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Executives

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

Analysts

Farha Aslam - Stephens Inc., Research Division

Christine McCracken - Cleveland Research Company

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Robert Moskow - Crédit Suisse AG, Research Division

Eric Larson

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

Hormel Foods (HRL) Q2 2012 Earnings Call May 23, 2012 9:30 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hormel Foods Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, May 23, 2012.

I would now like to turn the conference over to Kevin Jones, Director of Investor Relations. Please go ahead, sir.

Kevin C. Jones

Good morning, everyone. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2012. We released our results this morning before the market opened around 6:30 a.m. Eastern Time. If you did not receive a copy of the release, you can find it on our website at www.hormelfoods.com under the Investors section.

On our call today is Jeff Ettinger, Chairman of the Board, President and Chief Executive Officer; and Jody Feragen, Executive Vice President and Chief Financial Officer. Jeff will provide a review of the operating results for the quarter, then Jody will provide detailed financial results. The line will be open for questions following Jody's remarks. An audio replay of this call will be available beginning at 10:30 a.m. Central Time, May 23, 2012. The dial-in number is (800) 406-7325, and the access code is 4535051. It will also be posted to our website and archived for 1 year.

Before we get started with the results of the quarter, I need to reference the Safe Harbor statement. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed in or implied by the statements we will be making. Among the factors that may affect the operating results of the company are fluctuations in the cost and availability of raw materials and market conditions for finished products. Please refer to Pages 28 through 35 in the company's 10-Q for the quarter ended January 29, 2012, which was filed with the SEC on March 9, 2012. It can be accessed on our website. [Operator Instructions]

Now I will turn the call over to Jeff.

Jeffrey M. Ettinger

Thanks, Kevin, and good morning, everyone. We are pleased to announce a record quarter for both earnings and sales. Earnings for our second quarter were $0.48 per share, up 20% from a year ago, 4 of 5 segments contributed to these results. Sales increased 3% during the quarter and again, we're up in 4 out of 5 segments. Total volume declined 2%, though much of the decline was due to reduced sales of commodity meat in both our Refrigerated Foods and Jennie-O Turkey Store segments.

This quarter once again demonstrates the benefit of our balanced model, as the strong performances by our Jennie-O Turkey Store and All Other International segment and year-over-year gains by Grocery Products and Specialty Foods, more than made up for the softer results by our Refrigerated Foods segment. I will now take you through each segment.

For Grocery Products, segment profit increased 10% on a 1% sales increase. We again experienced softness in center of the store sales during Q2, but we did see some improvement in comparison with the first quarter. Sales of our SPAM family of products grew during the quarter, aided by our fresh round of advertising, featuring a new animated character, Sir Can-A-Lot. It is noteworthy that this product line is celebrating its 75th anniversary this year and is still growing, both in the U.S. and abroad. Sales of our Compleats microwave meals were soft, along with the category.

Our new product packaging and several new product varieties have still not been fully reflected in retail stores. We will continue to advertise our Hormel brand, which features this product line, along with Hormel Natural Choice deli meat and Hormel pepperoni. We are pleased with the growth of our MegaMex food product line led by Wholly Guacamole refrigerated dip and [indiscernible] Salsa. We have also rolled out some new varieties of our Wholly refrigerated salsas. Our Refrigerated Foods segment reported a 25% decline in operating profit due primarily to unfavorable pork operating margins. The company overall did benefit during the quarter from lower pork raw material cost for our value-added products, benefiting foodservice and meat products within Refrigerated Foods.

Sales for our Refrigerated Foods segment declined 1% in the quarter, reflecting lower sales of commodity pork. The team reduced harvest level during the quarter in order to limit our exposure to the unfavorable pork operating margin. Sales of retail value-added products grew, led by Hormel Natural Choice deli meats, Hormel party trays, Hormel sliced pepperoni and our Di Lusso Deli products. Foodservice sales were also higher, with solid gains from Hormel Natural Choice deli meats, Café H ethnic products and Hormel premium bacon.

Our Jennie-O Turkey Store segment had another outstanding quarter, with segment profit -- operating profit up 50% on a sales increase of 7%, driven primarily by expanded sales of our retail value added products. Jennie-O Turkey Store's results also demonstrate efficiency gains throughout its farms, plant and supply chain. Sales of our Jennie-O Turkey Store fresh tray pack items and turkey burgers were particularly strong, as we continue to benefit from our Make the Switch advertising campaign late last year.

Our Specialty Foods segment operating profit increased 9% in the quarter as pricing actions taken earlier this year offset higher raw material cost. Sales by our Specialty Foods segment grew 12% during the quarter, led by private label canned meat, ingredient sales and bulk and nutritional products. In our All Other International segment, operating profit grew 52% and sales increased 11%, due primarily to strong exports of fresh pork product and sales growth in our SPAM family of products. We also saw improved results at our Purefoods-Hormel joint venture in the Philippines.

As we stated in our fourth quarter conference call last year, we anticipated a more difficult operating environment in 2012 and for comparisons to be more challenging in the first half. Our strong performance in Q2 brings us back to even in terms of earnings per share at the halfway point of the year. Heading into the second half of the year, our Grocery Products, Specialty Foods and International segments are positioned well to contribute solid earnings growth. In particular, we expect continued strong performance from our international team, which is benefiting from a positive export environment and from their branding and marketing efforts.

The run of gains at Jennie-O Turkey Store has lasted longer than I originally anticipated and the recent decline in commodity turkey values, coupled with higher grain inputs, may slow these gains going forward. We do plan on running a new advertising campaign later this year to help drive the continued growth in the sales of our value-added turkey products. We look for our Refrigerated Foods segment to improve in the back half of the year through improved margins and sales of our value-added products, even as pork operating margins remain below typical levels. Taking all of these significant factors into account, we are maintaining our fiscal 2012 earnings guidance range of $1.79 to $1.89 per share.

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

Jody H. Feragen

Thank you, Jeff. Good morning. Earnings for the second quarter of fiscal 2012 totaled $127.9 million or $0.48 per share compared to $109.6 million or $0.40 per share a year ago. Earnings for the first half of fiscal 2012 were $256.3 million or $0.95 per share compared to $258.4 million or $0.95 per share last year. Dollar sales for the second quarter totaled $2.01 billion compared to $1.96 billion last year, a 3% increase. For the first half, dollar sales increased 4% to $4.05 billion. Volume for the second quarter was 1.2 billion pounds, down 2% from fiscal 2011. Year-to-date, volume was 2.41 billion pounds, down 2% compared to last year.

Selling, general and administrative expenses in the second quarter were 7.4% of sales, down from 8.2% last year. Year-to-date, selling, general and administrative expenses were 7.4% compared to 7.9% last year. SG&A expenses are expected to be around 7.5% of sales for the remainder of the year. Interest and investment income was $2.3 million for the second quarter compared to $2 million last year. Year-to-date, interest in investment income was $3.9 million compared to $2.9 million a year ago.

Interest expense for the quarter was $3.3 million compared to $7.2 million last year. For the first half of fiscal 2012, interest expense was $6.5 million compared to $13.8 million a year ago. With lower debt levels and decreased interest rates, we expect interest expense to be approximately $12 million to $14 million for fiscal 2012. Our effective tax rate in the second quarter was 33.5% versus 33.9% in fiscal 2011. The year-to-date effective tax rate is 33.5% compared to 34.4% last year.

For fiscal 2012, we expect the effective tax rate to be between 33.5% and 34.5%. The basic weighted average number of shares outstanding for the second quarter was 264 million. The diluted weighted average number of shares outstanding for the second quarter was 269 million. We repurchased 1.1 million shares of common stock during the second quarter, spending $31 million. We have 1.9 million shares remaining to be purchased from the current authorization in place. Total long-term debt at the end of the quarter was $250 million, unchanged from last year.

Depreciation and amortization for the quarter was $29 million compared to $31 million last year. Year-to-date depreciation and amortization totaled $59.7 million compared to $62.3 million a year ago. We expect depreciation and amortization to be approximately $115 million in fiscal 2012. Capital expenditures for the quarter totaled $28 million compared to $19 million last year. For the first half, capital expenditures were $58 million compared to $36 million last year. For fiscal 2012, we expect capital expenditures to be approximately $120 million to $130 million.

As we mentioned last quarter, we integrated the sales of Don Miguel Foods, part of our MegaMex Foods joint ventures starting with our fiscal third quarter. Our retail sales force has responsibility for representing this expanded Mexican foods portfolio, and we will report these sales in our Grocery Product segment. Profits will continue to be accounted for through equity and earnings in the Grocery Products segment. As a result, added sales from the Don Miguel integration for the second half of 2012 are estimated to be $80 million to $90 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Farha Aslam from Stephens.

Farha Aslam - Stephens Inc., Research Division

Could you just provide us some more color around the turkey business, in terms of -- for the full year, what do you think volumes and kind of sales and operating profits will do for that division?

Jeffrey M. Ettinger

Volume will probably continue to trend slightly down because it's based primarily on the total number of turkeys we're bringing into the operation, and we said we are running a tight operation this year on that basis. We would expect net sales to be up somewhat as pricing has -- we've had to take pricing in the past and that will continue to roll through in the second half of the year. In terms of earnings, the unit, obviously, has done very well thus far this year. They will be facing more pressure in the form of increased grain costs in the second half and the commodity markets have gone down somewhat in terms of the commodity meat sales. So those will pressure their ability to continue to deliver the very large gains that we've seen thus far. But overall, we think that business is positioned well and with the ad campaign we mentioned and continued spending against the value-added line, we still have a positive outlook for Jennie-O for the remainder of the year.

Farha Aslam - Stephens Inc., Research Division

So you expect profits to be up year-over-year in that division by ’13 would you say?

Jeffrey M. Ettinger

Well, clearly for the year, based on the strong start, they're going to be up. We're not going to give a specific segment-by-segment amount in terms of exactly what we're looking at for Jennie-O, but we talked early in the conference call at the end of last year about them holding their own. They've done more than hold their own thus far. They may have enough momentum to be able to continue to generate positive gains. But the floor we would see would be to be able to at least hold their own at last year.

Farha Aslam - Stephens Inc., Research Division

Okay. That's helpful. And then just a follow-up, Jody, on the corporate expense, it's kind of down almost half year-over-year. I was wondering what drove that and if you could just give us a color on what it's going to be for the full year as well as what interest expenses for the full year.

Jody H. Feragen

I gave that as part of the script, Farha. So let me pull back to make sure I state it correctly. But our general corporate expenses were positively impacted by our insurance experience, if you will. Our medical and pension accounts ended up being more positive this year versus last year when we had some unfavorable trends. For your other question -- and for the full year, we expect it to be more around the 7.5% in net sales for total SG&A. And then interest expense, we're looking at the $12 million to $14 million. Really, we're down in the level of debt that we have and the interest rate is much lower on the bonds that's outstanding.

Operator

And our next question comes from the line of Christine McCracken from Cleveland Research.

Christine McCracken - Cleveland Research Company

I just wanted to dig a little bit into your -- what appears to be export strength in your All Other segment. It does seem like things have slowed a little there. I'm just curious if you could detail and/or provide any color around pockets of strength. I think you mentioned your Philippines joint venture. But specifically, if you have any other color around that segment that could help us understand what you're looking for over the balance of the year.

Jeffrey M. Ettinger

Well, general export, the one area we've seen a little bit of a slowdown would be Korea, given that last year they had foot and mouth issues and their herd has come back to about 90% of where it was. Even with that, our numbers year-over-year for the quarter were pretty favorable or down slightly in Korea. We more than made up for that with the rest of the Asian markets and when it comes to fresh pork. And then in terms of some of our partnerships, you correctly referenced the San Miguel Philippine partnership as being very favorable for the quarter. We continue to improve our results in China, albeit it's still not a large contributor to the bottom line, but it's heading in the right direction. So we're comfortable with our Asia focus and it's a combination of pork items, both fresh and processed. And then SPAM is a very important product in the Philippines and Korea or Okinawa. We're working to make it more important in Japan through our ad campaign there and we're back in China working on trying to build the marketplace in China for SPAM as well.

Christine McCracken - Cleveland Research Company

Just as a follow-up, when I think about this business going forward, prices have softened a little, but it seems like your volumes probably see a pickup as a result. Long term, is this a business that you think can continue to grow at this pace? Obviously, it's hard to make long-term estimates based on kind of what we're seeing globally, but it seems like pork's still a popular item around the world. Is that something you expect to continue?

Jeffrey M. Ettinger

Well, Christine, your question focuses on international, I'm assuming still?

Christine McCracken - Cleveland Research Company

Yes, yes.

Jeffrey M. Ettinger

Okay. Yes, yes, our expectation for International is that it would continue to grow at rates that are higher than our company-wide goals, which are the 5% revenue and 10% earnings growth. They've certainly been delivering on that strongly the last couple of years and based on the various branded franchises we have in place in different markets right now, we look at that very favorably.

Operator

Our next question comes from the line of Diane Geissler from CLSA.

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

I have a question. How did the quarter rate versus what your internal budgeting had been looking for coming into it? And then to the extent that it was either ahead of plan or on plan, why the conservatism on the full year outlook? Certainly, you were significantly higher than consensus. So maybe we were just all wrong versus your budget, but just trying to figure out if there's something, a particular headwind that you're concerned about, is the grain prices in turkey or pork cutout or why keep the guidance where it is?

Jeffrey M. Ettinger

We talked at the beginning of the year about how we expected the first half of the year to be difficult and that we would see most of the gains -- and we provided a guidance range that clearly was going to be, hopefully, our 27th up year in our last 30 years. When all said and done for the half, we're at even. We probably did a little bit better in the second quarter than I originally anticipated and a little bit worse in the first quarter, with refrigerated experiencing a lot more significant challenges with the processing margin. You identified a couple of things that are certainly watch-outs going forward in terms of the pork operating margins are still poor right now. The center of store volumes, although improving sequentially, are still not to where we'd like them to be. But we feel we can more than offset those with the positive momentum going on in specialty with our other grocery items, with our Foodservice and meat products, with Jennie-O's branded items. And so as we sit here today, we net out that to hit our guidance range, we'll have to have continued up quarters in the high-single digits to low-double digit range. And we think that's probably a reasonable range right now for the remainder of the year.

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

And has the pork operating margin improved since the start of the third quarter?

Jeffrey M. Ettinger

It's bounced around. It improved some initially, and the very current picture is not very pretty right now.

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

So would you say there's really no discernible trend yet on pork cutouts?

Jeffrey M. Ettinger

I would agree with that.

Operator

Our next question comes from the line of Tim Ramey from D.A. Davidson.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Just to take another cut at the Jennie-O Turkey Store question which, obviously, these results have just been stunningly good. I think you mentioned in your prepared remarks you thought the gains have been strong and the gains would slow. If that's -- I just want to verify that, that's exactly what you mean rather than things will start to have tough comps or down comps. If you continue to think that we're going to have up numbers in Jennie-O Turkey Store at least, I for one, have been way too bearish on that.

Jeffrey M. Ettinger

Well, through the half, their segment profit is up 22%. Our best look right now, I would say that they should not be continuing at that kind of an increased rate for the remainder of the year. However, we do believe at this point that they should be able to still generate a positive second half year-over-year, and it will be somewhere between that as an up end and flat as a down end.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

And I guess, just thinking about it, seems early to be starting to think about fiscal '13. But at some point, these numbers become comps. We thought they were going to be difficult comps in 2012 and you've been able to continue to generate great returns there. Has your thinking changed about -- I mean, should we be thinking about Jennie-O Turkey Store as a 19%, 20% EBIT margin kind of business now?

Jeffrey M. Ettinger

I think I would agree that, that's probably above the high end of where we think our run rate would be on an annualized basis. They ended last year at 14%. They'll clearly do a little bit better than that this year. Obviously, we've not done any budgeting yet for 2013. Well, looking at the crystal ball as you are, clearly, their comps will be challenging again for next year. I would say, at least, as where we sit here today, that frankly, Refrigerated Foods comps will be not as challenging and so that could be an area where we would make that up. And then ultimately, it's the same old story. It's that -- what are the value-added franchises within all these business units doing and as long as we can continue to drive growth there, we should be in good shape, long term.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

And Jody, did you say anything about your -- if you did, I missed it. The length of your corn forward purchase commitment at this point? Your general view on, do we want to be long or short?

Jody H. Feragen

Our traditional hedging policy is 25% to 75%. Last year, 2011, we were probably on the high side of that range, this year we're probably more in the middle side of that range. And obviously, we look for input from the business units to secure positions that they think they can live with in the marketplace. So we do have some for 2012 and some for 2013.

Operator

Our next question comes from the line of Lindsay Drucker Mann from Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

I just wanted to talk a little more about Jennie-O. You had pretty fantastic flow-through of the incremental sales to your margins, something like 100% incremental margins. And you mentioned a couple of buckets of drivers of that, including shift to value-add and some cost efficiency programs. Could you go a little bit deeper into the kind of what drive -- what drove what proportion of the incremental margin in the quarter?

Jeffrey M. Ettinger

I guess the best I can do with that, on the value-added side was that our kind of the star performer in terms of being able to continue to generate not only net sales growth but volume growth was the retail area. That retail, fresh tray pack franchise that, frankly, we acquired back in 2001 from the Turkey Store and that our team's done a great job of growing ever since, is very robust right now. It's been well supported by the ad campaign that we ran the last 2 years and that we're intending to run again this fall. And so that's been a key driver on the value-added side. And that being said, both the foodservice and deli sides of the business have really been holding their own in a challenging environment, where price often has to be pushed, but they really done a nice job of maintaining volume there. In terms of efficiencies, they really are kind of across-the-board, that's by far the most vertical part of our business all the way from breeder hatchery operations, to feed mills, to owning our own barns, in many case. And also partnering with family farms in the area in terms of grow out. We've been able to really push improvements throughout that aspect of the supply chain through our plant operations and through our logistics area and those are all paying off for Jennie-O in terms of offsetting a lot of those other green input increases.

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Would you normally expect the incremental volume in the retail piece or any of the buckets of the end markets to drive full flow-through to profits or shouldn't be there's some sort of variable margin associated with the typical sales growth story?

Jeffrey M. Ettinger

I mean, not having the benefit of the model you're running, I will say that, in general, our philosophy in the company is not only convert commodity to value add, but to move value add up a value chain that ultimately does widen the margin. As we innovate with new products, we look for higher returns on innovative new items and there may be a category that has a lot of competition and has been around a while. So in the long run, we do think the flow-through ought to be quite good. I don't know whether dollar for dollar is a realistic expectation.

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Okay. And then can you just give us a sense of what the breakout of the mix is now of value-added versus the commodity meat within that division?

Jeffrey M. Ettinger

At Jennie-O?

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Yes.

Jeffrey M. Ettinger

I mean, on a dollar sales basis, Jennie-O is close to 80% value added. On a tonnage basis -- now assuming, we internally, frankly, count the whole bird part as more of a commodity aspect of the business. It is branded but it behaves more on markets and so forth. So assuming that volume is in the commodity volumes, then the volumes are probably closer to 60% value added and 40% in the other category.

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Okay. That's very helpful. And then just lastly, I know that this is a much smaller piece of your overall business but can you comment at all on what you think has been driving some of the pressure in the fresh pork business? Some industry participants have talked about pink slime as having some negative spillover effect, perhaps some change in exports, perhaps some change in some of the competitive activity, any perspective you can add as to why we're seeing the magnitude of margin pressure we are in this business would be helpful.

Jody H. Feragen

So I don't know if you're talking about the pork operating margins. But generally what we've seen is real softness in the domestic market for pork products. Some speculation that it's retailers holding the price and consumers not buying into that franchise. And then for the price of hogs, I'm still mystified as why they continue to drive up in this type of an environment.

Operator

Our next question comes from the line of Rohan Patkar from KeyBanc Capital Markets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

This is Akshay Jagdale, actually. My question was on the pork processing side actually, just -- what's your impression of what happened that resulted in lower packer margins? And just a follow-up to that, how are you thinking about those factors as we move forward?

Jody H. Feragen

Well, we certainly did not expect that for the second quarter, the pork operating margins would be negative. And as I indicated before, it seems to be a combination of softer domestic demand on the cutout side and more demand for the hogs that run up prices on that side of the business. Going forward, outlook for the year would be that those pork operating margins would remain below the levels of last year, but improving in the fall as we get into a traditionally more robust season for production on the hogs side.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So that -- just to be clear, so that improvement in margins will be a result of better domestic demand? Is that sort of a seasonal factor that you're applying?

Jody H. Feragen

My seasonal factor was related to the production of hogs. So more hogs on the ground in the fall as we traditionally see, but still thinking that pork operating margins will be below last year's level.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

But demand will be -- you are assuming that demand will get better?

Jody H. Feragen

Probably expecting the cutouts to be below last year as well.

Operator

Our next question comes from the line of Ken Zaslow from BMO Capital Markets.

Kenneth B. Zaslow - BMO Capital Markets U.S.

In terms of the center of the store, can you talk about what you think the drivers have been to why -- you guys are not the only packaged food company to actually talk about the center of store being a little sluggish. Can you talk about what you think the macro environment is that's keeping it from happening -- from accelerating? And then what are you guys doing to compensate for that and to drive center of the store -- consumers back to the center of the store?

Jeffrey M. Ettinger

Okay. Yes, I mean, everyone kind of has theories on it. We certainly believe there has been some effect related to pricing, that a lot of manufacturers have been confronted with steep increases in raw materials in the types of products that go center of the store. And that have therefore had to push pricing. And we're no exception to that. So at some point, if you take a couple of rounds of price increases if there's at least some short-term resistance to those levels, those could be being reflected. Tied in with that would be, we are seeing a change in terms of promotional behavior and response, where, say, the kind of deals that many retailers would do 10 for 10s, 10 cans of something for $10, et cetera, that those just are not receiving the response they used to. At least, that's been our experience. I think when you do have a cash-strapped consumer, they still like the items, but they're just not willing to load in the pantry at that kind of a level, so that creates year-over-year comp challenges. We definitely feel there has at least been some weather effect, I would concede that, that only make sense with items that seem to be more -- like in our case, canned chili, that had a not-so-great half. This year's winter has been very benign. The year before was very cold. A lot of weekends lost to the Foodservice trade where people ate at home. In terms of what we're doing to combat it, a lot of it is just that day-to-day work you do through your sales organization with the retailers. But on top of that, advertising is clearly very important. We're going to be advertising a really wide array of our products during the second half of the year. So on the Hormel side it's -- Compleats will continue to have a campaign, as well as Natural Choice. We'll be advertising SPAM, and SPAM seems to be responding well to it. We even saw that during the second quarter. Jennie-O Turkey Store will have a new campaign and then our MegaMex venture has 3 different brands that they advertise. And MegaMex is still generating positive volume even in this environment.

Kenneth B. Zaslow - BMO Capital Markets U.S.

So my one follow-up is, why would marketing ebb and flow? Why isn't it not more consistent throughout a year? I guess, that's my follow-up.

Jeffrey M. Ettinger

Okay. I mean even though I mentioned to you the second half programs we're running, these have all been set well in advance. And we kind of set a program, it depends on seasonality of products, it depends -- in the case of the Hormel brand, we try to do it on a complementary basis so that maybe in the winter, we're running pepperoni more, that's more for kind of cooking up and heating up at home or having snacks. Natural Choice, for example, is the third Hormel brand that we're advertising. That's sandwich meats mostly, and that's more of a summer item. So I mean we'd love to have the kind of budget where we'd be on all year. And someday maybe we'll work our way up to that, but I'm using it in a prudent fashion. We lay out an advertising calendar well in advance and there is some seasonality to that.

Operator

And our next question comes from Robert Moskow from Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I guess my question is that you've seen in the Refrigerated Foods business a normalization of margins back to your historical range of 5% to 7% even at the low end. And then you have the turkey business, which is really elevated here. I know you're saying that, that's not sustainable. But you're still saying that it is going to be well above what you had thought was a normalized margin of, I think it was like 9% to 10%. So what is it about the turkey business today that you think is different about the refrigerated business so that we can hold on to these -- hold on to margins maybe in the teens instead of going all the way back down to 9% to 10%?

Jeffrey M. Ettinger

Well, on the refrigerated side, I would argue that we're on the low end of where we belong and in that area and that we need to, through better macro conditions but more importantly, through added value-added sales in foodservice and meat products, eventually get our way up to that higher end of that range. On the turkey side, internally, our expectation has to be a little bit higher in terms of returns to that business because of the verticality. I mean, we have a lot more capital invested at Jennie-O, and that's what you're hopefully getting for that investment is better overall returns. But clearly, at least for now, we seem to have hit on a good formula of driving efficiencies in the operation, most of which I don't expect to just vanish. I mean these are systemic changes that they have made that should be positive going forward. And then supporting branded differentiated items through advertising and other programs with the retailer that should continue to allow those franchisees to grow. After these couple of years, I mean, I think as we head into 2013, we'll probably assess, okay, is there a new guidance level range for where we would expect Jennie-O to be? But we're still kind of in the middle of this year now and so I don't really have that for you yet.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. But the pieces you're putting together here on Jennie-O, that would justify a higher normalized margin -- is the level of investment that you've made in terms of creating value added -- that's different from 5 years ago? Is it also maybe just the consumer is still in the early stages of per capita consumption on value-added turkey and that's changed versus 5 years ago or am I in the right direction?

Jeffrey M. Ettinger

Well, those are important. The export picture is a lot more favorable today and has steadily been that way, but increasing over the last few years. So that definitely provides some added value in a system where you're still -- a lot of the dark meat is going outside the United States. So that's a positive. The more years that go by from the acquisition, I know it's now been 10, but there's times that you find opportunities to consolidate your facilities, to utilize your raw materials better, to purchase better and so forth. And those have been kind of rolling forward as well through their system.

Operator

[Operator Instructions] Our next question is from Eric Larson from CL King & Associates.

Eric Larson

A couple of questions. The first one is probably for Jody. Jody, just for clarification, the first half of this current fiscal year, MegaMex was accounted for only as an equity -- the only P&L item was equity earnings. Is that correct?

Jody H. Feragen

Well, it's a little more complicated than that. MegaMex, the core products that were in the original joint venture have always been sold by our consumer product sales force. So those sales have been included in Grocery Products. So that would be the Herdez items, the La Vic items, the CHI-CHI items, and I know I'm forgetting something. As MegaMex acquired additional businesses, Don Miguel and Fresherized Foods, some of the products that Jeff talked about, they were included only in equity of earnings because they were being sold outside the Hormel CPS organization. We have now integrated Don Miguel to take advantage of some synergies, particularly our sales force. So those Don Miguel sales, starting in this third quarter and going forward, will show up in the Grocery Products top line, but not -- but still be accounted for in equity and earnings. Fresherized Foods at some point in time, we'll look to see if that fits within our Consumer Product Sales organizations to see if there's anything there. But right now, it's Don Miguel and the traditional MegaMex items.

Eric Larson

Okay. What were the Don Miguel sales for the first half, I would assume you're not going to restate any of that, so you'll have that positive impact on your top line in Grocery for your first half next year. So what was roughly your sales for the first half in that business? Don Miguel?

Jody H. Feragen

I would tell you that the $80 million to $90 million range that I gave you for the back half is about what they delivered in the front half.

Eric Larson

Okay. That's fair. I thought maybe you had maybe mentioned that and I may have missed it. The next question is, when you look at your commodity costs outlook for turkey, obviously in the very short run, if you're short, you're getting penalized because of the [indiscernible] both in corn and soybeans. That will probably change for corn going forward, soybeans is probably going to be higher. But I guess the real question is, what is the mix of those 2 commodities that you feed your turkeys? Is it 50/50? Is it 40% soybean meal, 60% corn? What is roughly the mix of feed to your livestock?

Jeffrey M. Ettinger

Well, it varies by season and what we're trying to accomplish. But just to give you a rough estimate it would be more like 2/3, 1/3 corn to soy meal.

Operator

And our next question is from Ann Gurkin from Davenport.

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

I just wanted to ask a question on Jennie-O. How has the selling been for the Thanksgiving holiday? Is that meeting expectations?

Jeffrey M. Ettinger

Yes. We're in good shape with it. It does cause volume changes in our sales numbers because it's really -- we make it up to the customer as to when they take delivery. And this year, some of them are taking delivery a little later than they did last year, so we actually have a little more inventory than we have in the past. But it's committed, so we're in good shape for that.

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

And then Jody, continue to see cash build, which is a good thing. Any updates on potential acquisitions or use of cash or anything there that you could help us with?

Jody H. Feragen

I don't really have an update, but I have said in the past, obviously, we look to invest in our businesses and continue to look at strategic opportunities in the acquisition area. Anything that's a market leader or something that provides scale, something that's accretive from a margin and sales standpoint. We have made a commitment to higher capital level -- CapEx spending this year with some expansion of facilities actually adding some more capacity in our value-added areas. We've made a commitment to our shareholders on dividends, and we continue to perform very well in that area. And then opportunistically, looking at share repurchase.

Jeffrey M. Ettinger

I would just add, I mean, we're very happy with the couple of Mexican acquisitions we have made in the last couple of years. So about this time last year, we talked about Wholly Guacamole, it's just been a great addition to the franchise. And Don Miguel continues to grow nicely also for MegaMex.

Operator

[Operator Instructions] And there are no further questions at this time. I'll turn it back for any closing remarks.

Kevin C. Jones

Very good. Thank you, everyone for listening in on our call. Feel free to follow up with me with any additional questions, Kevin Jones. And have a great day.

Operator

Ladies and gentlemen, this concludes the Hormel Foods Second Quarter Earnings Conference Call. Basically, we'd like to thank you for your participation. You may now disconnect.

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