Hormel Foods F4Q07 (Qtr End 10/28/07) Earnings Call Transcript

Hormel Foods Corp. (HRL)

F4Q07 (Qtr End 10/28/07) Earnings Call

November 20, 2007 10:00 am ET

Executives

Fred Halvin - Director of IR

Jeff Ettinger - Chairman, President and CEO

Jody Feragen - SVP and CFO

Analysts

Farha Aslam - Stephens Incorporated

John San Marco - Wachovia

Akshay Jagdale - JP Morgan

Tim Ramey - D.A. Davidson

Diane Geissler - Merrill Lynch

Robert Moskow - Credit Suisse

Christina McGlone - Deutsche Bank

Eric Larson - Piper Jaffray

Oliver Wood - Stifel Nicolaus

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods Fourth Quarter Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded Tuesday, November 20th, 2007. I would now like to turn the conference over to Fred Halvin, Director of Investor Relations. Please go ahead, sir.

Fred Halvin

Good morning. Welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2007. We released our results this morning before the market opened around 6:30 a.m. Central Time. If you did not receive the copy of the release, you can find it on our website at www.hormelfoods.com under the Investor section.

I wanted to point out that our corporate website has changed to hormelfoods.com from previously hormel.com.

On our call today is Jeff Ettinger, Chairman of the Board, President and Chief Executive Officer. I hope you had a chance to catch Jeff on CNBC on this mornings' Squawk Box edition. Jody Feragen, our Senior Vice President and Chief Financial Officer is also on the call with us today. Jeff will provide a review of the operating results and an outlook for the new year. Then, Jody will provide the detailed financial results for the quarter.

The line will be opened for questions following Jody's remarks. An audio replay of this call will be available beginning at 11a.m. Central Time today, November 20th, 2007. The dial-in number is 800-405-2236 and the access code is 11102214. It will also be posted to our website and archived for one year.

Before we get started with the results for the quarter, I first need to reference the Safe Harbor statement. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed in or implied by the statements we will be making. Among the factors that may affect the operating results of the Company are the fluctuations in the cost and availability of raw materials and the market conditions for finished products.

Please refer to pages 26 through 31 in the Company's Form 10-Q for quarter ending July 29, 2007, for more details. It can be accessed on our website.

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

Jeff Ettinger

Good morning, everyone. We are pleased to end the year with a strong finish, allowing us to deliver respectable full year results in a challenging environment. The combination of strong consumer demand for our products and solid execution by our team members were the key drivers to the strong finish. This momentum also positions us well, as we begin 2008.

Sales for the quarter were $1.7 billion, up 7% from the prior year and up 4% excluding acquisitions. Earnings per share for the quarter were $0.73 compared to $0.64 last year, an increase of 14%. Included in this year's Q4 results is a $0.02 per share gain from the sale of a company airplane and $0.01 per share gain from the dissolution of our Patak's joint venture.

For the full year, sales were $6.2 billion, up 8% and exceeding $6 billion for the first time. Earnings per share for the full year were $2.17, up 6% or $2.14 without the plane sale and the Patak's divestiture.

As I evaluate this year's performance, I am pleased that all five segments reported topline growth and four out of five segments reported operating profit growth as well. The one segment that reported lower operating profit, Jennie-O Turkey Store, was burdened with over $80 million in higher grain inputs for the year. This segment made good progress to offset these higher costs as evidenced by its solid Q4 results.

I believe 2007 provides another illustration of the value of our balanced model. In a difficult environment like the first three quarters of 2007, it created stability. When conditions turned more favorable like the first quarter, it provides an upside.

This morning, we announced a robust 23% increase to our annual dividend rate, making the new rate $0.74 per share. We have an exceptional history of returning profits to our shareholders through dividend increases. Today's announcement is the 42nd consecutive year of increases and is the largest dividend increase in our company's history. This more significant increase is based on our confidence to deliver improved cash flow in the future. Our consistent earnings history is similar to a packaged food company. Over time, we intend to move our dividend yield closer to a packaged food company yield. I will now take you through each segment.

The Grocery Product segment reported a 2% increase in sales and a 9% decrease in segment profit for the quarter. There were both positives and negatives in the quarter for Grocery Products. First, the positive, very good progress continues to be made building our HORMEL COMPLEATS microwave tray business. We are improving our shelf presence and gaining distribution. The television advertising launch last quarter for this product line has proven to be very effective. Sales for the quarter were up over 40%. This level of explosive growth comes with its challenges, specifically in keeping up with demand.

We will continue to bring on more capacity in 2008 and beyond to support this demand. We also had very positive results from both our STAGG and HORMEL chili businesses. The STAGG brand benefited from new distribution during the quarter.

Areas for Grocery Products reporting weaker results in the quarter were the SPAM family of products and VALLEY FRESH chunk meats. The lower results for the SPAM family of products were related to a very strong third quarter promotions that may have pulled some sales forward and also a difficult year ago comparison.

For the full year, SPAM volume was slightly above last year. Although it's kind of a roller coaster year for grocery products in 2007, the unit completed the year with top line growth of 4% and operating profit growth of 3%.

The Refrigerated Foods segment capped off a great fiscal 2007, with a strong fourth quarter, reporting 15% higher operating profit and an 8% increase in sales for the quarter. For the year, operating profit for Refrigerated Foods was up 17% and sales were up 8%.

We believe we are the industry leader in value-added protein, based on our ability to innovate our understanding of consumer and customer needs and our execution of our plans. Products in the Retail Channel reporting strong growth include ALWAYS TENDER marinated meats, DiLUSSO DELI COMPANY products and HORMEL party trays.

Food Service items reporting strong growth for the quarter included BREAD READY sliced meats, AUSTIN BLUES barbecue products and premium fresh pork. The Burke Corporation acquisition which was announced during the fourth quarter was accretive to the Refrigerated Foods results and strengthens our portfolio of products in the important pizza-topping category.

Jennie-O Turkey Store reported a stronger than expected fourth quarter with operating profit of 15% and sales of 7%. Improved product mix, operational efficiencies and better recovery of higher costs through pricing were the key drivers. The incremental burden of higher grain costs for Jennie-O Turkey store were $29 million for the quarter. For the year, operating profit was down 17%, while sales were up 5%.

Despite the year of distractions caused by difficult input costs, our Jennie-O Turkey Store management team stayed focused on growing their value-added portfolio. Value-added growth was up 10% for both the quarter and the year. Some of the items driving this growth include Jennie-O Turkey Store Oven Ready Products, rotisserie products, premium deli products and turkey burgers in both the Retail and Food Service sections.

We anticipate grain markets to continue to be volatile through 2008. It is our expectation that grain markets will be somewhat higher in 2008, causing feed costs to overall be $40 million higher than 2007.

The Specialty Foods segment reported 5% top line growth in Q4. They finally ended their exceptional run of year-over-year improvement in operating profits primarily due to a very difficult year ago comparison.

Over the last two years, this segment has grown very fast and has become a significant contributor to our total company top and bottom line. The three businesses that make up this segment; Hormel Specialty Products, Century Foods and Diamond Crystal Brands, all delivered excellent full year results which contributed to the segment's top line growth of 26% and operating profit growth of 27% in total 2007.

As previously mentioned, we expect the long-term growth rate of this segment to be more in line with our total company goals of 5% top line and 10% bottom line. In the All Other segment, our international business unit had another good quarter with sales up 22% and operating profits up 10% compared to last year.

Value-added export sale growth, worldwide demand for the SPAM family of products and strong results from our Purefoods-Hormel joint venture located in the Philippines were the key drivers. For the year, sales for international were up 26% and operating profit was up 34%. Our SPAM export volume was up 14% for the year.

As I look forward to 2008, I am confident we can return to our long-term growth objective of 10% earnings per share growth. I anticipate a combination of external factors to impact our business. On the negative side, we do expect to see continued pressure from higher grain and energy costs. On the positive side, we expect to see the benefit of lower protein and food costs.

The demand for our products continues to be vibrant, both in the retail and food service channel. Our focus on innovation has never been stronger, as evidenced by the achievement of our $1 billion challenge goal two years ahead of schedule. For those of you not familiar with $1 billion dollar challenge, we set a target that by the end of 2009 we wanted $1 billion worth of sales from items introduced during the decade. We surpassed the $1 billion goal in 2007 sales alone.

Now for the 2008 earnings guidance. Effective with 2008, we have changed our earnings guidance practice to only provide annual guidance. We feel this is consistent with the long-term view the company takes in making business decisions. After assessing industry factors in our business plans and prospects for the upcoming year, we are setting our fiscal 2008 guidance range at $2.30 to $2.40 per share.

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

Jody Feragen

Thank you, Jeff. Good morning, everyone. Acquisitions added $40.4 million to the topline in the fourth quarter and about $100 million for the year. Volume for the fourth quarter was 1.2 billion pounds, basically flat with fiscal 2006 quarter.

Acquisitions added 25 million pounds to the quarter. Volume for the full fiscal year was 4.5 billion pounds, up 3% from fiscal 2006. Acquisitions added 59 million pounds to the year.

Selling and delivery expenses in the fourth quarter were 10.4% of sales this year, compared with 10.7% last year. For the full year, expenses were 10.6% of sales compared with 11.1% last year. Freight cost was lower year-over-year due to the benefit of cost-saving measures we implemented throughout the year. As we look ahead to 2008, some of these benefits are likely to be offset by higher fuel costs. We're expecting selling and delivery expenses to be closer to 11% of sales for next year.

Our marketing investment in the fourth quarter was $18.9 million or 1.1% of sales compared with $20.6 million or 1.3% of sales last year. For fiscal 2007, marketing expense was 1.8% of sales compared to 2% last year. We are expecting about 2% for fiscal 2008.

Administrative and general expense was 2.3% of sales for the quarter compared to 2.9% last year. G&A expense for the full year was 2.6% compared to 3.2% last year. The fourth quarter expense includes $4.8 million gain from the sale of our company airplane in 2007.

Full year expenses in 2006 include $9.2 million of stock option expense related to executive retirements and the adoption of FAS 123R, a $5.8 million of non-qualified pension plan settlement charges and a $2.3 million gain from the sale of the company plane.

We are expecting administrative and general expenses to average 2.7% of net sales in 2008. Interest expense for the quarter was $7.7 million compared to $6.4 million last year. Short-term debt balances mostly related to the Burke acquisition were higher throughout the quarter this year compared to fiscal 2006.

Year-to-date interest expense is $27.7 million compared to $25.6 million last year. We expect interest expense to approximate $28 million in fiscal 2008. Total long-term debt at the end of the quarter was $350 million, even with where we were at the end of 2006. We also ended the year with $70 million outstanding on our short-term line of credit related to the Burke acquisition.

Depreciation and amortization for the quarter was $33 million compared to $31 million last year. For the full year, depreciation and amortization was $127 million compared to $121 million last year. We expect depreciation and amortization to be approximately $130 million in 2008.

Our effective tax rate in the fourth quarter was 34.9% versus 36.2% in the fourth quarter of last year. The year-to-date effective tax rate was 35.8% compared to 33.5% last year. The full year tax rate was lower in 2006 due primarily to discrete tax benefits recognized last year mostly related to the Medicare subsidy.

Our initial projection for the effective tax rate in the first quarter of fiscal 2008 is a range of 36% to 37%. We are currently finalizing the work associated with the adoption of FIN 48 and we'll have more visibility into our expected full year tax rate at the end of the first quarter.

Capital expenditures for the quarter totaled $29 million compared to $34 million last year. For the full year, capital expenditures totaled $126 million compared with $142 million last year. For 2008, we expect capital expenditures to be approximately $145 million to $150 million. The increase is the result of plant expansions to meet expected consumer demand for value-added products.

The adoption of Statement of Financial Accounting Standards No. 158 required the company to recognize the funded status of our benefit plans on our balance sheet this quarter. While the adoption of this accounting standard had no impact on earnings, it did reduce shareholders' investment, other comprehensive income by $100 million and increased pension liabilities by a similar amount. It also increased our deferred tax assets, but that increase was offset by a decrease in our net pension asset.

The basic weighted average number of shares outstanding for the fourth quarter was $136 million and for the full year was $137 million. The diluted weighted average number of shares outstanding for the fourth quarter was $138 million, and for the year, it was $139 million. We repurchased 1.1 million shares of common stock during the fourth quarter at an average price of $35.63.

For the full year, we repurchased 2.4 million shares compared to 1.1 million shares repurchased during fiscal 2006.

As I outlined at our Investor Day in October, we are targeting share repurchases to be at level similar to our 2007 activity. We have 4.2 million shares remaining to be purchased from the 10 million share authorization currently in place. We processed 2.4 million hogs in the fourth quarter, which is even with last year.

For the full year, we processed 9.4 million hogs compared to 9.2 million last year. The actual live hog cost in the fourth quarter was $49 per live hundred weight, in line with our forecasted market we provided in our third quarter conference call and basically the same as last year. We anticipate an average market of $41 per live hundred weight for the first quarter of fiscal 2008 compared to a $46 live hundred weight for the first quarter in 2007. We expect the hog supply to increase approximately 2% in 2008.

At this time, I would like to turn the call over to the operator for the question-and-answer portion of the call. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question is from Farha Aslam with Stephens Incorporated. Please go ahead.

Farha Aslam - Stephens Incorporated

Hi, good morning.

Jeff Ettinger

Hi, Farha.

Jody Feragen

Good morning.

Farha Aslam - Stephens Incorporated

Congratulations on a good quarter.

Jeff Ettinger

Thank you.

Jody Feragen

Thank you.

Farha Aslam - Stephens Incorporated

This morning hog prices are limited, on top the China is seeking to buy more U.S. pork, could you comment on your expectations of international pork demand and your thoughts on how prices are going in for the full year '08?

Jody Feragen

As I had indicated in my portion of the call, Farah, I expect that for the first quarter the live hog prices would be about $41. We are fully expecting that prices for proteins to be lower across the board than they were in fiscal 2007. I know there has been lots of speculation in a conjecture regarding demand coming out of China, but we just haven't seen that so far.

Farha Aslam - Stephens Incorporated

Thank you. And when you talk about the $40 million increase in grain cost, at this point has your Turkey pricing that's in place offset the higher cost?

Jeff Ettinger

Yeah, lots of that's going to occur during the first half of the year because with the 22-week life cycle for the tom turkeys, even though grain started going up last year in September, we weren't feeling that in our product cost until mostly after the first quarter was over. And so, yes, the pricing activity we've been embarking on for the last couple of quarters is in place to cover down as much as that we think is prudent.

Farha Aslam - Stephens Incorporated

Right. And if you look at what's assumed in terms of grain in that $40 million, could you just give us a ballpark of where you are seeing corn and soybean meal is factored in there?

Jeff Ettinger

Corn's in the high $3.50 to $4.0 range and soy meal would be in the mid to upper mid 200 range.

Farha Aslam - Stephens Incorporated

Okay, great. Thank you very much.

Operator

Our next question comes from Bill Chappell with SunTrust Robinson Humphrey. Please go ahead.

Shahzad

Hi, this is actually [Shahzad] in for Bill. Good morning.

Jeff Ettinger

Hi, Shahzad.

Jody Feragen

Good morning.

Shahzad

So, recent pork packer margins are very strong. How should we look at that as an impact on your Grocery Products business going forward into the first quarter and maybe in the second quarter?

Jody Feragen

We certainly would see a benefit from having those lower protein input costs to the Grocery Products segment, particularly our product utilizing pork such as SPAM.

Jeff Ettinger

For our total company model, the more significant area that is going to show up would be Refrigerated Foods and Refrigerated Foods has excellent momentum now, I mean other 15% quarter and is in good shape heading into early '08.

Shahzad

Okay. So, why do we expect a slow start in Grocery Products, I mean is that related to the VALLEY FRESH acquisition, that's been showing kind of softer results over the past few quarters?

Jeff Ettinger

That's one contributor. We've had a couple of quarters in a row. Our Grocery Products has had negative segment profit, and so we think we are going to get back to at least a neutral position.

We're still on somewhat of an investment mode in that division, particularly in terms of that COMPLEATS line as we spend against products slotting and again racking systems and other items related to that launch. And then, as we head into the second half of the year, we expect them to hit the stride and contribute at much more significant levels.

Shahzad

Looking at VALLEY FRESH though, what do we expect? I mean, are we going to see a turnaround maybe in the near future?

Jeff Ettinger

VALLEY FRESH, there has been two issues with it. One has been a good segment of last year. Chicken prices were quite a bit higher than what we had expected. That's moderated quite a bit, and so that would be a benefit to that franchise.

And then secondly, as I think we discussed during Investor Day somewhat, I mean we in retrospect feel there are promotional strategy on that brand was not optimal and we kind of gone back to how VALLEY FRESH was sold prior to when we acquired it and we do expect that over time that that will benefit and get that franchise back where it belong.

Shahzad

Okay. And one last question here. Just future uses of cash, I mean, is the dividend really the one thing we were kind of looking for or should we look for more to come in terms use of cash?

Jody Feragen

Well, I guess I'll go back to our stated uses of cash that I think we have gone over many times, and we are going to look at investing in our business, either organically or through acquisitions. We're going to look to return to our shareholders, either through dividend increases, which I think we've made a good start in that front with the announcement today, and then also in the area of share repurchase where I fully expect that we'll be repurchasing at a level equal to 2007. So, all in our attempt to try to take advantage of the capacity we have to improve our capital structure.

Shahzad

Sounds great. Congrats on the great quarter. Thank you.

Jody Feragen

Thank you.

Operator

Our next question comes from Jonathan Feeney with Wachovia. Please go ahead.

John San Marco - Wachovia

Hello. Good morning, everyone. This is actually [John San Marco] on behalf of Jonathan Feeney. Thanks for taking. A couple of quick questions.

Jeff Ettinger

Hi, John.

John San Marco - Wachovia

Just going back to pork cost, particularly in China, are you expecting to see any release specifically in China there by the end of F '08 and are you anywhere closer to it? And are you seeing any improvements in the condition of the hog hood there?

Jeff Ettinger

It’s improving. Our costs have moderated in our China venture. They were up almost double during one stretch of the year, and they will come back may be 40% to 50% off of that, but they are still on a historical basis high. We don't raise hogs in China, but obviously we have some connection with the folks who do, and we are hearing it's improving. But it's a difficult place to get complete information, but we are optimistic about that unit's ability to deliver decent results even with these markets.

John San Marco - Wachovia

Great. And then sort of as a follow-up there, it seems like here domestically, you've benefited from lower pork prices, particularly in refrigerated. Do you expect that the pricing increases you have taken in recent years to be sticky there or would you expect to have to give some of that pricing back if pork continued to be deflationary year-over-year?

Jeff Ettinger

The pork pricing really has two parts to it. I mean there are market-based items like fresh pork and a lot of the mid-tier ham sales, the program bacon sales that frankly ride up and down more on a demand market than they do on what our cost of goods are. I mean you get as much margin as you can out of those types of items.

In terms of refrigerated items, we've been very strategic and methodical about where to take price increases, and it isn't just grain, it isn't just pork input that causes that equation. We are looking at energy cost. We look at general price inflation. And so, we are comfortable about our ability to hold those prices.

John San Marco - Wachovia

Okay. That's great. That's all I have. Thank you.

Jeff Ettinger

Thanks.

Operator

Our next question comes from Akshay Jagdale with JP Morgan. Please go ahead.

Akshay Jagdale - JP Morgan

Good morning. This is actually Akshay on Pablo's behalf. How are you doing?

Jeff Ettinger

Good morning.

Jody Feragen

Good morning.

Akshay Jagdale - JP Morgan

A couple of questions. First one is related to refrigerated fruits and just a follow-up to some other questions. You've said in the past that margins in refrigerated foods are pretty stable. I mean they can be sticky on the way down.

We’re just trying to get an idea of the upside to the margins in refrigerated foods, given the expectations for lower hog prices. I mean the highest margins we’ve seen over the years was about 6% in '04, and this quarter matched that. So, just trying to see how much of the upside in lower hog price can be sustained for '08 if you could us any guidance around that or help us try to understand that a little better?

Jody Feragen

I think when we look at the refrigerated foods segment on a normalized year-over-year basis, we look at 5.5% to 6.5% return for that business unit segment to be in their normalized range.

Akshay Jagdale - JP Morgan

So, as I understand, I mean in your investor event, you had said 5% to 6% for '08 I believe for refrigerated foods. I mean, does your outlook for hogs now change that? I mean if you are at 5.5% to 6.5%, midpoint of 6%, which is the high-end of your range. So, has that changed in terms of your expectations for '08?

Jody Feragen

I perhaps gave the rounding estimate, but I would say we're off to a good start so far this year, and it probably isn't unreasonable at the higher end of the 5% to 6% that we'd given you on Investor Day.

Akshay Jagdale - JP Morgan

Okay. And then just on Jennie-O Turkey, I mean I know you've talked about this in the past and you gave quite a bit of detail in your investor packet, but if you could just remind us in terms of normalized margins there, maybe even what will be better is if you could tell us what EBIT per pound would be in that business in normalized terms.

I mean I know you said $80 million in grain cost increase. Most of that is probably related to Turkey, and I think the math that I did based on price increases that you were expecting shows that you're going to more than offset that. So if you -- sort of two questions, if you would answer those, that would be great.

Jeff Ettinger

Okay. I don't know that I could help you on that EBIT by pound. I just don't have that available. Our expectations for segment profit for Jennie-O Turkey Store would be in the 9% to 10% range. In terms of pricing, the larger number, the $80 million number was the full year feed impact for 2007.

It's hard to calculate because you have so many mix changes going on as well. But our best estimate is that we covered down maybe two-thirds to three-quarters of that. So, we don't believe we were able to price to cover all of it. But the unit did a nice job of attaining other operating efficiencies in their farm areas and their plant areas that covered on the rest and allow us to have the momentum you saw heading into fourth quarter.

Akshay Jagdale - JP Morgan

And just last one, if I may. If you could just also give us some sense of the value-added opportunity in the Turkey business, I mean, again from the numbers that we have, value-added was about 42% of volume in '06 I believe. Where is that now and where do you see that going a year from now, two years from now?

Jeff Ettinger

That may be about the right number on volume because we tend to not count whole bird sales other than [urban ready] is being value-added. In terms of dollar sales, it's already at a 70% to 75% rate of our sales. But there is lots of upside, I mean it's still of the four major proteins by far the lowest per capital consumption. I think we're going to finally see an up number from the USTA this year in terms of Turkey consumption given the markets we saw and given the supply situation.

And Jennie-O Turkey Store is really the kind of undisputed leader when it comes to the value-added portion of it. So, we have focused groups against retail, deli and foods service at Jennie-O and they are all growing at a high single-digit, even in some cases low double-digit rate and we've seen that now from quite sometime.

Akshay Jagdale - JP Morgan

Okay, great. Thank you very much.

Operator

Our next question comes from Tim Ramey with D.A. Davidson. Please go ahead.

Tim Ramey - D.A. Davidson

Good morning, congratulations.

Jeff Ettinger

Hi, Tim.

Tim Ramey - D.A. Davidson

You sighted the value-added business in Jennie-O Turkey Store and that clearly was the upside surprise. But how did the whole bird business do and how is sort of the holiday ham business coming through for you?

Jeff Ettinger

Hormel business, it did well. The market value this year is just even on the more commodity side, the whole birds are higher than they were last year and our OVEN READY franchise continues to grow, it's up another 40% or it's just a fourth year of that being in market and we just kind of keep no bowling it forward, so that's contributed nicely to margins.

Some of the Turkey effect comes through Q1, I mean particularly the fresh sales for the Thanksgiving and any Christmas related sales and those are looking good, are in a decent clean up position in terms of our inventories. And same really can be true on the ham side, we've been running our plans very hard, but they were in good shape to fulfill our customers needs in those items and so we're optimistic and that's part of our encouraging thoughts towards the Refrigerated Foods start of the year.

Tim Ramey - D.A. Davidson

And, Jeff just clarify, I was little confused by the last question. Did you say that the incremental cost of grain in '08 over '07 was $40 million or zero?

Jeff Ettinger

No, we gave two numbers and I am sorry if that caused some confusion. The $80 million number is our best estimate for the total year effect in the fiscal year, that's now on the book. The $40 million number is our estimate of grain cost increases yet to roll through '08 versus '07 and that related to what I mentioned before about how first quarter, we still have some catch up to do on cost versus '07.

Tim Ramey - D.A. Davidson

Okay. So saying that in another way an incremental cost of $40 million next year, is that correct?

Jeff Ettinger

Yes.

Tim Ramey - D.A. Davidson

Okay, terrific. Thank you.

Jeff Ettinger

Mostly in the first half of the year.

Tim Ramey - D.A. Davidson

Terrific.

Operator

Our next question comes from Diane Geissler with Merrill Lynch. Please go ahead.

Diane Geissler - Merrill Lynch

Good morning.

Jeff Ettinger

Good morning Diane.

Diane Geissler - Merrill Lynch

Congratulations on your quarter.

Jeff Ettinger

Thank you.

Diane Geissler - Merrill Lynch

Hey, I have a question on your stands on the quarterly guidance. I appreciate getting people to look at your business from a long-term perspective, but the reality of the situation is street looks at things kind of quarter-to-quarter and you are not a commodity company and your valuation is not added kind of a commodity level versus some of your competitors in the protein space.

So I guess my question is, I don't expect commodity companies to kind of give me guidance, but for a company that has a valuation like yours and has a big skew of their business in kind of non-commodity related items, I guess I am just trying to understand the move away from quarterly guidance?

Jeff Ettinger

We looked at our peer group and we look predominately at more the package food peers, our information indicated that they were down to about 25% to 30% that we are still giving quarterly guidance since that was something that our board looked at when we made a determination. We do believe our business over time with our balanced model provides a decent amount of stability quarter-to-quarter.

I think our thrust is really in us not advancing and trying at all times to hit against the quarter numbers. But to be more consistent with how we run our company which is more on a full year or a longer term basis. Clearly, if we were to see some major than occurring business encompass by our annual guidance, then we would be expecting to inform our investment community of that type of thing, but absence that we think the transition should be fine.

Diane Geissler - Merrill Lynch

Okay. All right. I will appreciate a little bit more clarity there as to the reasoning behind it. I guess that kind of brings up fourth quarter kind of what the guidance you had reiterated at your Analyst Day at the beginning of October. Was October just that much better than you had anticipated? Was that primarily what happened in the hog markets that caused you to be above the end, the high end of your range?

Jeff Ettinger

And the big change is we're on the protein sides of our business, both Jennie-O Turkey Store and Refrigerated Foods. It's an important time of the year for both of those businesses. And so, when we saw the kind of significance in both, volume enhancement and margin enhancement in those areas that really led to us ending up the year stronger than what we had expected as of early October.

Jody Feragen

And we started the quarter with the hog markets kind of in a topsy-turvy mode and didn't see that the impact of that would turn as quickly as it did towards the end of the quarter.

Diane Geissler - Merrill Lynch

Okay. Well, just the volatility is pretty extreme in that space right now. And then I guess you had indicated in your commentary that the Burke acquisition was accretive. Could you give us an idea about to what level it was? I mean I know it's a sort of smaller business, but --?

Jeff Ettinger

It was maybe [in the] quarter.

Diane Geissler - Merrill Lynch

Okay. Is that ahead where you thought it would be?

Jeff Ettinger

Just about what we thought. It's doing very nicely.

Jody Feragen

And we really only had two months of activity with that business on our book. So I would expect it to return refrigerated food type margins on the higher end.

Diane Geissler - Merrill Lynch

Okay. All right. Well, that was really all I had. Have a great Thanksgiving.

Jeff Ettinger

You too.

Jody Feragen

You too.

Diane Geissler - Merrill Lynch

Okay.

Operator

Our next question comes from Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow - Credit Suisse

Hi. Good afternoon.

Jeff Ettinger

Hi, Robert.

Robert Moskow - Credit Suisse

Hi. I was just wondering, so you gave guidance on cost of what's inflation for fiscal '08 at 3% to 3.5%. That sounded kind of low compared to other food companies that we are seeing. Maybe some of this is -- the low number has to do with protein prices. Do you have an updated number for us or have you seen anything different?

Jody Feragen

We really haven't updated that number. In fact, we are seeing that the protein markets are perhaps a little lower than what we had originally estimated. Now, that has been offset by some increase in energy costs. And I'll have to put the pen and paper and see if there is significant change. But right now, my plans still include that range.

Robert Moskow - Credit Suisse

Okay. Great. And in turkey, you know, I am looking at fresh prices and I know you have a great value-added business, but the fresh component does play in. Fresh [ham] breasts are down sequentially from its highest, like 375 a pound and now tracking, I guess, closer to 295 a pound. And it was 295 a pound, maybe now at $2 now. Tender is down as well. Are you seeing similar numbers flowing through for yourselves and how do you view that? Is it a function of a lower priced market or not?

Jeff Ettinger

Well, I mean, it's uneven a lot. For example, when we really get down to selling meat on a commodity basis, the dark meat parts of the turkey are much more significant for our business and the thigh market is really quite strong now even on year-over-year basis.

There are some of whole bird and breast items that are lower. For this time of the year, the whole bird pricing, a lot of those prices are set earlier in the year. A lot of them are delivered even earlier in the year. It really depends on what the retailer wants to do. And so, whatever the coated market ends up being at the very end of the year, there isn't a large percentage of our volume that's actually sold on that basis.

Robert Moskow - Credit Suisse

Okay. And your chicken competitors, I guess they are kind of competitors, I mean they've made some rather aggressive statements about how much they intend to dial-up production during the course of the year. Historically, have you seen any kind of reaction in the turkey markets when chicken is doing sometime like that?

Jeff Ettinger

Not really. I mean the one year that would be the exception to that would be back when there was a foreign embargo on the early part of the decade. And at some point, if there is so much meat backing up into our system, it affects all proteins. But the chicken has much quicker turnaround. We've seen it up. We've seen it down over the last few years, and turkey seems to be able to be much more steady and not have a big reaction against that.

Again, if you look at it from a retailer standpoint, I mean chicken is the feature item that's a major ad driver for the retailer. Turkey, frankly is not. It's a very nice niche item. We have very loyal consumers in our area. But aside from Thanksgiving, Turkey is -- I mean we are not a driver of the feature item in most retail outlets.

Robert Moskow - Credit Suisse

Okay. Thank you very much.

Jeff Ettinger

Yes.

Operator

Our next question comes from Christina McGlone with Deutsche Bank. Please go ahead.

Christina McGlone - Deutsche Bank

Good morning.

Jeff Ettinger

Hi, Christina.

Jody Feragen

Good morning.

Christina McGlone - Deutsche Bank

Just taking a look at growth rate, I was surprised to see kind of negative price revelation, given the price increase that you took at the end of the April. Why was that? Why did that occur?

Jeff Ettinger

Pretty significant promotional spending, and that comes out of pricing. I mean we have often done the price increase as we did discuss are being reflected on the marketplace. So we have eat up in some of the areas against certain items and that ultimately ended up not only contracting the sales price quoted, but margins for the whole division.

Christina McGlone - Deutsche Bank

And so, Jeff, when you talk about a slow start to grocery, and following up on a previous question, do you mean in terms of top line or are you talking about operating profit because of the lag in realizing the lower raw material, the lower protein price there or is it the combination of both?

Jeff Ettinger

It’s more of the profit side that we are talking about. I mean, we are just trying to be cautious and realistic in relation that we have had two quarters in a row of negative segment profit return year-over-year. Our outlook would be able to flatten that out in the first half.

We’ll see a little less growth on the top side than we would have otherwise because of the divestiture we mentioned of Patak's. And it was not a significant profit contributor, but it's about $6 million in sales over the course of the year. And so, that will be out of the mix as well.

Christina McGlone - Deutsche Bank

Okay. And then most of the packaged food companies are kind of their growth algorithm has changed, where you really see strong top line growth and then really no operating margin improvement. So it's kind of the critical top line growth leading to the same sort of operating profit growth, and then financial leverage. But you are guiding to your long-term targets where you do see operating leverage. Can maybe you talk about your balanced model and how that enables to get that sort of operating leverage when a lot of the packaged foods peers are unable to?

Jeff Ettinger

I think it's really may be less the balanced model and more related to areas such as innovation. That when we bring out new products, we are always looking to really add elements of convenience, flavor whatever to the consumer, but we are also looking to price it accordingly and expect to have those margins (inaudible) items that have been in the market either a long time or items that have a lot of competitors in the same space.

And one of the things we mentioned in our release was, I've talked about a $1 billion challenge. I mentioned a number of items, although we haven't had any home runs in terms of new products, we have a lot of items that are kicking in $20 million, $40 million, $80 million, $60 million in annual sales at very significant margin enhancement and so that's adding to our ability to leverage it down to bottom line.

Christina McGlone - Deutsche Bank

Okay. And then just one last question. I think at the Investor Day, you had said that working capital would be, I think, neutral next year in terms of cash flow, but it looks like inventories finished a little higher than I would expect. I'm just curious if that's still your guidance in terms of neutral working capital next year?

Jody Feragen

To the extent that we have acquisitions, you're probably going to see slightly more working capital in the inventory and accounts receivable area booked at about $30 million to $35 million in the current asset side of things. Seen a little bit of higher inventories at Jennie-O because of the grain inputs into the Turkeys, but that sometimes is a cyclical thing as well, so I would model it flat to up slightly.

Christina McGlone - Deutsche Bank

Okay, thank you.

Operator

Our next comes from Eric Larson with Piper Jaffray. Please go ahead.

Eric Larson - Piper Jaffray

Yeah. Good morning. Congratulation on a good quarter and year everyone.

Jeff Ettinger

Thank you, Eric.

Eric Larson - Piper Jaffray

Jeff, one of the things that your organization made some pretty good strides on in 2007, are you selling delivery expenses, your administrative general expenses as a percent on some of those, they are the lowest spend since prior to 2001.

Also your marketing spending as a percent of sales was the first time below 2% that we've seen in a long time as well. Can you talk about the expenses, those expense ratios, are they sustainable?

And then on the marketing side, I don't know if you got the absolute dollars are sufficient, the dropping as a percent of sales. But do you feel you have sufficient stimulus against your brands to keep the marketing [progress] go on?

Jeff Ettinger

Let me take the marketing question first, and then, Jody I think, will talk to more of the SG&A side. We really would expect our marketing spend to be more back up to the 2% level. We did defer a couple of programs that we had originally anticipated running in fourth quarter.

We deferred an ad campaign against SPAM once only because we're going to be rolling out SPAM singles on a national basis, and we wanted to give our sales force adequate time to gain the kind of distribution it needs to really make that spend worthwhile.

And we also deferred some of the Jennie-O Turkey Store advertising in part because of the year they have been having and in part because their early focus in advertising gone up and ready, and we found that it really works just as well to have that advertising in the two to three week timeframe right before Thanksgiving as oppose to kicking it off in September, October as we did in prior years. So on that piece, you should see some more significant growth in the marketing side in 2008.

Jody Feragen

And then I guess if I were to address the selling and delivery costs, we've made several acquisitions, we've launched many new products and we've done that with a pretty steady base of sales people delivering those same results, so certain leverage in that area. We've also taken advantage of some great programs in the logistics area to reduce our costs of delivering products to our customers, so certainly some great work internally.

From the whole G&A aspect, last year certainly had some unusual costs and we've outlined those before for you. I would take advantage of leveraging those assets as we move forward and gain scale on the top line. And we are obviously always looking for ways we can cut costs.

Eric Larson - Piper Jaffray

Okay, thanks. And maybe I missed it, but Tim Ramey didn't give his wine picks this year for Thanksgiving unless I missed that.

Jeff Ettinger

Well, maybe there will be a follow-up e-mail.

Eric Larson - Piper Jaffray

All right, okay. Happy Turkey to everyone.

Jeff Ettinger

Thank you, Eric.

Operator

Our next question comes from Oliver Wood with Stifel Nicolaus. Please go ahead.

Oliver Wood - Stifel Nicolaus

Great, thank you. Nice quarter.

Jeff Ettinger

Thanks, Oliver.

Jody Feragen

Thanks.

Oliver Wood - Stifel Nicolaus

I feel like I'm kind of beating a dead horse here. But just getting back to these live hog markets, it seems like currently there's, what I would characterize is way too many hogs out there, that margins are fairly terrific on the packing side. But given the size of the breeding herd, just trying to understand how this market is going to rebalance?

Jody Feragen

I guess we are calling for the live prices to be under where they were for full year 2007. My visibility into the first quarter of 2008 puts it at about 41. I am not sure that I am answering your question, but I wasn’t sure where it was going either.

Oliver Wood - Stifel Nicolaus

Well, I am trying to get a sense for if there is just too many breeders out there. Are we going to get balance from export markets picking up or is there some sort of big regression that is to happen just within the actual mechanics of that market?

Jody Feragen

Well, from the breeder standpoint, they invested a lot in infrastructure and that's something that you don't turn off, perhaps as fast as chicken producers can. So, I think they have had some several good years in a row of profits on the producing side, and my expectation is that they will plan on hanging in there and the protein will have to be clear in the market before that changes.

Oliver Wood - Stifel Nicolaus

So the market is in a better position to sustain losses?

Jody Feragen

I think from the producer standpoint, they have had several good years of profitability in raising it.

Oliver Wood - Stifel Nicolaus

Well, sounds like good news for you guys. And then just wanted to clarify with guidance, does that include any benefit of acquisitions or would that be incremental?

Jody Feragen

We typically don't include any acquisitions in our planning process and forecast. Long term, we'll say that we are going to grow the top line 5 and bottom line 10, and a portion of that will come from acquisitions. But our near-term guidance for 2008 does not include any acquisition.

Oliver Wood - Stifel Nicolaus

Okay. Great. Thank you very much.

Jeff Ettinger

Thanks, Oliver.

Operator

(Operator Instructions)

Our next question is follow up from Tim Ramey. Please go ahead.

Jeff Ettinger

Operator, we're coming to [wind up] here.

Tim Ramey - D.A. Davidson

Well, by popular demand, I think the thing that you want to have with your Jennie-O Turkey Store Oven Ready Turkey would be an organ keen on a war, both patriotic and luscious to have with that whole bird. So we will give our guidance once a year only as well.

Jody Feragen

Thank you, Tim.

Operator

And at this time, I am showing no additional questions in the queue. I would like to turn the call back over to management for any concluding remarks they may have.

Jeff Ettinger

Well, this is Jeff, Andrew, I just want to thank you for joining us on our call today. Hopefully by moving from Wednesday to Tuesday, that was beneficial for everyone in terms their holidays getaways, and we look forward to working with you in the future.

Jody Feragen

Happy Thanksgiving.

Operator

Ladies and gentlemen, this does conclude the Hormel Foods fourth quarter earnings conference call. You may now disconnect, and we thank you for using ACT Conferencing.

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