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Hormel Foods Corporation (NYSE:HRL)

Q1 FY08 Earnings Call

February 15, 2008, 11:00 AM.

Executives

Kevin Jones - Director of IR

Jeffrey M. Ettinger - Chairman of the Board, President and CEO

Jody H. Feragen - Sr. VP and CFO

Analysts

Jonathan Feeney - Wachovia Securities

Farha Aslam - Stephens Incorporated

Mark Churchill - Piper Jaffray

William B. Chapell - SunTrust Robinson Humphrey

Timothy S. Ramey - D.A. Davidson

Christina McGlone - Deutsche Bank North America

Robert B. Moskow - Credit Suisse

Michael Hamilton - RBC Dain Rauscher

Christine McCracken - Cleveland Research

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Hormel Foods First Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. As a reminder, this conference is being recorded today Friday February 15, 2008.

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

Kevin Jones - Director of Investor Relations

Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2008. We released our results this morning before the market opened around 6.30 AM Central 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, Senior Vice President, and Chief Financial Officer.

Jeff will provide a review of the operating results, and an outlook for the new fiscal year. Then Jody will provide a detailed financial results for the quarter. The line will be open for questions following Jody's remarks. An audio replay of this call will be available beginning at 12 PM Central Time today, February 15, 2008. The dial-in number is 800-405-2236, and the access code is 11107655. It will also be posted on our website and archived for one year.

Before we get started with the results of 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 fluctuations and the cost and availability of raw materials and market conditions for finished products. Please refer to pages 32 through 35 in the company's annual report for the fiscal year ended October 28, 2007 for more details. It can be accessed at our website.

Now, I will turn the call over to Jeff.

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

Good morning. We are off to a good start this year, building upon the momentum we achieved in the last quarter of fiscal 2007. Sales for Q1 were $1.6 billion, up 8% from the prior year and up 5% excluding acquisitions. Earnings for the quarter was $0.64 per share, compared to $0.54 per share last year, an increase of 19%. And, operating profit was up 25% from a year ago. In reviewing our performance this quarter, I am happy to see that all five segments reported both top line and bottom line growth. And, I will now take you through each segment.

Our grocery product segment reported a 10% increase in both sales, and segment profits for the quarter. The explosive growth of our Hormel Compleats microwave trade business has continued, as sales for the quarter were up 64%. We have addressed the continued strong demand for this product line with the announcement of an $89 million plant dedicated to microwave trades that will be built in Dubuque, Iowa and is scheduled to open in November of 2009. Grocery products also benefited from strong sales of our SPAM family of products which were up 15% from a year ago. Enhanced promotional and advertising support, as well as increased distribution of SPAM singles wine leads to increased household penetration.

Sales of our Stagg and Hormel Chilli business where also strong aided by increased distribution. We are still experiencing weaker results with Valley Fresh chunk meat and Chi-Chi's sauces. Our refrigerated food segment had an outstanding quarter reporting 50% higher operating profit on a 8% increase in sales. This group benefited from lower pork raw material costs, and strong sales of value-added products. Products in the retail channel reporting strong double-digit growth include Hormel refrigerated entrees and Hormel Natural Choice sandwich meats. The refrigerated food segment also benefited from a full quarter of result by the Burke Corporation.

Jennie-O Turkey Store had another strong quarter with operating profit up 16%, and sales up 5%. Higher commodity grain input costs were offset through a combination of recaptured pricing, product mix improvements, and manufacturing efficiencies. Products reporting strong growth included Jennie-O Turkey store frozen burgers, marinated tender wines and DI LUSSO Deli Products.

The Specialty Food segment reported increase sales of 7% and a 1% increase in operating profit versus a year ago. The Specialty Products business unit helped the segment results with added contract manufacturing volumes.

Century Foods International also posted improved profit results due to our favorable product mix shift. Operating profits were lower in the Diamond Crystal brands business unit, as they were unable to completely offset higher commodity input costs. In the all other segment, our international business unit had another exceptional quarter with sales up 21%, and operating profits up 39% compared to last year, strong export sales of the SPAM family of Products Stagg Chilli and fresh pork were the key drivers. As we had mentioned we anticipate continued pressure from higher grain and energy costs. Given the increase in Corn and Soya prices, we expect the full year impact of feed cost to be an additional $80 million above the $40 million we discussed during our first quarter call. Some of this increasing cost will be offset by hedges we have in place and we will continue to pursue strategic pricing advances.

We also expect to see continued benefit from lower protein input costs as Jody will elaborate upon later in the call. Ultimately the major driver of value for our company and our shareholders is our continued focus on growing our value added products and our new product innovation. As you know we achieved our billion dollar goal of new products introduced during the decade as of the end of fiscal 2007. Two years earlier than our original stated target.

We continue to emphasize innovation at Hormel Foods and has set new goal of $2 billion in sales by 2012 of new products introduced since 2000. Our most recent tracking of these items show sales of over $300 million in the first quarter of 2008 alone, a 23% increase over the same measure a year ago. After evaluating both the macro economic factors affecting our business and our momentum in creating value added growth, we are reconfirming 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 the financial information.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Thank you Jeff. Good morning everyone. As Jeff mentioned dollar sales for the quarter totaled over 1.6 billion compared to 1.5 billion last year, an 8% increase. Acquisitions added 39 million to the top line in the first quarter. Volumes for the first quarter was £1.2 billion, up 5.2% from fiscal 2007.

Acquisition added £29.3 million to the quarter. Selling and delivery expenses in the first quarter were 12.8% of sales this year compared with 13.2% last year. You may have noticed we are no longer reporting marketing expense as a separate line item on our income statement.

Marketing expense has been included in the selling and delivery expense to align our financial information in the earnings releases with the presentation we used in our SEC filings.

We will begin reporting consolidated advertising expense, which includes the cost of production and consumer communication. For the first quarter advertising expense was 1.7% of sales compared to 1.9% in fiscal 2007. We expect advertising expense throughout 2008, to increase as we implement branding campaigns behind SPAM, Completes, Lloyd's Barbeque, and our Fully Cooked Entrées.

Administrative and general expense was 2.8% of sales for the quarter which was even with last year. Interest expense for the quarter was $6.7 million compared to $6.4 million last year. Interest expense increased in the quarter due to higher outstanding short-term debt balances associated with our Burke acquisition. We expect interest expense to be approximately 24 million for the full year.

Interest in investment income was a loss to $5 million for the first quarter of 2008, compared to income of $2 million in fiscal 2007. Returns on our Rabbi trust investments, which we used to fund our non-qualified pension plans and differed compensation were significantly lower this year due to the volatile market condition.

Total debt at the end of the quarter was 350 million flat with last year. We expect cash flow from operations to fund the majority of our capital needs during fiscal 2008, including our new Dubuque, Iowa plant.

Depreciation and amortization for the quarter was 33 million compared to 31 million last year. We expect full year depreciation and amortization to be about $130 million. Our effective tax rate in the first quarter was 36.7% versus the 34.8% in fiscal 2007. We expect the effective tax rate to be in the range of 36% to 37% in our second quarter.

Capital expenditures for the quarter totaled 32 million compared to $36 million last year. For 2008 we expect our capital expenditures to be in the $145 million to $150 million range. We have expansion projects underway at several locations to meet expected consumer demand for our value added products.

Basic weighted average number of shares outstanding for the first quarter was 136 million, the diluted weighted average number of shares outstanding for the quarter was 138 million. We repurchased 384,000 shares of common stock during the quarter at an average price of $36.91 per share.

We have 3.8 million shares remaining to be repurchased from our 10 million share authorization. We processed 2.5 million hogs in the quarter compared with 2.4 million last year. The actual live hog cost in the first quarter was $40 for live 100 weight. Slightly less than our forecast of $41 we gave in the fourth quarter conference call. This compared with an average live base price of $46 for the same period last year. We anticipate an average market of $44 to $45 per live hundred weights for our second quarter compared to a $48 last year. We expect the favorable supply conditions in the hog market to continue in to the later part of 2008. We are not seeing significant solid liquidation and do agree with the USDA assessment of a 4% increase in pork production for 2008.

At this time, I'd like to turn the call over to the operator for the question-and-answer portion.

Question And Answer

Operator

Thank you Ma'am. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Jonathan Feeney with Wachovia. Please go ahead.

Jonathan Feeney - Wachovia Securities

Good morning and thank you.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Good morning.

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

Hi John.

Jonathan Feeney - Wachovia Securities

Nice quarter, when you look at first Jody, when you talk about, I am not sure you talked about solid liquidate, a lack of solid liquidation I guess we've been hearing conflicting things about that, can you talk a little bit more about your forecast for beef costs over the next year, three to six months?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

We're expecting based on the supply numbers we are seeing out there and conversations we are having with our producers, that there is going to be a plentiful supply and that prices are going to be less than what they were last year. I think we will seeing 44 to 45 for our second quarter and continued to be under where they were in 2007 for the remainder of the year. There has been some uptick in some of the weeks on solid liquidation, but we have seen plentiful hogs coming in out of Canada, that's where we see the market at this point.

Jonathan Feeney - Wachovia Securities

Its interesting and now my original question which was going to be for Jeff, you have some real, pretty nice volume performance in grocery products and I know you have a lot of nice new product in there, but also a portfolio that seems to offer a decent amount of say convenient value to consumers. Do you think that's a fair statement, do you think you are getting better lift in your products because of that maybe trading down from restaurants or maybe trading down from some other category?

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

I think there could be some other going on John but I mean, I think we've talked in past calls that if we could even neutralize the effect of some of the more matured franchise than grocery and allow Complete and the microwave side to shine through, the grocery will be in good shape and you look at sales this quarter of the $21 million increase for grocery complete with $16 million of it. So I mean its, it really is having that affect but that thing said, it was a good quarter also for Hormel Chili and for SPAM so there certainly could be some element of consumers of seeing the value propositions in those items and responding accordingly.

Jonathan Feeney - Wachovia Securities

And could you just comment more generally about the... I mean I know for the most part, your most important meat commodity reserves are pretty low but your cost overall are rising, I mean is it, are there, is it easier now for you guys to take pricing. I mean, is it, I guess is it a good pricing environment for you where pricing is, in places where pricing is appropriate even though maybe some of your commodity cost are actually a bit deflationary?

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

Well first of all on the cost side, is this somewhat of the mix bag, we're not, we don't have that same benefit necessary on all the beef inputs we have for items like Hormel Chili and getting [ph] beef, are the Turkey being more vertically integrated, it's a pure cost essence and that's clearly been in heavily inflationary. Pretty along the forecast types of grocery products and all refrigerated they have seem to benefit there. In terms of outlook, it's a hard to say right now. From our perspective, we think we had good success in most cases taking pricing but we are in situation such as with Jennie-O where we're on round 3 and round 4 and you have to balance your needs the customer's needs, what the threshold is for the consumers, all we're trying to do with our pricing frankly is tread water where we if we could, if we can recapture the cost increases that were confined with then we have enough innovation going on in the company and enough growth in our branded items that we can deliver our bottom-line goals through expanded volumes there.

Jonathan Feeney - Wachovia Securities

Okay. Well thanks very much.

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

Thanks John.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Thanks John.

Operator

Thank you sir. Our next question comes from the line of Farha Aslam with Stephens Incorporated. Please go ahead.

Farha Aslam - Stephens Incorporated

Hi Good morning.

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

Hi Farha.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Good morning.

Farha Aslam - Stephens Incorporated

Congratulations on a great quarter.

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

Thank you.

Farha Aslam - Stephens Incorporated

Could you just comment on your thoughts on country-of-origin labeling do you think that's going go through and what's your view about Canadian hog with that legislation?

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

Well... I mean first of all its hard, we are not sure on country-of-origin labeling where it stands and the whole farm build has been a kind of mess with the election year proceeding. There has been a lot of efforts to work towards and comprises language so that the language that was in the old bill has been delayed, won't take affect and were in favor on the compromise language and our best assessment is that it will eventually get worked into law but it doesn't happen yet.

All that being said, we are in favor to comprise language were kind of gap that were even at this stage is such a non-issue to consumer as far anything we have ever heard and so its going to impose added cost and added the handling to the system totally a necessary basis. I noticed that there was proposal before Congress to surpass on fees to the retailers for to help the government offset their cost of imposing this which is shows kind of how ridiculous the whole thing is but. Anyway that all being said in the area Canadian hogs, it clearly is having a short-term effect because they have a concern that whatever emerges could be detrimental for the free flow of commerce from Canada and so we are seeing that, but I don't have a very good outlook for you past the next few months, it kind of depends on what that final language is and how consumers react to it.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

I think there is some impact on the hogs from Canada also, because of decreased production capabilities up there with some of the businesses, shattering some of their plans as well for us.

Farha Aslam - Stephens Incorporated

Great, that's fair. And could you comment on the actions you're taking to improve Farmer John, you've been working on that. Could you just share with us your progress there?

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

Farmer John is a timing of our acquisition for Farmer John and has ended up being less and fully opportunistic. They are much more of a kind of a more integrated, more susceptible to commodity markets, more susceptible to the input costs, because they do raise a percentage of their hogs and have others on cost based contracts. And so it's been a struggle. The long-term goal there is clearly to convert Farmer John in the same way, as we converted the Hormel portfolio over the last 10 years. They have increased the percentage of products that become... they get into the category of brand into value added, and we are making some progress. It's been better on the food service side, so far than it has in retail.

But, it's a terrific brand. I mean there is tremendous awareness and strong association in the Western markets. So, like... it's a great platform for us to turn lose our innovation, expertise, and come up with some better margining items for the portfolio. So, we are confident in the long-run, that's the team we have in place out there. We'll get the job done.

Farha Aslam - Stephens Incorporated

Okay. And my final question is on your food service contract. Your food service business overall. Could you share with us what you anticipate that to do with the weakening economy?

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

Well, we saw a... our first quarter sales volumes were lower than what we've had been experiencing over the past few years, and then we typically are of mid to high single-digit growth entity within that realm and this quarter was more low single-digit. So we are seeing some effect. It seems to be more in the casual dining sector, and so, we are both working with those accounts, and with other accounts to make sure that we continue to bring items that consumers are looking for in various application. And overall it's a good quarter for the division in terms of their overall operating result. So we are cautiously optimistic about their ability to continue to grow in this environment, but that does seem to be where the overall economy pressure are landing first

Farha Aslam - Stephens Incorporated

Okay, great. Thank you.

Operator

Thank you Ma'am. Our next question comes from the line of Steven Nissan [ph] with Mindful Capital Investments. Please go ahead.

Unidentified Analyst

Thanks a lot guys, Jeff great job as usual. Couple of things, regarding your operational improvement initiative for 2008, what you guys going to be doing revolving around lean and Six Sigma? And how do you expect that the benefit throughput in all of your plans?

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

We... I don't want to say we dabble on it, because that wouldn't be the right way, but if we are not a full-on lean operator, we are not...we have elements of Six Sigma in our company. We have trained black belts etcetera. But they tend to be very specific projects, as opposed to entire planned installation that are on that basis. That being said, I think that group has done a very nice job at assisting our operations units, and our industrial engineering group with finding a lot of opportunities to attain improved deficiencies in our plants and that was a key contributor of results, particularly in refrigerated foods and Jennie-O Turkey Store. It's finding ways to gain more throughput thought certain of the facilities. It's shifting lines between facilities to optimize those returns. We are doing some expansion within the company. Jody mentioned those and in most of those cases those end up being with a lower operating cost when you have a dedicated focus, new operation, that's going to have a kind of throughputs that can drive those kind of returns. So, it is a key contributor to our success.

Unidentified Analyst

How would you feel like your ability right now to synchronize orders that are coming in with your material's capacity? Are those pretty much in sync or are you running a little behind in terms of lean times or would you say in terms of throughout?

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

: We are in good shape with that. I mean, as the primarily mid meat business player, I mean we're... you have to be that. If we were not getting that job done on a day-in and day out basis we would be letting a lot of value go out the door.

Unidentified Analyst

Okay. What metrics are you guys using you in your manufacturing process to look at your success? Are you looking at RONA or ROE? How are you guys judging yourselves against your peers?

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

: Right, you are getting the specifics that we had just assumed not disclose on our public call.

Unidentified Analyst

Okay. And final question going forward for 2008. What would you like to accomplish as your number one goal as CEO to make sure you improve shareholder value, and give in to all your demand, and also be a little, get in all your throughput throughout your plans to allow all your customers to get the right product at the right place at the right time?

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

: Our key focus is the company continues to be our branded value added business and we are enjoying really excellent success at that, we're...our 8% top line growth in Q1 build upon 8% last year, 6% in 06, 13% in 05, and so we think we have the right recipe in place for meeting the needs of the consumers, and we produce some on a efficient basis.

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you sir. Our next question comes from the line of Michael Hamilton with RBC Dain Rauscher. Please go ahead.

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

: Hi Michael.

Operator

Pardon me, Michael has dropped out of the queue. Our next question will be from the line of Mark Churchill with Piper Jaffray. Please go ahead.

Mark Churchill - Piper Jaffray

Yes, you guys had mentioned a few different things for commodity costs, but can you give us an idea on the balance of the portfolio what you're looking for as a percentage of increase year-over-year?

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

: Are you talking about inputs?

Mark Churchill - Piper Jaffray

Yes, I mean I think you had talked before about 3% to 3.5% higher inputs on a previous call. Can you talk about product change now as you've gotten to see one quarter?

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

: Well it kind of varies by unit. I mean it's clearly the bigger increase is going to confront to Jennie-O-units.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Yes, and then we've actually kind of did quantify it in terms of call for you. We expect it to be about $80 million more than the 40 that we talked about at the end of fourth quarter on our call. So,

Mark Churchill - Piper Jaffray

Okay, thanks a lot.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

All right.

Mark Churchill - Piper Jaffray

I must have misunderstood there.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

I'm sorry

Mark Churchill - Piper Jaffray

No, no problem. Can you talk about your marketing? You said it's down year-to-date, but increasing through 08. How should we view that against 07, when we get to the end of the year?

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

: Well at this point our plan would be that you'll see an increase by the end of the year. We are continuing the strong effort against the Hormel brand, which we started handling on an integrated basis last year with our new label design in our new campaign, and we have a strong effort against that brand as well this year. But, we've expanded our overall investments in our brands to cover some of our other brands as well. We have a new TV and print campaign for SPAM. We have print campaign for Lloyds and Chi-Chi's and so we're in Jennie-O Turkey still has the print television. So, we think we have a lot of momentum about the branded items and we think these advertising campaigns will add to that

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you Sir. Our next question comes from the line of Bill Chapell with SunTrust Robinson Humphrey. Please go ahead.

William B. Chapell - SunTrust Robinson Humphrey

Good morning.

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

: Hi Bill

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Good morning.

William B. Chapell - SunTrust Robinson Humphrey

Just a quick question on the Rabbi trust. Is that something that's ongoing. Should we model that in similar course, or it's more of a one time charge?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

You can look back to any of our quarter and it's been there for oh gosh last four years. It's a market portfolio security. So I...you'll see what the results of that reflecting what's going on in the broader market, and it's meant to mirror the underlying claims that exists for us.

William B. Chapell - SunTrust Robinson Humphrey

Got you, I just hadn't see the volatility like this in prior quarter, I guess this will have to do?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

The stock markets is the driver there,

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

: It is a bigger than usual.

William B. Chapell - SunTrust Robinson Humphrey

Gosh. And then in terms... I know you've talked a little bit about the company maybe being in a un-levered situation or less levered than you could be comfortable with. Is there any change on that front, or right now have you decided cash for more of these capital expenditure, and still looking for acquisitions.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

No our number one priority for our usage of cash flow is to reinvest in our business and see there a few organic investments, like we are doing in some of our plants, to meet the needs of our valued added product, or through acquisition, so we continue to be looking at those opportunities. We are hoping that the current state of the private equity market allow strategic buyer to be a little more opportunistic, and get these deals at multiple that we feel are accretive for our shareholders.

William B. Chapell - SunTrust Robinson Humphrey

Then it's a last one. On kind of understanding your marketing spend, I guess my understanding was a lot of the marketing on the grocery side would have historically gone towards kind of the Chili and the stew, which were big towards kind of the fall, football season type time frame, but it sounds like that shifting towards other products and then whole [indiscernible] shifted. Is that the right way to look at it?

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

: I think you are right in your assessment from kind of buy a few years ago, but as we balanced the Hormel item range from natural choice, which is lunch meat more of a summer skew for sandwiches. Even their entrée line has a very has a very balance seasonal distribution, Hormel completes as the year round item and if anything we've last year, we've advertised in summer and fall, and that's kind of probably what we were targeting again this year. Lloyd's is the year-round product. So, any of more of the [indiscernible] in place and is out there right now for the seasonality this Hormel Chili as well. But it's a it's a more balanced seasonal approach than what we prior in past years.

William B. Chapell - SunTrust Robinson Humphrey

And I guess just conversely it sounds than the Chile and stew must have really died down if you don't sound like just a step up advertising and promotion on those categories?.

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

: Well I think we aggressive pricing and features that we saw when they were a new entrance into the Chili category in particular that has stabilized, but I mean if anything were we're really trying to focus attention on innovation, one of drivers of growth for Hormel Chili for the quarter was the introduction of microwaveable meals to use the same trade format is complete, but are branded under the Hormel Chili brand, and those for off to a good start so, we are focusing attention on gaining distribution on those.

William B. Chapell - SunTrust Robinson Humphrey

Great. Well thanks and a good quarter.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Thanks.

Operator

Thank you sir. Our next question comes from the line of Tim Ramey with D.A. Davidson. Please go ahead.

Timothy S. Ramey - D.A. Davidson

Good morning. Congratulations.

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

Thanks Tim.

Timothy S. Ramey - D.A. Davidson

The big gain in SPAM that's has to attributable to something either a comparison or a promotion. Do you mind giving us a little bit more detail on what made the needle move so far on that?

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

: Well to be candid I mean SPAM has some volatility in terms of the purchase, I mean that's one advantage frankly of having a shelf life product. If the stores could kind of decide when to feature it, when they want and when they want and whether they bring it in and whether they want to carry inventory or not. We kind of had a little bit of that story last year we had quarter or two that were really outstanding and a quarter or two that were really outstanding and according to that they were less also.

So I don't want to imply from 15% first quarter that's the new run rate for SPAM. We do think SPAM Singles is helping the franchise and we do think that John's earlier question there's probably some benefit to the franchise coming from the overall economy but we do have new advertising against it. We were certainly hopeful that we're going to be able to sustain maybe low to mid single digit kind of sustainable growth against it but the 15% is little more of an aberration. There wasn't a trade load.

There wasn't a trade load?

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

No, they really, not at all.

Unidentified Analyst

Was there a meaningful price increase in that in the quarter?

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

We are taking pricing on SPAM. There has been kind of a lag effect with some of it in the quarter and some coming in to the next quarter. And so there is a little element of that in that. But the volumes were strong also.

Okay. And Jody, you look like you bought maybe 100,000 shares or something like that in the quarter?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

About 384.

Okay, sorry. May be I have missed it off.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Less than $37 a share. I think is where I picked up most of it.

Good for you. Is that sort of a run rate we should think of or is this one of the more cash strapped quarters of the year?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Ryan, you know I think we kind of talked that on Investor Day and even in the fourth quarter that look at 2007 and we'll probably be in that type of run rate. That's what I would expect. Find any large acquisition but...

Great. Thank you.

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

Welcome.

Operator

Thank you sir. Our next question comes from the line of Christina McGlone with Deutsche Bank. Please go ahead.

Christina McGlone - Deutsche Bank North America

Good morning.

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

Good morning Christine.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Hey.

Christina McGlone - Deutsche Bank North America

Jody, it seems like your outlook for white hog cost was pretty benign but can you kind of reconcile that with pures? I mean maybe it isn't such a big deal and also this morning we heard the statistic that in China like 69 million chicken and hog that were destroyed by the storm. I mean how do you think that impact there need to you know dissatisfy consumer demand for meat?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

The China question is kind of a little bit of a black box right now because you know everybody talks big about it but we have not really seen a lot of movement. Ultimately they do have to figure out how they are going to feed their populations and certainly we seem to have the low price as well as low value currency so that could make sure that that demand we see from the production does clear the system. The other question was reconciling the hog cost and the pures impact.

Christina McGlone - Deutsche Bank North America

Yes you know that is operated there.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Pures is a seasonal thing that happens and if you go back and look at the statistic you are going to see pures operate this time of a year and it's really driven by a lot of moisture and weather conditions you know with the state of technology in the veterinary medicine. We are not seeing there will be a huge impact with our producers

Christina McGlone - Deutsche Bank North America

Okay and then back to China say you haven't seen any pick up in the talk because of the weather issue there?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

I haven't seen anything in the recent days.

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

I mean its been a pressured market for a year with these issues they had over there cost into our plant more than doubled last year and they have moderated a little bit in more recent time but no we haven't been able to access a new affect if there is one to this way its weather related issue.

Christina McGlone - Deutsche Bank North America

Okay and then just last quarter you talked about normalized margins in refrigerated at kind of 5.5% to 6.5% and Jennie-O in the 9% to 10% range. Do you... obviously refrigerated were the both above that I mean how would you expect those margins, think that has your outlook change for those kind of hitting those margin this year based on what you had said earlier in the call and feed costs?

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

I think on a long term basis and the ballpark... say I provided a probably still relevant, I mean there is some fluxes for example clearly refrigerated benefiting right now from the lower hog input cost and so that will come and go, and as long as they are continuing to drive their value added business throughout that will be important. We prior haven't had a chance to fully asses a long term impact of Burke being added to the operation, but its not a big piece, but it's a nice business and so that's certainly could be a few basis points difference on a long term basis and as for Jennie-O I mean its... that's... its harder to reach Jennie-O quarter-to-quarter, the first quarter and the fourth quarter always Jennie-O strongest quarters and the second, third, usually will fall under. So on a full year basis, I think the range I gave was pretty priced. So it's going to be above that.

Christina McGlone - Deutsche Bank North America

Okay thank you.

Operator

Thank you ma'am. Our next question comes from the line of Robert Moskow with Credit Suisse. Please go ahead.

Robert B. Moskow - Credit Suisse

Hi thanks all of my questions have been answered. Thank you very much.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Thanks.

Operator

Okay our next question comes from the line of Michael Hamilton with RBC Dain Rauscher. Please go ahead.

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

You are back.

Operator

And I guess once again he has dropped off, so we will go to the next question and that's from the line of Justin Mauer with Lloyd Abbott [ph]. Please go ahead.

Unidentified Analyst

Good morning guys.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Good morning Justin.

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

Good morning.

Unidentified Analyst

Just quick Jeff, I think you said that, 16 of the 22 million in grocery was complete right?

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

Yes.

Unidentified Analyst

Okay I just wanted to verify, and then just to the earlier question on the rolling through of the feed cost if you will relative to the hog cost, would you anticipate that the next quarter or two you benefit more from the decrease in hog cost year-over-year then you are getting hit with the grain cost, or are you not really thinking about it that way?

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

: No the grain cost, you're right, we'll hit these next couple quarters in particular even as the market were to fall today. I mean we've had several weeks of $5 corn and that's going to now start coming to market in our system and that's when we would realize cost. The pork is kind of one of the offsets we are looking at overall, and we are looking as I mentioned to try to stay as current as we can on our pricing against our cost. And have ongoing efforts against that and then we also have our, just general business momentum, we have in the sale of our value added items that we're looking forward to not only offset the cost, but hopefully enable us to continue to grow our bottom line is built into our annualized guidance.

Unidentified Analyst

Got you. Okay. Thanks. My last editorial comment is if the guy is still listening asking the questions about Rona to not spend anybody's times, since he does it on all the calls I seem to listen to. Thanks

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Alright. Thanks.

Operator

Thank you sir. Alright next question comes from the line of Diane Geissler with Merrill Lynch. Please go ahead.

Unidentified Analyst

Hey this is actually Ryan Oxford [ph]. I'm calling in for Diane. I am just curious where the quarter came in versus your expectations, obviously it was a solid beef versus the street or just to be underestimating the first quarter because you maintained the outlook for the entire year.

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

: It was somewhat better than what we had anticipated as of the last conference call. Our grocery products, I think we talked about preferred at last call that the first half of the year for grocery would be more flat in the second half of the year was one that we really see a benefit, and obviously they outperformed that due to strength not only incomplete, but in SPAM and Hormel Chili and some of the traditional items. And then our refrigerated foods had an even quarter then we thought. We weren't necessarily looking at 50% of our segment profit increase, but only did they have the usual value added growth in the Burke effect that we knew was there, but they also benefited from what turned out to be the pork transfer prices for the quarter.

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you sir. And our next question comes from the line again of Michael Hamilton with RBC Dain Rauscher, please go ahead.

Michael Hamilton - RBC Dain Rauscher

All the years of pounding my phone against the wall has finally taken their toll.

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

: Is it died or what?

Michael Hamilton - RBC Dain Rauscher

I apologize. Just one big picture question for you. You've been able to spend some time now assessing what goes on in the cutout versus a whole hog pricing game. Are you seeing any dynamics change there that you can sure to benefit analysts?

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

: I don't see anything that I would call long term change, I mean it's still volatile and, for example, right now, even with fairly low inputs, we are probably not looking at quite a favorable cut out as we were a year ago, but both pieces, both sides of the coin move. And so... no, I am really not seeing any significant changing at this point.

Michael Hamilton - RBC Dain Rauscher

And then my other question. Can you comment at all on where you want to go forward with Natural Choice?

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

We are really very happy with how Natural Choice is going. We've... its initial focus was to utilize our high pressure pasteurization technology and to get it an entry point into the sliced meats category. We started with three varieties of Ham and three varieties of Turkey, and those have been quite successful on a get-them in store, get trial, get repeat and we are... and we continue to, we have another advertising campaign against them here this spring and summer and then because of that line had that success and because consumers do seem to have a strong interest in natural products, we've added roast beef to the sliced line, we have added Canadian bacon, we have added an uncured bacon, we have added chicken strips, we are in the deli with it both. We think it's a really exciting overall platform for Hormel and do see it as a good area of growth.

Michael Hamilton - RBC Dain Rauscher

Well thanks for a gratifying quarter.

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

Well, thank you.

Operator

Thank you sir. Our next question comes from the line Christine McCracken with Cleveland Research. Please go ahead.

Christine McCracken - Cleveland Research

Just a quick question on turkey, we've seen on new burp I guess in production. In the last couple of months, I am wondering is it your expectation that you try to take some weight off as the growing cost go up and that be an offset or how do you look at that increase?

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

We have seen some of that Christine you are right. We are getting more toward maybe more normalized supply demand balance and went through years where high dollar, $1.85, $1.90... this time here would have been wonderful but I but the cost environment has changed as well. You have anything else.

Jody H. Feragen - Senior Vice President and Chief Financial Officer

Our group continually evaluates age of birds versus how the throughput in the plant goes Christine, so we take advantage of whatever opportunities are there.

Christine McCracken - Cleveland Research

Have you seen any change I guess in the weights, is it your expectation that there is some gives there in terms of the size of the bird?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

We've seen bigger birds this last quarter and more had deliverability and improved as well as the weight. So there may be an opportunity to evaluate say age that you will bring them into production.

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

I may turn out the optimal way then this green environment is different that what we've been used to, so we are still like taking a look at that.

Christine McCracken - Cleveland Research

Alright. And just in terms of the timing of Easter this year. You have some seasonal product sales is it... are you expecting any impact from the timing of Easter this year on your business?

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

Not on a reported quarter basis I mean clearly internally, when we look week to week there will be some fairly significant moves for ham and other items but now it will all come out in the second quarter.

Christine McCracken - Cleveland Research

Any shift between hams 1and turkey that you can see relative to pricing and where ham prices are right now?

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

For our expenses done not much as we'd like Easter to be a big turkey opportunity for the Jennie-O operations as well. Really, for us it's dominated by ham. The other times of the year where you have a little more balance. So no, we're not... I'm not really seeing any significant shift in there.

Christine McCracken - Cleveland Research

Alright. I'll leave it there. Thanks.

Operator

Thank you ma'am. And our next question is a follow up from the line of Tim Ramey. Please go ahead.

Timothy S. Ramey - D.A. Davidson

Jody, I meant to ask you for anymore clarity on the comment that costs were up an incremental $80 million but you hedged some of that? That doesn't really help us as much in modeling. Can you talk about what percentage perhaps the hedges of offset of that?

Jody H. Feragen - Senior Vice President and Chief Financial Officer

You know Tim we really don't talk about what our hedging strategy is but we do have some in place that are less than current market prices that will add some benefit as we go through the rest of the year.

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

I guess they only thing we had is that we are in a stronger hedge position, this year against this run up than we were last year against that run up and the run up is fairly similar. So that provides you at least a little color as to the total situation.

Timothy S. Ramey - D.A. Davidson

When you mentioned the things that provided margin release in the 1Q, you did not mention hedges? You mentioned pricing mix and cost productivity. Is that implied that hedging was not among the top three reasons for margin preservation?

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

No. it probably belonged in there.

Timothy S. Ramey - D.A. Davidson

Okay. Alright. Thanks.

Operator

Thank you sir. [Operator Instructions]. And Mr. Ettinger there are no further questions. Please continue with any closing remarks.

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

I just want to thank every one for participating. I know a lot of you will be at the Camey [ph] Conference week and although Hormel is not presenting, we will have both Kevin Jones and Fred Halvin from our company. So if you have any further questions about what you heard today please feel free to contact them. Have a good week.

Operator

Ladies and gentlemen this concludes the Hormel Foods first quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 1800-405-2236, or internationally 303-590-3000 entering passcode 11107655. Once again if you would like to a listen to a replay of today's conference please dial 1800-405-2236 or internationally 303-590-3000 entering passcode 11107655. ACT would like to Thank you for your participation. You may now disconnect. Have a pleasant and a pleasant week end.

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Source: Hormel Foods Corp. F1Q08 (Qtr. End 12/31/07) Earnings Call Transcript
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