look at our sources of accelerated growth, on a historical basis, you've heard a lot from us over the years about SPAM exports and pork exports. And those have been wonderful businesses that have done a tremendous job for the corporation, a tremendous job for the international business. But what's really, really exciting is we now have more ammunition.

So as we think about adding the Skippy brand of products, and Skippy gives us another ambient or shelf-stable product category that complements SPAM, which, too, is a shelf-stable product, and really gives us more scale as we're talking to customers and consumers around the globe. And when we think about the success that we have had in China, as we now feel like we've reached the critical mass, and really how we've positioned ourselves for future growth, not only with our organic business or existing business, but what Skippy will be able to add to China as well. So we're going to take a look at all of these sources of accelerated growth with a little deeper dive on the Skippy brand in China.

So as I mentioned, the SPAM brand of products has been a tremendous workhorse for the Hormel Foods International Group. It has truly become a global brand. The results have been outstanding. And we've got a little internal competition within the corporation, and sales outside of the United States are oh so close to exceeding those domestically. And so between the International group and the Grocery Products group, we have this ongoing friendly battle and we haven't yet been able to catch our Grocery Products brethren. But we're certainly not giving up, and that's one of those goals that we -- will be a banner day for us and we know that we've made it.

And what's even more exciting is when we look at these growth markets and our new market, we know that the future is still very, very bright for our SPAM family brand of -- SPAM brand of products. We've got tremendous opportunity in Korea. The Philippines has been phenomenal oh growth for us. Japan, on a smaller base, we've invested a lot of time, effort and money in that market and really feel like we're now well positioned to reap some of the benefits. And we've talked a lot about China over the past year and the introduction -- reintroduction of SPAM into that marketplace. And while we're in our infancy in China, we really feel good about where we are, the traction that we're gaining. You saw the picture that Jeff shared earlier with the SPAM display, and the results have really borne fruit for us.

This year alone, again, it's a small base, but we're expecting to double our business on our SPAM product -- our SPAM sales in 2013. I do want to point out that on the right side here, we have a number of markets that are nurture or legacy segment. And please don't think for a second that we're abandoning those markets or that they're not going to grow. Really, what we're saying here is that they're not going to grow as fast as Korea, Philippines, Japan and China. We're still spending time and effort and money to make sure that they grow as fast as they possibly can.

And so the growth that we've seen with the SPAM brand doesn't happen on accident. We have a formula for success that has contributed to the success that we've had. And so again, it may look pretty simple, but it's important that we execute in each of these steps to make sure that we're able to continue to grow the SPAM brand. We know how important it is to localize the products. In some markets, it might be a lower sodium profile. The example I have on the slide here is a SPAM tocino brand. Tocino is a Filipino way of preparing pork that utilizes garlic and sugar to really give it a blackened flavor when the product's grilled. It's an item that's in the pipeline right now, and we expect to have it launched in the Philippines this fall.

We know how important it is to deliver value, and delivering value goes beyond just the price on the shelf. Delivering value is making life easier for foodservice operators, convenience store operators, any segment that we think SPAM would apply.

The example I have on the slide here is we're in the process of rolling out a pre-sliced SPAM log for foodservice and convenience store operators. In Asia, there's a gastronomical delight that's known as SPAM musubi. And for those of you who don't know what that is, it's a slice of SPAM on a bed of rice, wrapped in seaweed. And it's served throughout Asia in foodservice locations, in C-stores as a grab-and-go item. So again, our ability to add value, pre-slice the product, affords more and more operators to get into the SPAM musubi business. Gaining distribution. If the product's not on the shelf, who's going to buy it?

We had a great success story in Japan and I talked about how we think we're well positioned to reap the fruits of our labor. We've seen the presence of SPAM in Japan go from about 7,000 stores in 2008 to approximately 25,000 stores in 2013. So we're doing the blocking and tackling.

Now obviously, we've got to make sure that we're gaining trial and we're gaining repeat sales, and that's why we have Japan as a core growth market for us. We think there's tremendous opportunity to really deliver on the work that we've already done. And of course, if you don't understand the consumer, what good are you? You have to understand what the consumer wants. So we know, in China, SPAM is all about meaty, juicy satisfaction. We have to understand that. We know in Japan, it's all about versatility. So how many different dayparts? How many different recipe ideas can we give the consumer?

So when we apply this formula to the SPAM brand of products, it's what has allowed us to be successful, but it's the same formula that's going to carry us into the future. By doing that, we'll be able to provide accelerated growth on the SPAM brand of products for the foreseeable future.

So on probably a different marketing level, I had mentioned pork exports as one of our sources of accelerated growth. And so it's, clearly, a different line of products but the formula still holds true. So it's important for us to be able to localize products. And what you see on the slide is a plate of all fall-type items that have been custom-made. And so what that means is working with our customers, with our distributors. They tell us what it is that we can do to localize the product. Is it cutting it differently? Is it the size of the portion? So there's a number of things that we do to make sure that the product meets their local needs because they think of some of these all fall items differently in each market throughout Asia.

This particular plate of products is targeted at a South Korean restaurant chain. So they've come to us working with a distributor to say, "We want these all fall cuts cut a certain way." Sounds basic, sounds easy. But we get a lot of feedback and a lot of positive comments from our customers on our ability to execute time after time after time. That's important.

When we think about delivering value in pork exports, again, how do you do that? It's a commodity business, right? My answer is wrong. That we get credit with our customers, our consumers, our distributors because we listen to them. And this example here, we were the first ones in Japan to really downsize the box to make it more friendly for use in the restaurant trade. This particular example is pork tongues. We went from a 30- to 40-pound box down to a 10-pound box. Guess what? It's layer packed, and again, sounds very basic. Duplicatable? Sure. But the ability to do it time after time the right way, doing it right every time delivers value.

Distribution. A lot of our pork business today, I mentioned South Korea, I mentioned Japan, it resides in Asia. So as we look to the future, are we saturated in Asia? We don't think so. But we want to be ahead of that saturation point. And so Jeff mentioned in his opening comments, really, our next passion is probably Latin America. Geographically, it makes sense. We've got a number of free trade agreements that are coming into play. As duties come to 0, financially, it seems to make sense. Don't have a clearly defined strategy around that today, but it's something that we'll be working on throughout this year and into 2014.

And through all of this, I said it's a different type of product. It's a different business. But we have to understand the consumer. The more we do that, we'll have more happy consumers like this eating front seat in South Korea. This, too, will provide an ongoing source of accelerated growth.

So SPAM, fresh pork, it's been a great history for us. But now we've got this great new shiny toy that we're going to play with and it's called Skippy. This is really exciting. So let me give you an idea here of what our 2012 global Skippy sales are.

In total, $95 million. Don't try to add all the numbers together. Canada is a U.S. export, but I wanted to break that out for you because it is our second largest market behind China, okay? So in total, $95 million, our biggest market is China. We don't own the facility today. We're in the process of getting that done and we still feel like we're on schedule to have it closed by the end of our fiscal year. Beyond that, we're managing the rest of that business today. The integration has been a lot of work, but the integration has been very successful.

Our teams worked hard to make sure that we don't lose one canister of peanut butter business and we feel like we've been very, very successful in this transition.

And what's so exciting about it is we've got a brand that has just so many attributes, so many strengths that it's useful, it's energetic, it's healthy, it's convenient. We mentioned it's a versatile protein. It really helps diversify our protein portfolio. Nut-based spread is a category that's growing all over the world and really creates a number of new opportunities for us, whether it's new markets or being able to market the brand versus trading it.

What does that mean? The ability to truly go out and market to a consumer versus just doing the promotions on price and trying to drive the consumer to your product by pricing it low enough. We feel like there's a true opportunity for us to market the product.

And innovations. We'll follow a lot of what is happening domestically and where appropriate, try to capitalize on that. But we also have our own facility in Weifang. And so we'll be able to do some of our own innovations, but making sure that we're aligned with the domestic brand and making sure that we're not doing anything all that different so that we have the same strategy in focus.

And so what does that mean for us? What are we going to do with Skippy? Well, we think there's a great opportunity to expand distribution. Skippy takes us to new markets. We have some existing markets where we think we can help Skippy and, of course, we need to understand the consumer. We're going to talk about the first 3. We're not going to spend a lot of time on the last one because we've just commissioned our own marketing research, our own work against the brand. What I showed you on that previous slide is kind of what we have assumed through the acquisition. We want to make sure that we validate that with consumers. And so we're in the middle of some marketing research that we'll have completed, hopefully, by the end of this year.

On the distribution front, how do we win? Well, today, we have a base of business. Two items, 40% of our export business resides in 2 items and it's just our regular creamy and extra crunchy product. Both great items, nothing wrong with them, but it doesn't give you the shelf presence or distribution that you need.

Our ability to execute at the retail level will set us up for success. We see a real opportunity to be able to expand flavors, roasted honey nut, reduce fat products, kind of on the health play, and then also some of the innovations around natural, the natural dark chocolate. And as we start to build and round out our distribution, we really see a billboard effect that we can create throughout the world that's going to allow consumers to shop the category and, of course, shop our brand and sell more peanut butter.

Skippy takes us, takes Hormel, to some new markets. Some places that we haven't been, France, the Nordics. We mentioned Middle East. Some places in Latin America. So as we've worked to integrate the business, we've had conversations with customers, with retailers, with distributors, who are excited, one, that the brand is going to be owned and marketed by a company that really is going to give it the TLC that it deserves. But also, that still has a portfolio of products that can expand their offerings. So we've had numerous conversations about, can we sell SPAM? Can we sell Stagg chili? Can sell Compleat into these new markets, into this new distribution points? So still something that's on our -- that's yet to be developed, but we really see this as a key opportunity.

And of course, there are some markets where we're the lead duck. And so our business is bigger in China, Canada, U.K., Japan. We do see that nut-based spreads in 3 out of the 4 are projected to have significant growth. The growth in the Japan market is not exactly what we'd like to see. But we know -- what we do know is that the peanut butter category is highly fragmented, so we see an opportunity to gain share there.

So this is kind of that reverse synergy where we're going to be able to, hopefully, leverage some of our strength in these markets and gain distribution and gain share with the Skippy brand of products. So this isn't a one-way street. We are going to be able to add value to the Skippy brand. That's an exciting piece of business and we really think the future is bright for Skippy.

The other source of growth that I talked about that's really exciting for us and we've had tremendous results in the short term and really feel like we're finally well positioned by achieving the critical mass that we need, is China. So we've got a clearly defined strategic mission. And if you look real closely, you'll see it's focused on foodservice expansion with key account customers, so those are your big multinational QSRs, and then our geographic expansion with distributors, very much what we do domestically. So a core competency to the Hormel Foods Corporation being able to drive the Foodservice business.

On the retail front, we've really kind of retrenched our retail business. When we went to China in the late '90s, we were going to teach the Chinese what Western packaged meats were all about and gosh, darn it, they were going to -- they were just going to eat them and love it. Well, we were wrong.

So although they wanted packaged meats, we couldn't go as far as we thought because of the cold chain is not very well developed. We didn't really have the right varieties that, yes, they want some Western flavors, but they really like Chinese flavors still. So it's taken us some time to evolve our retail refrigerated strategy, but we really feel like we're on track in terms of the products and the place.

We know now that Beijing and Shanghai are the places where we can efficiently distribute product. We've had a lot of success. And of course, as China develops its infrastructure, we'll follow that and make sure that we expand our cold chain distribution as well.

And then, expanding ambient. Obviously, we've had SPAM in China for a few years now, so that's been a key strategy for us. But now adding Skippy gives us another ambient or shelf-stable play that gives us more strength with the retailer and the consumer.

So why Foodservice? I said it's a core competency for the corporation. But if I look here, the consumer. Consumers spending more than ever in China on food away from home. The customer. We've got multinational QSRs chomping at the bit to expand in China. And guess what? Our company performance shows that we're able to execute against that. And so as we look at our key account business over the last 3 years, our distributor business, we're spot on in the strategy. There's the opportunity, we're executing against it and we'll continue to execute against it in the future.

Retail. I mentioned about how -- where we were positioned when we first went into China, how we've kind of rethought that strategy and are we having success against that? Our recent brand awareness study shows that we have gained significant brand awareness in both Beijing and Shanghai. We've done a lot of in-store promotional work, really promoting -- whoops, my apologies -- right here, 120 years. We got high marks from the Chinese consumer for quality, trustworthiness, taste of the product and food safety. Obviously, a critical issue. High marks from the Chinese consumer and so obviously, our efforts here are paying off.

So our business was good in China. We've achieved that critical mass. And now even better news, now we plug Skippy into the mix. And so to give you an idea of the size of that Skippy business relative to our other businesses, when we plug it into our estimated revenue for 2014, it's roughly about the same size of our retail business. So again, it's meaningful business to us.

Jeff mentioned in his earlier comments, of that slice of the pie that is Skippy, 50% of it is foodservice and 50% of it is retail. So again, perfectly aligned with the strategies I showed you on the first page. There is this Foodservice element that we execute against very well and, of course, are gaining the retail strength as well.

So let's dive a little deeper into that, on the Foodservice side of the business. You can see, Skippy takes us a lot more places. So it is more widely distributed in China than we are today. So it takes us to more cities. We have more distributors, and we have more end users or those who are our customers, the restaurants, the hotels, the operators.

You look at this and one of your questions may be, "How in the heck are you going to execute against that? That's a big pill to swallow." Yes, it is. But guess what? We're already working against it. So we're having the meetings with the distributors to make sure that we have the distribution points. We are adding some salespeople to make sure that we've got the sales coverage. We are talking to the key operators to make sure we retain the business. So we're ahead of the curve on the integration process, both Foodservice and retail.

What this slide doesn't show you is the geographical complement that the Skippy Foodservices business gives us. Almost all of their businesses in Southern China, almost all of our Foodservice business today is in Northern China. So now think about the geographical complement, the geographical synergies being able to take Skippy to the north, Hormel Foodservice to the south. It's really a match made in heaven.

On the retail side, we talked about the refrigerated retail that's limited by the cold chain. But on the SPAM side of the business, again, there's more places, more cities, more distributors, more points of distribution. So we're excited about where Skippy can take our SPAM family of products. And you might say, "Well, why aren't you doing that today?" Well, it's like anything else. You have to have a reason to be, right, so we've been very methodical in our rollout of SPAM, making sure that it's controlled, make sure we have the adequate supply chain. Well, today, we can now move a little bit faster. We'll be talking to more retailers. We'll be talking to more customers on the retail front. And oh, guess what? Not only are we selling Skippy, we've got SPAM to sell alongside of it. Gives us that ambient shelf-stable scale that we really have been looking for.

And so the strategic implication should be pretty straightforward. On the Foodservice side, it continues to add to our distribution depth and breadth, gives us that ambient scale, like I just said, with the retailer, gives us more importance when we're talking to the consumer.

And we really have our -- we're starting to form our own Chinese balanced model, if you will, both on the Foodservice and retail side of the business. It's a nice balance. In the Foodservice, we've got our QSR piece and our distributor piece. Under the cold chain, if you will, we've got some frozen and chilled products. We're establishing a nice ambient business. And then, I mentioned earlier, it's a balance between Western style and Chinese style. And so when we add this all up, we really like our position in terms of our balanced model in China.

And so it's an exciting time to be in our international business, to really have these new sources of growth, Skippy, the ongoing development of our China business. We remain very confident and bullish that we're going to be able to achieve ongoing accelerated growth and meet the established expectations that this company has for us. And I hope, based on what you've seen today, you share my excitement and enthusiasm for the international business.

[Chinese] So with that, I'd be happy to entertain any questions anyone may have. Yes?

Unknown Analyst

In terms of building the Skippy brand in China, in particular, what do you see on the margin side?

James P. Snee

I'm sorry, can you say that first part again?

Unknown Analyst

In terms of building the Skippy brand in China, what do you see on the margin side? So obviously, it was a property owned by another company that maybe wasn't as focused on it as you will be. I'm assuming there is going to be some spend, media spend, behind it. You're adding salespeople, et cetera. Could you just talk about what you envision in terms of the margins on that business?

James P. Snee

Yes, I think, as we've taken over that business, the margins are accretive to our existing margins. From a marketing and advertising perspective, it's too early to tell. There is 0 advertising spent historically against it. So we'll do some work, whether it's promoting the product, more effective promotions, not just price. We are adding salespeople. But all of those things are assumptions that we've had into the business. And so when it's all said and done, we still expect the margins to be very accretive to our business.

Unknown Analyst

Do you have any relationship with Unilever that once you actually get the business transitioned, that you can keep the Unilever sales force for a period of time thereafter -- after it closes so you can make sure you'll keep your points of distribution and everything intact?

James P. Snee

Yes, we've had, as part of the deal, we have transition services agreements. And so those are in place for periods of time but can be severed or cut short as soon as we feel confident in our ability to handle the business. And so of the business I showed you that we're handling today, I'm going to say 90% of it right now is under our management. We have a few markets where we're in the process of interviewing distributors and working to make sure the transition is seamless. The same thing in China. But we feel like, in China, we're ahead of the curve in terms of doing some of the integration work. So it's a long-winded answer. The answer is yes, there are still some in play, but we feel very confident we'll be able to be managing all of the business in pretty short order. Okay. Well, oh, you came in under the wire.

Unknown Analyst

I just wondered if you could speak a little bit more on the retail side, of the steps you're taking to transfer that leading edge consumer understanding that you have in the United States into new markets with different taste.

James P. Snee

Yes, I mean, I think one of the things that we have worked very hard on is to collaborate with where we have brand overlap to make sure that we're working closely with particularly our grocery products counterpart. So on the SPAM brand, for example, do we have a global positioning? Do we understand what the brand means? Obviously, we understand what it means domestically, working to understand what it means internationally and perhaps, how do we align those 2 to make sure that we're fully optimizing resources that we're using against the brand. So we are working together on SPAM. And that's been more of an evolution because it was a domestic brand that has taken on more of a global positioning. And so we've kind of had to backtrack to say, "Let's make sure we are truly treating it as a global brand." The Skippy one comes to the company with a global positioning to begin with. And so we're very active in making sure that the international marketing people are working with the domestic marketing people, understanding the consumer insights, how we want to position it with our advertising. Doesn't mean we're going to do everything the same, but where we can, we obviously want to optimize those resources. That's it. Okay. Great. Well, it's my pleasure to introduce Glenn Leitch, who is the President of Jennie-O Turkey Store.

Glenn R. Leitch

Good early afternoon, everyone. It's my pleasure to take you through Jennie-O Turkey Store this afternoon. Our agenda will focus on some industry statistics and I will let you know some things going on. We've got some fundamental goals for our business that I'll take you through, how we win, especially in the value-added sector. Our supply chain metrics, I'll just give you a taste of some of what we do on the supply chain side. And then I'll summarize at the end.

This chart, I think some of you would have seen before, if you are here at the last go-around. It is an indicator of live weight production pounds in the industry. And it's provided about WATT Poultry. It's a busy chart. If you look at the big 3 companies, what you do see is over the last couple of years, there really hasn't been much growth from the large companies. What we have seen is the middle set has been the group that has really been trying and grow this industry. And they're learning a lesson now. In fact, the business, I'll take you through the pricing here in a minute. And so going through some more difficult pricing here in the first half of the year, it's actually resulted in House of Raeford, #9 on your screen here. As announced, they're no longer going to be in the turkey harvest business going forward.

And a key reason for that is the breast meat market has been on a low, you see, versus the last couple of years. Certainly, a lot lower pricing. It used to be $1.65 or $1.70, $1.75 wasn't a bad price for turkey breast. But with grain markets where they're at, that just doesn't work anymore. And so we've been able to weather through that pretty well. This is the down cycle that we're in on the commodity side. And we're rolling through it, not without some hiccups. On the thigh meat side, that we aren't expecting thigh meat to have that same roller coaster it had a year ago, thigh meat typically dips this time of the year. It has a little bit of trouble rolling through Lent. It does a lot of business in Mexico. And so we struggle a little bit there, but we are expecting thigh meat to come back. The breast meat pricing is already showing some improvement. So we do think, from a cycle standpoint on the meat side, that we're now at the bottom of it and we're going to be looking better going forward. Whole birds are a little trickier. Whole birds started to show some increase in the cold storage stocks here about a year ago. We did very well last fall. We cleaned out our stocks. You do need to be done by Thanksgiving. Everything needs to be true. But not all of our competitors were in that same situation. So inventory was carried into this year. That's not good for the industry. And so some have had struggles clearing some of that inventory. The government did have a purchase program in place. That will take some inventory away. We think we'll have to go through this cycle, through this Thanksgiving period before it all gets cleaned up. But as you'll see in a minute with the eggs and poults, there are definitely some reductions taking place. So I believe some companies are working hard to try and get themselves back in line. On the parts and other side of cold storage stocks, here, it has been bad news, but turning more good than bad in the breast meat pricing here and the stocks just reported are now -- or the volume is below a year ago in cold storage. And so that hasn't happened for a while and that's a good trend. And we do expect that trend to continue as the parts and other category gets itself in line.

Live weight slaughter for the year. I have, through April on here, May just came out this week, so it's not on this chart, but we were running about 2% over for the year. The May number's 2% under for that month. And you are now going to start to see some months where you got some pretty significant downward. It won't be perfect. It'll have its bumps along the way, but you're going to see some negative months here and perhaps some very significant negative months.

We like to track the cycle of the turkey industry. I've got this chart actually over 20 years. And we need to be well in front in our bird placements, how we view the industry, how we manage it and charts like this help us do that. It's change in slaughter pounds with same number of kill days, which is an important -- one of the important variables that we need to make sure we understand in this chart and look and see what is happening forward and make some plans on that.

From an average live weight per head standpoint, yes, bird weights are going up. The nice thing about really the poultry sector is that the genetic improvement that takes place is really just natural selection. The best birds are the ones that are placed back in for breeding and they breed the best birds and the best birds and the best birds and you go forward in that direction. And so we do actually get better feed efficiency out of our birds every year and that's important to us. It helps us lower our cost of production, everything else being equal every year. And some choose to raise on a bigger bird, but when feed costs are high, you need to look at whether you just bring the bird to market a little bit earlier and we're doing more of the latter than we are the former.

I mentioned eggs and poults. Some really good news here. I mean, you're seeing things we haven't seen really since 2009, the last negative cycle on the commodity side where we saw some significant changes. When eggs are down, that means hens are down and toms are down and the toms are the bonus meat. The hens are the whole birds. And so that's a really significant reduction, not just from last year, but from 2 years ago.

And on the poult placed side, this is percentage change year-over-year. Based on some growth a year ago, you would expect these numbers would be down, need to be down. But they're down, and they're down significantly. It takes months to ride this through. A ton top can be in that market for 4 or 5 months before it actually comes to market. So you've got to sit and watch and wait a little bit. But certainly, that trend line is very supportive.

I don't want to talk about grain. This is a -- it's a 40-year chart on corn. And we're under no illusions that we're going back anywhere in here, but certainly, it's been very erratic. It's been difficult to manage. We do have a hedging program that allows us to do that. We also have some contracts on the value-added side that are tied to grain markets, and that isn't helpful. But we also say there are 4 things that define us. It's basically food safety, people safety and animal care, low-cost operating, and sustainable value-added growth. And you'll see that borne out in my points here, and that's really what we, as a company, need to focus on, want to focus on every day, manage grain, but do these things really well.

So how do we win in the marketplace? I talked to someone earlier today about turkey chili, and certainly, there's great opportunity there. On the tray pack side, we've had some really nice volume growth. I'm just showing the last couple of years, but the growth really has been steady and consistent. We've grown 34% since 2010. We've now got a 36% market share in that category, and so that is -- it's a category leader. We're a leader in that, and we understand that. We want to be a lot more than that. So I'll take you through some of that more than that. On the brand share of fresh, frozen and processed turkey categories. We've got a 35% share. So beyond tray pack, the total turkey complex, we lead that in aggregate as well.

We do think it's very important from a customer service standpoint that we're predominately thought of as being in a fresh category. You have to do the fresh very well. You can do other things well, but if you can't do fresh well, you're going to be in trouble. And so we have to make sure we're on the shelf everyday for our consumers. You can't want to make a turkey chili at night, stop at store [ph] and not have our product on the shelf. Now we're able to do that at a very good success rate. It's valuable to our customers, and in fact, it's so valuable that since 2009, we did some work and showed our retention rate is 98% with our customer base there.

What are the ways we're able to do that is we call it the logistics fresh super highway. We have -- based on our structure, we've got all of our plants and facilities in about a 200-, 250-mile radius of each other. And that allows us to be able to take raw material from one plant, deliver it to a value-added operation, bring the value-added product back to a final distribution point, which is centrally located. We're in the upper Midwest, so we can hit 48 states very easily, and we actually -- we do go to Hawaii and Alaska as well. So we have it down to an art form. We've been doing it for a long time. It's fresh product, limited shelf life. And again, you have to be there, and you have to be responsive. You have to have trucks on the road several times a week, so stocks can be constantly be replenished. And that's what we do very well.

Innovation, as you heard, is a big -- it's a big one for us as well. We think turkey has lots of opportunity here, lots of different things we can do. I've kind of highlighted for you here just some of the different ways that we view it in our business. I'll show you a little bit more on the turkey bacon in a minute. Our shelf life is something we work very hard on. I mentioned fresh. And the more shelf life you can provide to your customer and consumer, the more that product's going to turn on that shelf and less the stress that they're going to have. From a convenience standpoint, some pre-cooked products that we're providing. Nontraditional markets more into the dollar store category. That's being a big hit for us, and we see real growth there. Some new ideas trying to balance all that carcass, [ph] making sure we've got breast meat at retail. So we're got a breast steak and we actually have some display here this morning. That's brand new out in the marketplace. And then merchandising, how do we get closer to beef? How do we make that comparison a little bit easier for the consumer to be able to see and understand both from pricing and from a health and wellness perspective.

We also like to brand build in lots of different ways. You -- I hope you've seen the World Series the last couple of years. Didn't have the twins in it, but we -- and Walt [ph this year. But we spent some money advertising in that sense. We've been on The Biggest Loser for many, many years now and have a really nice relationship with them. But we also like to do the small stuff. We just started our Facebook operation here just about a year ago, over 225,000 likes so far. We've got 1 million hits to our website every year, and so some of that is very important to us as well, as we try and build that total brand picture.

Purchase intent for us is -- it's really been a growing opportunity for us. And I don't have the 2013 numbers yet for you. We only do this every couple of years, but we've been able to drive up the intent to purchase from 26% to 53%. And so we think that's a really good market for us based on the work that we've done. From a category leadership standpoint, we've grown the brand in category consumption by driving tray pack, new household penetration, 51% since 2007. And the best thing for me about this chart is there's still room on that runway. There's still -- there's a lot more that we can grow when we talk about household penetration.

Food safety and brand communication is also important to us. You can see we've got lots of different thermometers up here and things we're focusing on. We also have -- you'll see it in our commercial slide in just a minute -- cooked to 165, not typically a food Safety message into a consumer product campaign, but we think it's important. We think consumers need to know and understand. They need to feel like they can trust us and have confidence in us, and that's very important.

Some other opportunities for us, growth going forward. The breakfast chub category. You may not think chubs are that sexy, if you will, but to us, they are with a shelf life we've been able to achieve on it. We think that we can compete very well with the red meat sausages that are in that sector. And so far, it's done very well. We have over 40 customers purchasing it regularly.

And we want to be in the fresh ground chubs set as well. I mentioned the merchandising against beef, and this is really important to us. And so we're working hard to try and arrange this and have the retailers work with us. We don't think it will impact our tray pack consumer. We don't think we will steal business from tray pack into chubs. What we really think we will do is we'll convert that beef chub user into a turkey chub user and then maybe one day into a tray pack user. That's -- our research is showing us that there's opportunity for that.

Back to turkey bacon. This is a chart minus the numbers on the far left. But it's a real chart with real trend. The vertical line is when we changed our packaging and changed our formula of our turkey bacon. And we reintroduced it, and we've had some really good success with it. You can see the markers on the right-hand side. The ACV is up significantly. The dollar volume up significantly. So we're very pleased with it. We think it's the best bacon on the market. Our information tells us it is, and so we're looking for more growth there. Now with that as an introduction, I like to show you a spot that's support of that bacon introduction, Wake Up Sleepy Hollow.


Glenn R. Leitch

So what are the results? Well, we have bacon sales that are indexing right now at 42% over a year ago. And the fresh breakfast sausage that I mentioned a minute ago was actually the sales so far this year would make it the fastest start of any new product that we've rolled out in national distribution.

We've got different promotions going on through the year. We do breakfast as you've just seen. We have some grilling promotions as well. We have something prepared for the fall here for Oven Ready coming up. We will be in the World Series again this year. we're going to do it on a much smaller scale with the grain markets, what they are. We thought we had some ability to cut back there. And frankly, I don't think we need to have a major campaign every year to be able to get our messaging through. I think we've been able to resonate very well with consumers.

We're also different things such as Recipe Rehab, as The Biggest Loser kind of winds down as Recipe Rehab may be a better opportunity for us to get with those folks that are really trying to learn how to cook again and how do I cook healthier, and we fit very well into that. But I would also call your attention to some of the work being done with the Hormel family of brands, that we think there is some effect here on in being able to work with them jointly on promotions. One such promotion is Wholly Guacamole. We really like their consumer base. We think it works really well with our product lines. And we're doing everything with them from coupons. We're on their package. They're on our package. Lots of interaction with their consumers and our consumers. And we think there's some really easy work that we can do there that actually will be more advantageous and really help our consumers eat better.

There have been quite a few new product launches in our company in the last couple of years. These are just ones in the retail side of the business. Lots of them here. I won't go through them all with you. We've got everything. If you look from a very specific flavored chub for a certain region of the country that wanted it, and it's doing very well in those markets where we haven't. We've got dollar stores, smaller-sized packages. We've got the turkey breast steak that I mentioned earlier that we really think will help that white-dark mix and be able to produce a flat white meat turkey steak, which is not easy to do. Breast loaf is not flat, but we've done some work, and we can do that. And the Jalapeno Jack turkey burger that you would have tried at lunch. It was a little over done in there I think, but it might have been sitting for a while. But try it again, please do. We really like it. And there will be more white meat turkey burger offerings coming. We think white meat has a lot of opportunity in turkey burgers that really hasn't been explored yet in different flavors as well.

And then moving along to Foodservice and just some highlights there. Net sales growth has been very good in Foodservice. '13's an estimate, but we run on consistently 12% annual growth. We really like it because we're balanced in our sales mix. And there is one area that has been going down. It's intentional, the correction side of the business. And there, it's mostly bid business, and we used to do quite a bit of it years ago, selling baloney into corrections. And so we've been able to grow 12% a year by dropping our corrections, doing a lot more in K-12 schools, a lot more with national accounts and independent distributors. That business is really growing very nicely for us.

And staying on with turkey bacon since that's the theme of my segment today, one of the advantages of you've got this big retail operation going on and you've got to make the switch and people see it and hear it. There's strength in that. And that strength rolls over very clearly to Foodservice. We've had a lot of Foodservice operators say "Hey, I want to try that. And turkey bacon, frankly, years ago, wasn't all that good. I don't mind telling you that. And so we've done a lot with it in the past few years. It doesn't eat [ph] quite the same as pork. It's meant to be different. But we're very proud of it. And we also have a crispy expertise on the Foodservice side, which actually, now is with a couple of major restaurant chains.

A sample of some customer successes so far this year without giving away customers or getting too far into this. We've got a major sandwich chain, which were the lead providers, up 58%, and that big volume, good business, a sitdown breakfast, new bacon item with a chain there. Regional chain in the Southern U.S. has a natural turkey burger that they just -- they were all beef, all about beef. Southern U.S. is big in beef, and yet, we've done some things there. Major K-12, latitude contract. Latitude is a finite based product a spice flavored into the school system, very lean, good for the kids but with a nice flavoring profile, different flavor profile, like Cuban for example. And then 3 all natural products that are especially retailer. They started with 1, went to 2, not they're on 3. So we just -- we knock them off as we go.

Here's another example of some of the things that we're working on. This is with a school dish. You can probably figure out, which one as you what's on the side of the truck. But it's okay. It's -- we've got a great partnership, a long-term partnership. We have messaging we need to get out, that turkey is great in the schools. It's healthy. If kids want to eat healthier and there's lots of dynamic around that, as you know, and so we've been doing our part to try and help get that messaging out.

On the deli side and I hope this makes your mouth water and you find this appealing. It's better than looking at a bowl breast behind the glass. And so we're focusing more on this, store baked types of programs. We can make it really easy or we can make it even easier, and we can do the easiest depending on what level of cooking that you want to try and have in the offering. But the stores like it because it's unique to each retailer and customer. They can move these around and manipulate a little bit and show it in many different ways. It can be sold in any deli. Even if they have a master agreement with someone to provide services to their deli, they can still sell this product in and through. It's minimal labor at the deli, and that's an issue with the delis overall. And it differentiates from the meat department. It's very much a unique look. We also have some very specific ovens that we run this product through that we don't think our competitors can easily duplicate this program.

And rotisserie, we've mentioned earlier, and it's a huge category. And we're just trying to steal some share. We've done a nice job on the split breast side, which is the -- a half breast from a hen turkey. It's part of that, moving up the end pool. And we've also got a turkey pot roast, which is dark meat thigh meat. And I would encourage all of you to try it. It's in the grab and go. Still some issues with some retailers with execution, but those that can execute are doing extraordinarily well with it and they like it because they can set a new price point versus that really tight chicken rotisserie price points that they're sometimes tied to, and they don't want to be.

From a traditional deli standpoint and ACV, you can see we're doing fine. We have 51% ACV next to private label, which we also do some of that business.

Moving to whole birds and trying to move up the scale. The left-hand side is your traditional whole bird. We've got a smoked turkey bag there that we'll have more smoked birds out this year. We've changed how that looks, and we think we're really excited about that product. And then Oven Ready, when you want no fuss, no muss, and you just need to put it in the oven frozen and hope it works, and it'll work. As long as you can set your oven, it'll work.

Effective cost reductions, though, are really important on the hen side. The margins are tough in the typical whole bird business. So we've got to have good things going on with our product reviews and our plant and process flow. We've got really good people in charge of those things. Farms were doing things such as converting from propane to natural gas, which is a cost savings that will accrue then over -- or many numbers of years. And we're in the middle of that process right now.

If we can add value to the hen mix, the margins are significantly better. And so this is part of our charge, and we are doing this. We just need to keep doing it in an aggressive pace. Traditional hen whole bird margins, again, are not very large.

We have lots of tactics. If we're going to have more value-added whole birds and whole bird derivatives. The one I'd like you to focus on is this one. It's a hangtag, which we're going to have on some birds this fall. And so it's got a QR code on there. So it can be scanned by a smartphone. And we're thinking that if the consumer scans it in the middle of July, they might be grilling a turkey. And so what's going to immediately happen is they'll see right on there, okay, grilling a turkey, here's what you can do with it. If they don't want that, they can still move along and go. When it's 24 hours before Thanksgiving, it's going to come up and say, here's you defrost the turkey in a hurry because chances are that's what their issues may be. And so we're really being more consumer focused on the whole birds side. That's just one example of several things that we're working on.

I did want to briefly just mention exports. We've been traditionally very reliant on Mexico and Canada Hong Kong, China. Russia's been in and out, depending on whatever the trade issue of the day happens to be with them. But we put some work into other markets as well. And from 2010 to 2013, minimal to no to no business in the Mid East, Colombia. We keep our acts separate because it's rather unique in its requirements and then, West Africa. But we've been able to grow those markets where we now started to do some business. And yes, it's small, but that's -- Mexico started small, too, in 1991, and has grown exponentially since then. So we do think it's really important. We put focus on it, and we expect better things going forward.

Now the back of the house, if you will, just to understand some of the supply chain and operations side, things that we're doing. Employee count is very important to us that we manage it well. We need to be more efficient, and this would indicate we're doing a good job of doing that.

From a cost neutral standpoint, labor cost per pound, I don't have the exact numbers here for you. Just, we'd like to do that to ourselves. But from a trend line year-over-year on how we stand, the labor costs have been flat, and so we're cost neutral there. So we're happy about that. Overhead costs, in a period of time here, where we've not produced a lot more live pounds our system, it's hard to keep your overhead costs flat but very pleased that we've been able to do that.

Recordable accidents, this is a great chart. It's maybe not, first and foremost, in your minds, but it's very important to us. It speaks to continuous improvement. The value we place on our team members, the idea that if we have a goal, we can get there. The 2013 number that you see here actually is a good comparison to '12, even though we're only halfway through the year because it's built on hours of work. And so it is a fair comparison that you can use midyear. But we're really pleased with our progress here.

Sustainability is part of what we report on every year, and we've done some improvements here with our water usage, long-term trend over time. The numbers on the far right are really from 2012 to '13. The fact they're in black is a good thing, and that means that we're reducing our water usage overall. It's slow and steady and gradual, but it's an important part of where we know we need to be.

And then with animal care, I didn't want to leave the discussion without just a thought or 2 with animal care. We understand what's been entrusted to us and the responsibility that we have. And so we have video reviews of loading. We actually have cameras on all of our loaders, so we can watch the loading process. We've got audits at unloading. We do extensive training before anyone can touch a bird. We've got industry best practices of an NTF that we follow and in fact, help right in some cases. But we also need to make sure we tell our story. And so folks know really more about us and who we are, and we're providing more of that information to our customers and ultimately, to our consumers. And so with that, we've shot 4 different videos of different growers that we have in our company in different areas, different type of growers, and we compile into one 2- or 2.5-minute video that I'd like to show you now.


Glenn R. Leitch

It's still a bit of a work in progress, but we do recognize the need to be able to get that messaging out there, and we're working on that as well. So as I summarize, at the end of all this, we're excited about our health and wellness brand. we're excited about the future, the things that we have in the pipeline. We know we have to be really good at that commodity meat side. We have to be very good at that. If we lose focus on that, we'll have trouble on the value-added side because it will squeeze its margins from the back end if you will. But ultimately, at the end of the day, we're converting that meat into value-added products that consumers want in front of them and help solve their problems with it every night or with their health and wellness needs. And so we're excited about the opportunities head. And that's the end of my presentation, and with that, I would entertain any questions.

Unknown Attendee

I have 2 questions. I was wondering if you could comment on how you're managing the -- what could be a shortfall in feed availability between the old crop, new crop and the U.S. and what seems to be a longer, wider gap than maybe originally expected when we entered calendar '13. And then second, if you'd talk about the sell-in for the fall turkey season, I think that's complete. Are you happy with the sell in the margins to expectations there?

Glenn R. Leitch

No shortage in feed for us. We're fortunate where we're located, and so we'll be fine there. We still have some selling to do for the fall whole bird season. But so far, we're in good shape. I think we'll be fine.

Unknown Attendee

Glenn, you mentioned a number of things you've done to improve the structural margin of Jennie-O over the past, certainly saw that reduction in employee count. But could you tell us where you think the margin has been much, much better the past few years than it was before then and volatile recently? Well, could you give us a sense where an average normal margin you think is right now and how that compares to history?

Glenn R. Leitch

Well, we provided 11% to 15% of the range. Now working through where we're at today, high grain markets, relatively poor commodity markets, and we're ahead of that 11%. So that's a good thing. But there's a lot yet to be written about grain markets going forward. And we certainly need to watch this harvest like everybody else does and then manage that going forward. So I still think 11% to 15% is a fair reasonable range to be in. And we just have to manage through these different variables as well as we possibly can.

Unknown Attendee

And that 11% to 15%, I think, I'm right, like that would imply a little bit less -- as wouldn't as well as a higher level a little bit less volatility in margin than there was, say, in the 2000s. What's driving that?

Glenn R. Leitch

Yes.. Well, what would primarily be driving that would be less reliance on commodity markets. From where we were 10 years ago to where we are today, we're much better balanced. We've been able to, if you will, grow our value-added segment in a faster rate than we're growing our meat pounds into that. And you're very focused on making sure we're balanced in those 2. So even though the breast meat market was a lot, $1.65, we didn't put very much meat on the market at all $1.65. You might have some odd months or things going on where you'd want to do things. But otherwise, we're not a player. And so if you're not a player, you're not taking that hit. You're relying on your value-added business.

Unknown Attendee

Just one last follow-up, are there others in the industry, competitors of yours that have followed this seemly lucrative path?

Glenn R. Leitch

Well, you have to build a brand. And we have clearly outspent our -- I didn't have -- I had a chart, but we were out of time, and it didn't make the final cut. But where we do -- we spent significantly more on our brand, but we also spend money on R&D and development and try and create something that really does have value. And so are others trying to do that? I assume so. I hope so, frankly. Turkey has a lot of run rate left. I mean, there is more progress we can make. And we'll do it alone or if others come along, then okay, they can come, too. Yes?

Unknown Attendee

I want to know if you've looked at per capita consumption rates of turkey in the U.S. and how it's grown. My perception always was that volume per capita is growing faster in this protein than, say, chicken or beef or pork. Have you looked at that?

Glenn R. Leitch

Well, yes, we do follow it. The trend line was very healthy for a long period of time. And it has stumbled a little bit in the past few years. Part of that is you need to be able to export more and grow that export. So there's opportunity. If you can't, then it has to fall back in -- domestically. When it falls back domestically, you get into a negative margin situation like some have been in. And then the industry has to pull back. And so we flatlined a little bit on consumption. Part of the reason also for that flat line is you just think about the total amount of protein that consumers in this environment with higher cost, the total protein purchase hasn't been going up here the last 2 or 3 years. And so long-term trend's still very good, still lots of opportunity, but it has been a little tougher on that on the per capita side here the last 2 or 3 years.

Unknown Attendee

And do you say that it takes about 4 months or so before the impact of the -- of all these lower poults and eggs starts to flow through into tighter supplies and higher pricing?

Glenn R. Leitch

Yes, clearly, from the time you put a bird on the ground, if it's a hen, you figure 12 to 17 weeks. And if it's a tom, you figure 18 to 21 weeks, somewhere in that range. So you're sitting through that period.

Unknown Attendee

Just in terms of the per capita consumption and the consumer actions to the higher prices, I think one of the big criticisms of turkey historically has been the price. In the deli case, it tends be maybe a little higher priced than some other things. And as kind of the leader in the value-added side, can you tell us kind of what your experience has been relative to pushing through some of these higher-cost grains into higher prices?

Glenn R. Leitch

Well, you -- deli is interesting because, at times, the industry over a 10- and 20-year period, has seen higher pricing, seen resistance to higher pricing, lower the quality of the product in the deli and send consumers away. And so we've learned a little bit by experience. And the reality is a well-run deli can have -- can and has consumers that will pay good margin, good dollars for good quality product. But a poorly run deli, it doesn't matter what you want to charge, you're not going to have a problem. And so we aren't as concerned about the price point in the deli. We are more concerned, frankly, with having a good quality product at a fair price and trying to upgrade that deli. That's part of what you see with our prepared foods offering. That's expensive product, and it goes through a special type of oven again, and there's -- it's a long process. A longer cooking cycle. It's more expensive. The retailers that can provide the right deli opportunity do very well with it.

Unknown Attendee

And then just in terms of regulatory issues that are facing the turkey industry, there's a lot of potential for regulation to really add costs, I think, to the system from an antibiotic perspective, certainly, salmonella is a big issue in the turkey industry, especially in the ground product. And I'm just curious how you think about what kind -- what do you concern about? Like what keeps you up at night if anything? You have some processes that others don't. And potentially, how much could that add to your cost?

Glenn R. Leitch

Good question. You said the salmonella word, and that certainly does keep us up at night. That's an important area for us to do well in. I can tell you I was in Washington yesterday talking to the government folks about new regulations potentially coming, making sure they understood the work that we were doing. The cook to 165 that we actually, have and we've embedded that, as you see it in a lot of places. That really is a joint effort with government folks if you will. It's our initiative. We're doing it. We're paying for it. But we said, Hey, we're prepared to do that. We're prepared to be more outspoken. Help you create a consumer understanding of food safety in the marketplace. And so we need to make sure that we manage that. But we've been working on salmonella since 2005. It's not a new initiative for us. We've knocked it down every year. And so we think there's some really good success going there. Raise [ph] about antibiotics will be a longer process. There are already folks looking at that issue, and we use them very judiciously, always under veterinary care. We've got full-time veterinarians that are strictly there for that. So we actually believe we're very well positioned because we have experts on salmonella. We've got expert veterinarians, and maybe you need to have some scale to be able to understand truly in a system how you manage through some of those things. So lots of topics, lots of issues, but we like where we're at.

Unknown Attendee

I'm sorry, just one last one on export because Mexico is such a big market for turkey. What's the potential for retaliatory action on COOL? And have you talked to guys down there? Is that even on the table? Or do you think turkey can get out from that?

Glenn R. Leitch

The relationship we've had with Mexico has been very deeply ingrained over many, many years now. And the advantage that we have over some, perhaps, is that most of the turkey that goes there is for further processing. And so if turkey meat in Mexico employs a lot of people in Mexico. And so when we have had issues in the past, some of our Mexican processors have approached their government and said, "If I shut this plant down, you now have 1,000 people that are out of work." And that usually provides some insight and some help into getting those issues resolved. So we -- yes, there is still a chance, but generally, the partnership is very good. We do a lot of work with their government and our government. Their trade association is with our trade association working on similar issues such as salmonella. So I don't see a big risk there.

Unknown Attendee

When you look at the industry players, you outlined the top 10 players. The bottom 7 players are pretty equally heeled players in terms of size. I think there's maybe 100 million pounds that separate all of them. Some of them have brands, some of them don't. When you look at potential consolidation in this industry and I would assume if you've picked up one of those bottom 7 players, you'd get a lot of commodity business with it as well. What is the potential for consolidation in this business going forward with, really, it looks like it's a lot of potential, but how do you balance the brand versus picking up a lot of commodity business if you were to make one of those acquisitions?

Glenn R. Leitch

Yes. It's a good question. Geographic location is important. Are they tom based or hen based? Do they have a vertically integrated system where they have their own supplier? Are they dependent on someone else to provide eggs or poults to them. The commodity meat that you mentioned, not size in operation, may not be that big of a risk for us, frankly, because we're going to grow, and we're going to need meat to grow. And we still have a little bit of room in our plants to be able to grow. We're not at full capacity yet. We're not that far off, but we have a little bit of room. So those are all considerations that we would look at going forward.

Glenn R. Leitch

Okay, perfect. Now it's my pleasure to introduce Jim Splinter, Group Vice President of the Grocery Products Group.

James M. Splinter

Hello, everyone. It's a pleasure to be here with you today. I'd like to talk to you about the long-term growth outlook for our Grocery Products division. And I was pleased to see that Kevin's theme for today's presentation was building on tradition since we're the division that brings to market these 75-year-old brands, legacy brands like SPAM and Skippy and Hormel Chile. So we do know a thing or 2 about managing and building on tradition.

Within the Grocery Products division, we continue to build on tradition by serving the new American family, and so let me explain. I've been very keen over the years to observe the impact of the redefined American family and how it impacts the go-to-market strategies for our Grocery Products division. Today, consumers and consumer behavior, these lines are blurring, and the boundaries are getting grayer. Gone are the days of these neat and tidy demographic side loads, which was easy-to-dissect and understand consumer needs states and targeting.

The American family structure is no longer the perfect slice of apple pie. And no matter how you slice it, the American family has many flavors, and there's no such thing as conventional anymore. We are an intergenerational, nontraditional, multicultural society. As Marian Salzman writes in her Huffington Post blog, we have nests that are no longer empty as jobless millennials are moving back home with mom and dad. Some families are led by a single parent. Some kids are cheered on at a soccer game by 2 moms or 2 dads, and a new Pew Research finds interracial marriages at an all-time high.

In addition to structural family changes, caste are also changing. Increased access to travel and education and ongoing global migration and shift in food service focus, these are all conspiring to drive more and more interest in ethnic foods. Welcome to the complexities of the new American family.

Now the new American family is also driving 3 social economic trends I'd like to talk to you about: income polarization, generational shifts and ethnic fragmentation. Now I believe that the degree to which food companies understand and position themselves in these impact areas will help determine their long-term growth prospects. So for example, consider the implication to a food company and in an economy where 60% of the households make less than $62,000 per year. And 40% of the household make more than $62,000 per year, but these 40% of the household control more than 75% of the annual household income in the U.S. 2 distinctly different households, the haves and the have notes, both with variant need states related to food. Or consider generational shifts in population, whereby the year 2020, Gen-Y millenials will comprise more than 50% of the U.S. population base. Consider, if you will, the implication to a food company given these growing demand from these consumer groups for immediate consumption foods, single-serve meals and, of course, snacks. And consider the implications, if you will, from food consumption based on ethnic fragmentation where the economic purchasing power of the Hispanic American family by the year 2015 will grow to a size analogous with the 12th largest economy in the entire world or having the same economic purchasing power as the entire country of South Korea.

As new demographic complexities give rise to diversed consumer group, we are increasingly challenged to keep in step with today's consumer, the modern caregiver mom. She's definitely busier than ever in a world where multitasking clearly is the new norm. She's connected. She's getting right with her food choices and going beyond foods that are just nutritious, affordable and convenient. Today's food choices need to conspire and even connect with her, providing her a unique case experience and, even in some cases, help bring her family closer together.

Consider the implications and the opportunities created by this new American family that I'm describing, appealing to inspired, busy, health-conscious moms with relevant products like new Herdez cooking sauces, solving for the most difficult portion of making an authentic Mexican dish, the sauces themselves, thereby, allowing her more time to cook with fresh ingredients. Smaller-sized families or when the eating occasion location calls for a single serve are a perfect fit for new Hormel Chili pour overs. Chili goes on anything like pasta, rice or hotdogs. And we serve the new American family when we engage and connect with consumers in a culturally relevant and sensitive manner, such as the case when we use or does Spanish language advertising or using our new SPAM spokesperson, Sir Can-A-Lot, to educate consumers on how and when to use our SPAM brand. And finally, we serve the new American family when we use integrated marketing communication, such as mobile, Internet and traditional media, all linked in consistency to provide her with relevant and helpful information along her path to purchase.

Today's Grocery Products division is steadily building beyond its legacy heritage brand of SPAM, Dinty Moore stew and Mary Kitchen hash and Hormel Chili by participating in exciting new growth platforms, such as Microwave Meals, Mexican foods and, of course, our most recent acquisition and endeavor, participating in the $2 billion peanut butter spread category with the Skippy brand.

Beyond the organic growth in these consumer staple categories, we are very committed to innovation as you heard in all of the presentation to date. At the core of our innovation is this insight that we possess around convenient protein and how do we fit into the lives of consumers. We know that consumers, more than ever before, consider protein to be an essential part of their diet, from an emotional, as well as a functional perspective. Now this focus and clarity and sense of purpose has allowed us to develop a very robust innovation pipeline of convenient protein offering, such as new SPAM varieties, new microwave meal varieties and the aforementioned Hormel Chili pour overs.

We are also committed to growth through acquisitions either on a direct basis or vis-à-vis our joint venture, MegaMex. Indeed, as depicted on this slide, the Grocery division has been quite active on this front, acquiring brand representing more than $700 million in net sales on an annualized basis. Now this combination of organic growth, acquisitions and a commitment to innovation has positioned our division to meet or exceed the company's growth mandate of 5% top line and 10% bottom line.

Now the vision for Grocery Products division is to be a leader in convenient protein-strong foods. We will fulfill this mission by executing on our strategic imperative against 4 strategic areas of opportunity that we call microwave meals; legacy core brands, which is our SPAM and Chile and stew franchises; MegaMex and the new Skippy brand. In each of these areas, we're very focused on building brand equity, winning with innovation, really focusing in on sales channel development and expanding our distribution point and of course, operationally, maintaining our cost and margin leadership and really looking at how can we fit in these different franchises from an ethnic capabilities perspective and then finally, winning with a great people culture, which is Hormel Foods.

So let's begin by looking at each of these, beginning with microwave meals platform and the Hormel Compleats brand enjoyed a 38% dollar share, the $525 million category. We're very excited to report to you today, the category is once again growing at higher than grocery store average rates, and this is all based on the insights to meet the growing consumer demands for these immediate consumption food that I talked about with the new American family. We need to fit into these meal locations that require very little prep time, consumption time and even cleanup time. And Hormel Compleats is a perfect solution.

Now we are committed to driving brand growth and elevating the overall category, with a focus on new items, as well as advertising. On the new item front, we recently launched 6 new Hormel Compleats cheesy pasta varieties, one of which you had during the launch. And we have such varieties as traditional mac and cheese, spinach and cheese-stuffed ravioli, amongst others. We've also extended the category with hot sandwich filler meats with a line of 5 new trays called sandwich makers, which is a line of meats and sauces that you simply warm and put over bread for a hot sandwich. And we placed 4 different SPAM meal products into limited geographies to help meet the consumers that are looking for more convenient SPAM offering. All these new items have been supported by digital media, in-store marketing and couponing. But in the case of Hormel Compleats, that launch of cheesy pasta was are supported by national levels of advertising support in the form of print advertising.

Now this combined focus on innovation, brand building has driven our household penetration increases for Hormel Compleats. Very pleased to report a 13.4% household penetration rate for our brand, and that is significant when you consider that there are 115 million households here in the U.S..

In summary, our formula for this category of building sustainable long-term growth is to use our brand power in combination with innovation to offer convenient food users new flavors, new meal experiences and expand meal eating locations. We also have consumer insights around how shoppers are shopping the category, as well as insights around how consumers are using the product in their home. And we share these with retailers, guiding them along to help make sure that this product category is efficiently assorted and efficiently merchandised so they can drive even higher profit margins.

Finally, we're in the process of launching even more new items into the category with the SPAM brands with some additional refreshers and then a to-be-announced product launch for Hormel Compleats. And unfortunately, you have to wait for the news to come out in the marketplace, but we're very excited to expand Hormel Compleats, yet again, into the category.

The second strategic growth opportunity area for discussion is our legacy core, consisting of SPAM, Hormel Chile, Dinty Moore stew and Mary Kitchen hash. And I apologize upfront because this next slide might be a little bit busy, but there are really just 2 points I want to take you away from this slide. First, I want you to note the very strong market share position we enjoy within each of these segments, ranging from an 87% dollar share of the market in the canned luncheon meat category, to a 47% dollar share market for the canned Chili category. The second point I want you to take away is note the dollar volume growth within these canned foods categories, center store canned food category, and you're seeing luncheon meat grow at 5% on a compound annual growth rate. Chili had grown at 1% and the hash going at a remarkable 5% growth on a compound and annual growth rate basis, with only the stew category showing some slight decline.

So legacy core brands is a $1.3 billion category and enjoys 43% household penetration levels. So while these comfort food categories certainly are mature, as you just saw on the previous slide, for the most part these categories are indeed growing, consumers are still participating in these categories in a very sizable way. So we will continue to self invest into these branded franchises in the form of the items and advertising directed at occasional users. On the new item front, we are very excited to leverage the fact that 2/3 of Chili is consumed out of the bowl. And we're offering a line of new Hormel Chili pour overs as toppers that goes on pasta, rice or hotdogs. This product is currently in test markets and has proven to be very incremental to the category, and we look to continue testing this product and hopefully successfully launching it into the marketplace in the future.

And we've successfully launched into the marketplace this last year, new varieties of SPAM, bringing innovation to the SPAM core users with a cracked black pepper and a jalapeno variety. We thought these will be just seasonal rotation items but the sales rates were so great and the repeat rates were so high, for the most part, we kept these items on the shelf. And even Mary Kitchen hash, the stated hash category [indiscernible], we've introduced new sausage hash to augment our corned beef hash variety with a lot of fanfare. And Sir Can-A-Lot has proven to be a very effective spokesperson for us on the SPAM advertising front, with all of our brand metrics on the rise such as purchase intent, awareness, baseline sales. These are all positive in the markets that we're advertising our SPAM varieties.

Next, what we'd like to do is share with you a little bit how we at Hormel are focused on the occasional users, how we want to activate these occasional users to get them to purchase on a more frequent basis. So our advertising strategy is really all about creating a dialogue with occasional users with a break the everyday food monotony message about the great taste of SPAM. We really use a matrix of traditional TV spots in combination with digital advertising and even social media to educate consumers and teach consumers how and when to make quick convenient and flavorful meals with SPAM. Whether it's a Hawaiian island chef Roy Choi Facebook post or a San Francisco 49ers Vernon Davis tweet, we are asking SPAM users and even the curious nonusers to join in on the conversation.

Finally, the impish Sir Can-A-Lot provides the perfect foil for our SPAM brand as he, with much bravado, entices us to join his personal quest for flavorful meals. Let's take a look at him in action and see how he's promoting glorious SPAM.


James M. Splinter

We're driving category growth comes from Hormel Chili this past Super Bowl merchandising period. In this case, we once again targeted occasional Chili users with in-store, in-plus purchase-generating displays that you see on the left-hand side. Now along the consumer's path to purchase, we deliver via digital media and Sunday FSI insert recipe ideas on how to use Hormel Chili during this entertaining season with great recipes like our famous chili cheese dip. Finally, we use new products that we'd put onto the shelves during this time frame to really generate even more excitement at the point of purchase. The result, an outstanding Hormel Chili product line grew the entire Chili category during the Super Bowl merchandising period by 4% on the basis and strength of a 15% increase in the Hormel Chili branded sales.

MegaMex is the next strategic growth opportunity area that I want to talk to you about, and I'd like to kind of give you a little bit up background on MegaMex for those of you that aren't aware of this joint venture. MegaMex is a 50-50 joint venture between Hormel Foods and Herdez Del Fuerte, a leading branded food company in Mexico located in Mexico City. Now really, what the shared vision of MegaMex is, is to lever parental strengths and capabilities to bring the spirit of Mexico to every table here in the U.S.

Since its inception in 2010, MegaMex has captured a 4% share of this very heavily fragmented $10 billion Mexican foods category and impressively achieved 30% household penetration rates. And just in the last year, we've added more than 1.6 million new households to our branded franchises. And we compete across multiple channels of distribution, including retail, food service, C-store.

Now the growth of this business has been achieved by our increased focus on advertising and investments in brands, like Herdez, CHI-CHI'S and La Victoria, in order to drive these higher household penetration rates. But at the same time, we completed strategic acquisitions of companies, like Don Miguel Foods and Fresherized Foods, the makers of Wholly Guacamole. We do see MegaMex as a very important growth strategy for Grocery Products well into the future.

A tour of a local grocery store near you really reveals the ubiquitous branded presence of MegaMex. Now upon entering the store and heading to the produce section, it's here where you will find the #1 brand of refrigerated dips, Wholly Guacamole. Wholly achieved its position by virtue of its all natural, no preservative positioning and also its great taste. The center store grocery aisle is where you'll find our leading brands of CHI-CHI'S, which is distributed on the East Coast, and La Victoria, which is distributed on the West Coast. And if you go into the Hispanic Mexican food set, it's here where you're apt to find our authentic Herdez brand, which it is not only the leading brand of salsa in Mexico, it is one of the fastest-growing Mexican food brand here in the U.S.. Don Miguel Food is a leading brand in the C-store and club channel and provides frozen foods, manufacturing and distribution capabilities from which to pivot other brands off of within MegaMex.

Now on the innovation pipeline within MegaMex, our pipelines are very well developed and very robust. The Herdez brand is currently in the process of launching 2 new brand platforms, the new Herdez cooking sauces, such as tomatillo verde and chipotle, which solves that Mexican cooking enthusiast's biggest challenge when she wants to make an authentic Mexican meal, which is the sauces themselves. And recently, we created this set, the Herdez authentic snacking destination set. You will find this in 1,500 different store locations at a national retailer in the U.S., where we're creating a full line of authentic snacking products with chips, various dips and quesos, as well as various ethnic flavored varieties of snacks. This is a very exciting new product launch for us. It's in the marketplace as we speak, and we already are getting interest from other retailers that are looking to create these destination snacking sets in their stores to take advantage of all the Hispanic food trends that I've been telling you about.

Now I've mentioned earlier the frozen foods manufacturing and distribution capabilities of Don Miguel Foods. So it's only natural then to leverage this capability with our other leading brands within the portfolio. So soon, you'll begin to see in the marketplace a line of CHI-CHI'S frozen food offerings, such as breakfast entrees, as well as appetizers. In addition, CHI-CHI'S is launching some refreshers in the tortilla area with some better-for-you position tortillas such as high fiber and reduced calorie SKUs.

And for those of you that are Wholly Guacamole fans, and I know there are some out there, I talked to some at lunch, interesting here for you folks is that we're going to be replacing the current snack pack pouches with a single-serve dip cups of guacamole and avocado spreads. We are just seeing incredible increases in eating occasions as guacamole moves from just a dip to a spread and a condiment, if you will, on sandwiches. And we believe that the mini cups are a convenient way of delivering that convenience to consumers around the spread and condiment usage on sandwiches.

Now the final strategic growth area that I want to talk to you about today is the peanut butter spread category and our newly acquired Skippy brand. Now the strategic basis for the Skippy acquisition for a company like Hormel Foods is perhaps perplexing to some of you. But for others, it's considered a very brilliant move. So allow me to walk you through the reasons why Skippy is such a great strategic fit for our company.

First of all, Skippy gives us access to an on-trend, really value-added business that adds earnings stability and margin accretion to our division. And adding a brand that is a significant source of non-meat protein is also very strategic in terms of our portfolio approach to the marketplace. And beyond protein delivery, Skippy is a large and widely known consumer-branded franchise, with leading center store scale that we can leverage with our other great center store brands. And finally, probably most importantly, Skippy is a brand that we feel is poised for category growth and innovation.

Let me tell you more about the reasons for our optimism around this business. The peanut butter category has been stable and has seen very healthy growth over the years. Retail sales of peanut butter reached $2 billion with a 52-week ending September 29, 2012. And while the abnormal peanut crop promoted manufacturers to take a lot of price increase that you see drove the last 52 weeks increase here of 30% in pricing, but look what happened on the equivalent unit basis, consumption actually grew on an equivalent unit basis, demonstrating a lot of elasticity on price within these category. People really like their peanut butter. And so we conclude that the category is healthy and it's resilient, driven by the natural subcategory as well, which, by the way, we have the #1 share position in. And it's all being driven by increased usage around snacking and dipping and traditional consumption as well.

Now we looked at the annual eating occasions on peanut butter. And as you can see, since 2005, you saw 25 eating occasions per capita and that has risen by 2011 up to 30. So we're actually seeing increases in consumption behavior in the peanut butter spread category. And the #1 usage is still the peanut butter and jelly sandwich, and that's been very stable on a historic basis.

Now after that drought-driven peanut shortages in 2011 and into the 2012 crop year, that really has changed a lot of the dynamics within the category. But 2012 has proved to be an exceptional year from a growing perspective, and it really led to more normalization of peanut input cost, as you can see on the chart. So we've seen an average up into the drought conditions about $0.47 per pound. And then during the drought, it went up to as much as $1.08 per pound. And now we're back down into more normal range, so the cash market today is trading in that $0.50 to $0.55 basis. Now we looked at the USDA ag service reports on the 2013 crop and the indications are that we're seeing very good crop performance. I should say good, it's the technical term that was use, good crop performance to date, with a more normal-sized crop being expected. Now currently, we do participate in the peanut market category through hedges in the form of forward-price commitments with our shellers.

Now after very successful, I should say, business integration, our focus has now turned to the growth strategies for Skippy. While we're not in the position today to share with you the explicit marketing strategy that we'll be using, know this, that we are very committed brand builders, with a focus on growth within the category and building the overall peanut butter spread category. Our current Skippy brand health assessment work reveals a lot of the brand values that we'll be able to leverage, and you can see many of those on the slide. And this really affirmed the differentiated positioning of Skippy for us, as well as confirming the opportunity to do our consumer segmentation work and ultimately culminating in a new integrated advertising campaign. As Jeff indicated, that should be coming out in fiscal year 2014 or very shortly thereafter.

Now our company's commitment to innovation is no different within the Skippy branded franchise, and we're very excited to put our innovation tenacity, focus and capabilities to work within the Skippy brand. Presently, we're in the process on the innovation front of launching new Skippy natural dark chocolate, very pleased to report a very good reception from both consumers, as well as customers, to this entry into the marketplace. Our current innovation efforts are really focused on gaining additional understanding of how consumers are using peanut butter, understanding that usage occasion, what are some of the value delivery shortfalls that we could possibly solve for with our innovation. We're very excited, remain very optimistic about the growth prospects, both in the jar and out of the jar, for the Skippy Brad.

So in summary, winning in today's food space requires a recognition and an understanding of this new American family. Our Grocery division is well positioned with 4 strategic both platforms of microwave meals, legacy core brands, MegaMex and Skippy in order to meet the needs of today's intergenerational, nontraditional, multicultural society. Thank you very much.

At this time, I'll be more than happy to take any questions.

Unknown Analyst

I didn't quite understand the comments about your forward commitments to the shellers. What are those commitments? Is it a smoothing mechanism so that you don't get the highs and the lows? Or is there some benefit coming where there's some lower cost coming to your structure?

James M. Splinter

It's more about managing the risk on the supply chain side. So we want to make sure that we have good availability, and so we'll make these forward commitments with the shellers so with that we have access to good availability of the peanuts. So that's number one. And then two, smoothing out some of the volatility from a cost perspective.

Unknown Analyst

Okay. So is it fair to say that the Skippy brand under Unilever didn't see the full impact part of the higher costs when it was part of Unilever and, therefore, won't see the full impact of lower costs when it's part of Hormel?

James M. Splinter

I would say that they experienced -- with their pricing that they took in 2011 and into '12, they certainly were pricing up for the input cost. So they did experience those higher costs, if that was your question. But they -- obviously, before when we acquired it, those markets were starting to come down

Unknown Analyst

Okay. And now with the #1 player in the category talking about lowering the price, you're -- you would be a price follower in that regard.

James M. Splinter

Yes. So in January, there was an announcement of a price decrease of about 10%, and we followed in suit. So we took a 10% decline in January as well.

Unknown Analyst

I'm very interested in your advancement into the frozen snack and breakfast segments, and it's been a difficult -- presently, it's been a difficult category obviously with some growth areas in maybe snacking and breakfast. But I'm curious as to what you expect for the segments of the category and how you're going to distribute these products in the stores.

James M. Splinter

Sure. So obviously, we're going to use the Don Miguel Foods frozen distribution system for some of our CHI-CHI'S brands that I talked about. And the differentiating point for us is Mexican foods. The ability to bring these Mexican food brands that consumers know and trust with relevant forms, the quick convenient meals and appetizers, that's how we're going to win.

Kevin C. Jones

Well, at this time, I was going to just transition to complete Q&A for the entire management team. But before we get to that, Jeff has some closing remarks, so if you wouldn't mind holding the questions until afterwards. Thanks.

Jeffrey M. Ettinger

And if I can't handle it, we'll bring Jim back up here. Be ready, Jim, we may be coming back your way.

I just want to conclude by -- I gave you some 10-year slides at the beginning of the morning in terms of our performance. And here at Hormel Foods, we do tend to think of things over a very long time horizon. We're 123-year-old company, very stable management group. Our most junior presenters today in terms of their tenure with Hormel Foods have over 12 years of experience. I've been with the company 24, so I'm a bit below the average of our officer group, which is 26 years. And then, obviously, there's the numbers of our leadership group that are 30-plus years with Hormel Foods. And so they've added the benefit of experiencing and being part of all of these track records that's on the slide here right now, the 27-up years out of our last 30 years and the 11% CAGR over that time frame in terms of our ability to increase earnings.

So if you project from the last full year we all have available, which is 2012, and you take our 5% and 10% goals, you end up with numbers such as these, a $10.6 billion target by 2017 for sales and a $2.90 target by 2017 for earnings. And we recognize that, okay, if in a year like 2013, particularly on the basis of a reduced guidance that we provided a week ago, if we're not going to quite hit our 10% goal on this year, our intention would be to make that up. Now I'm not giving a specific 2014 number at this time, but our mindset as is captured by that 30-year slide or the 10-year slide I gave you at the beginning is these are our long-term goals, and we're looking to meet those on a long-term basis.

So to just summarize the presentations you had today. So Jody Feragen provided you the story about our strong cash flows, the story about our strong CapEx support of new innovative items and of our business in general; a 47-year consecutive increase track record on the dividend fronts, so we're certainly committed to continuing to increase our dividend; and a recent track record of a double-digit annualized increase in the area of dividend growth.

Steve Binder and Steve Venenga talked to you about our Refrigerated Foods business, talked to you about some of the short-term challenges they're facing, but hopefully also provided you with the story of why we're excited about our brands within our retail and food service space. And in particular, Steve Venenga introduced to you the exciting things we have going on with the ref brand.

Don Kremin talked to you early -- late this morning about the work he's doing in Specialty Foods, has a little bit of work to do on the food service side with the one door that closed with respect to the SPLENDA brand, but the other doors that, that's going to open; and in particular, on retail and industrial, the ingredient side of the business, some of the exciting opportunities he sees. And then underlying all of that, the added efficiency that he's driving by having his business units work on a more collaborative basis.

Jim Snee talked this afternoon, opened us up right after lunch, talking about the SPAM and Skippy brands and fresh pork in China. But clearly, the other key message I hope you take away from Jim is the international area has been delivering superior growth, and we see no reason why that won't continue to occur.

Jennie-O Turkey Store, Glenn talked to you about the important efforts that are going on in terms of brand building right now, that the focus of the team is on that brand, it's on driving efficiencies. And yes, they have to manage their total supply chain, and I think he gave you some indication on the commodity meat side that we're actually probably going to be entering into a more favorable environment here late this year and going into next year. And then we're probably -- our guess maybe is good as yours in terms of what the grain picture has in store for us. Certainly, if the crop all gets in and is favorable, that could be a tailwind as well for Jennie-O next year, but it's really too early to call that at this time frame.

And then lastly, Jim Splinter provided you with the consumer-grounded approach the Grocery Products takes in the marketplace as he's going to drive growth in all of his major categories, the canned meat legacy areas where you have such strong shares but also microwave meals, our new peanut butter category and the Mexican food area.

So with that, I would like to conclude the presentation on a formal basis and introduce -- and open the floor to any questions that you have either for me or again, we can always -- and if you do have a question that's for one or the other presenters today, we'll will probably take a moment to get a mic back to them so that, again, it gets picked up by the broadcast. And we'll start right up here in front.

Unknown Analyst

Yes, this is kind of specific question following on the last presentation, but I think you could manage it as well. You look at the big...

Jeffrey M. Ettinger

We'll see.

Unknown Analyst

Well, the cuts to the SNAP programs that had been at least introduced are rather sizable, and I would think that a lot of the products that you sell at Grocery could be affected. I'm just curious how you think about overall income level. You did point out that there's 60% that are still struggling. How does your product line shake out relative to that?

Jeffrey M. Ettinger

I think we're pretty balanced in terms of what income groups enjoy our products. In terms of what's going to happen with the SNAP program, I guess, it runs the gamut from the cuts we're already approved in the Senate version of the Farm Bill to what the house was pushing forward to sort of a 5x cut to that. My guess is they'll end up with some kind of Farm Bill with a number in between those 2. There will certainly be a cut, but that's a cut -- I mean, the SNAP payments are so much higher than they were 5 years ago, and we certainly still had thriving franchisees even in those areas that you would describe as being more value oriented, maybe our canned foods group. So I guess we don't look at it on a company-wide basis as a really particularly large vulnerability for us. For every maybe value-oriented customer that might be oriented toward the canned goods group, we have a group of consumers that still remains excited about our party trays or the Jennie-O franchise or some of the food service items. And so I think on balance, we'll be fine.

Unknown Analyst

Just one quick other question. You didn't talk a lot specifically about exports of pork, but it is a big driver of the overall cutout in your International segment, specifically. I'm just curious. As it relates to the second half and some of the challenges with China and Russia and ractopamine. I'm just curious if you guys are pushing toward a ractopamine-free program in order to meet those or if you think the exports can rebound despite that trade there.

Jeffrey M. Ettinger

So our export position is probably a little unusual compared to some of the other major players. We are really not -- first of all, if you look at us in pork, we're only the 56th largest pork player to begin with. Secondly, we really have not chosen to orient our whole system toward broad exports of primal. So to have a Japan-based program, for example, you have to have a very specific delivery within your plants, and we don't have our plants geared toward that. In terms of carcass or half carcass sales to China, we haven't done any of those. We're really not oriented toward that. Our items in terms of exports, as Jim Snee talked about, are more of the specialty off all-based items, niche products that we've developed for certain marketplace. Now Glenn's business is a little different than that. The Turkey, he's in the broad export market in terms of some of his turkey items, but the ractopamine thing doesn't come into play there. In terms of ractopamine-free for our total system, I mean, it's not something we're looking at as being necessary on a broad basis. Now that being said, on a more micro basis, the SPAM products, for example, that we right now import into China is ractopamine-free. And so we are sourcing enough ractopamine-free hogs to be able to support that product line and recognize that, that's going to be almost certainly a continuing requirement to go out that market. But we've not seen the need to look at our total system at this point and move toward a ractopamine-free regimen.

Unknown Analyst

Jeff or maybe it's a question for Don. But obviously, you did lose the SPLENDA business. It's not a huge business, but it's nicely profitable. What is the probability that you can actually replace that business in a reasonable time frame? I know it closes off one piece of business, but it opens up a bigger category.

Jeffrey M. Ettinger

I think what Don was trying to communicate today is obviously we had been -- we have the business for over a 10-year time frame. We were partners in building it up to a very nice level within the marketplace, although some of the business had already been receiving a little bit with the patent rolling off and so forth. When we announced that to you commensurate with the second quarter release, I mean, that was when it was resolved in terms of whether we were or we're not going to have a long-term contract extension. So I think Don's group has done a nice job in a very short period of weeks of already starting to identify some of the areas that he thinks is a total group that he can replace the business. But probably I don't have and I doubt he does really at this point either any more specifics or if these pieces are exactly going to be able to match off what that business provided us before. The best indication we'll probably be able to give you of that is when we do come out with our 2014 guidance on a total company basis. I usually try to give you a pretty good sense of, okay, which segments do we see doing what for the upcoming year. And that will be probably a pretty good all-in sense of, okay, net-net, now that we just had a few months to deal with it, how do we see 2014 playing out in the era post SPLENDA.

Any others?

Unknown Analyst

Just have a general question on consumer behavior. I always appreciate your insights. We've come to a difficult economic time and there's, I guess, discussion about has the consumer shopping behavior permanently changed? They buy items at wholesale, they buy some items at club stores, they buy some items at dollar channels, traditional stores, whatever. And I'm just curious how you're incorporating consumer potential shopping pattern going forward into your different segments just on a broad scale?

Jeffrey M. Ettinger

I mean, I do believe that, that's a longer-term phenomenon that you've put your finger on. And just -- we created, for example, a stand-alone food service group within Hormel Foods a little over 20 years ago. And Steve Binder and Jim Snee in that group are part of the pioneers of really creating that. And that was in large part in recognition that, look, food away from home, if you want to be a food company and play in broad array of meals, you need to have a focused approach to not just the grocery store, which is kind of the traditional LCPG kind of mentality. Food service is something that's an important strategy. I do think if we look at the consumer behavior and we look at which segments have been growing, I think it's undeniable that you're going to have to look at consumers are making certain purchases at club stores, they're going to C-stores, they're going to dollar stores. These new channels are with us now, and we mentioned online even as a possibility. And so that is part of the team's effort and shift as we look forward here as, okay, what do we need to do to do a better job against those channels. The C-store example, sometimes you try to take advantage of when you make an acquisition or you bring some new skills onboard as being a springboard for that type of things. So C-stores, the Don Miguel acquisition, we liked it as a Mexican food portfolio, a product complementary to MegaMex. But it just so happened that over half of the sales of Don Miguel were in the C-store channel, and it brought with it a team that really has some deep expertise there. So that's given us a building block now to do a better job of going after that segment. Club stores, hopefully, is going to be a similar example of that. It's actually interesting that some of our less traditional outpost to Hormel Foods, the Farmer Johns out west or Wholly Guacamole or Don Miguel, again, seem to have a little more traction within the club store channel than our core legacy businesses have. So we're having an event in a month or 2 back at corporate where we're bringing in all of our teams and really kind of say, "Okay, what can we learn from the groups that have gone at it a little bit differently but have seemed to have more success in that channel?" So I do agree with your general premise that, that is something we're going to have to be more successful at in order to keep the growth trajectories we were looking at here.

Unknown Analyst

Jeff, when you kind of consolidate all of the discussions today, the growth opportunities that you have, now with Skippy put on top of it as well, and you look at your long-term revenue target of 5%, given the mix of where you see your growth, what is your actual physical tonnage growth have to be as part of that 5% growth rate?

Jeffrey M. Ettinger

Well, I mean, tonnage moves, frankly, on a year-to-year basis, maybe even more than the dollar sales do because there's times they're contracting or expanding our basic supply chain businesses. But I think it's -- I'd be comfortable saying, okay, the ton -- and kind of unit sales tonnage of your legacy items is probably in that lower single-digit rate but you're going to be enhancing the mix, not just the price. Frankly, in the kind of cost environment we've been in on the last 2 years, I mean, nobody is stretching margins through price. If you're staying even, you're doing pretty well. But through mix, you can, through creating more innovative items, through emphasizing items where you have a higher margin or a higher ring. I think that takes us to the 4% to 5% range. And obviously, we do intend to sort of round that off at some point with some contribution from acquisitions. Clearly, that has helped, and Jody identified we have several acquisitions we've made over the past dozen years that are part of that growth story. So back to the question that kind of came up earlier this morning, I mean, I really feel -- I mean, today's, hopefully, presentation was replete with examples of categories that we have a demonstrated record that we're not just growing 1% or 2%. I mean, there are a lot of examples. There are things growing in the high-single digit, low-double digits. And yes, we may have some franchises within the portfolio that are more in that kind of slower growth mode. But I think in the aggregate, we feel pretty comfortable about that 4% to 5% range.

Well, thank you, all, for traveling to our event and for your attention to our company.

Kevin C. Jones

Thanks, Jeff. I'd like to echo Jeff's thanks to all of you who have come here, some from quite a ways away, and I also would like to thank those who have hung with us on the webcast for your attention. For all of you who are here, we do have samples, product samples outside the doors that you can help yourselves to. A fair warning, some of these items, many of them will not go through security at the airport. So with that caveat, please help yourselves, including the items up here that Jim Splinter talked about. And so thank you again, and may you have safe travels back home.

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