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Hormel Foods (NYSE:HRL)

Q3 2012 Earnings Call

August 23, 2012 9:30 am ET

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

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

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

Mark E. Williams - Janney Montgomery Scott LLC, Research Division

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

Christine McCracken - Cleveland Research Company

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

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

Alan Brochstein

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Hormel Foods Third Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 23, 2012. I would now like to turn the conference over to Kevin Jones. Please go ahead.

Kevin C. Jones

Thank you. Good morning, everyone. Welcome to the Hormel Foods Conference Call for the Third 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 for the quarter. The line will be open for questions following Jody's remarks. [Operator Instructions] An audio replay of this call will be available beginning at 10:30 a.m. Central Time today, August 23, 2012. The dial-in number is (800) 406-7325 and the access code is 4556709. 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 the cautionary statements and risk factors on Pages 30 to 36 in the company's 10-Q for the quarter ended April 29, 2012, which was filed with the SEC on June 8, 2012, for more details. It can be accessed on our website. Now I'll turn the call over to Jeff.

Jeffrey M. Ettinger

Thank you, Kevin. Good morning, everyone. We are pleased to report record earnings and sales for the third quarter. Earnings for the quarter were $0.41 per share, up 14% from earnings of $0.36 a share a year ago. All 5 segments registered gains in segment profit. Total dollar sales topped $2 billion, an increase of 5% over a year ago on solid volume growth of 4%. I will now take you through each segment.

Our Grocery Products team delivered an operating profit increase of 32% and a dollar sales increase of 21% for the third quarter. You may recall that we began including Don Miguel sales in our Grocery Product segment results this past quarter. Sales for Grocery Products grew 3% excluding Don Miguel in the quarter. Among the contributors to sales growth in this segment were our SPAM family of products, Hormel Compleats microwave meals and our MegaMex portfolio.

For the SPAM family of products, our advertising campaign featuring Sir Can-A-Lot and the publicity around the 75th anniversary has contributed to the nice sales increase. We were pleased to see growth by our Hormel Compleats microwave meals in Q3. We are in the process of introducing additional new Compleats meals that feature cheesy pasta. We also introduced some other new microwavable items in the quarter, including SPAM meals and Hormel sandwich makers. These new items have performed well in limited markets so far.

Sales of our Mexican food products continue to grow, led by Wholly Guacamole Dip and by salsas and tortillas under both the Herdez and CHI-CHI'S brands.

Segment operating profit for our Refrigerated Foods group increased by 7%, with higher sales of our value-added products were able to offset lower pork operating margins. Sales were flat overall, but value-added sales continued to grow.

On the retail side, we enjoyed strong sales of Hormel Natural Choice Deli Meats, Hormel party trays, Hormel bacon and Hormel Pepperoni. Foodservice sales were also higher, led by sales of branded products such as Hormel Natural Choice Deli Meats, Hormel premium hams and premium bacon.

The Jennie-O Turkey Store segment had another solid quarter, with segment operating profit up 12% and sales up 7%. Continued growth in sales of value-added products and an improved product mix more than offset higher grain prices and lower commodity meat prices during Q3. Sales of our Jennie-O Turkey Store retail tray pack fresh turkey and our turkey burgers are still on the rise. We will be building up on last year's highly successful Make The Switch advertising campaign with a new TV commercial this fall, this time featuring turkey bacon and sausage. Stronger sales of whole birds also aided results this quarter for Jennie-O.

Our Specialty Foods segment had a very good quarter, achieving 18% growth in operating profit on a net sales increase of 11%. Segment profit gains were driven by higher sales of nutritional products, private label canned meats and ingredients.

Our All Other international segment delivered another strong quarter, with segment operating profit up 55% while sales increased 2%. Higher exports of our SPAM family of products and fresh pork were the primary drivers for this segment.

Moving into the fourth quarter, we do anticipate seasonally lower hog costs as we get into fall. Pork operating margins have thankfully returned to positive territory lately, and we expect these margins to remain positive though lower than a year ago during the fourth quarter.

Jennie-O Turkey Store's Q4 margins will be impacted as we cycle in higher grain costs. Our team at Jennie-O will continue to push for value-added sales growth and efficiency improvements in order to mitigate the impact of grain inflation. We also expect strong contributions to our earnings growth from our Grocery Products and International teams based on their solid momentum from the third quarter.

Taking all of these significant factors into account, we are maintaining our fiscal 2012 guidance range of $1.79 to $1.89 per share. The strength of our balanced business model and the vibrancy of our branded value-added portfolio should support continued sales and earnings growth as we close out fiscal 2012. At this time, I will turn the call over to Jody Feragen to discuss the financial information relating to the third quarter.

Jody H. Feragen

Thank you, Jeff, and good morning, everyone. For the third quarter of 2012, net earnings totaled $111.2 million or $0.41 per share compared to $98.5 million or $0.36 per share a year ago. Net earnings for the 9 months of fiscal 2012 totaled $367.4 million or $1.37 per share compared to net earnings of $356.9 million or $1.31 per share a year ago. Dollar sales for the third quarter totaled $2 billion compared to $1.9 billion last year, a 5% increase. For the 9 months of fiscal 2012, dollar sales were up 5% to $6.1 billion.

Volume for the third quarter was 1.2 billion pounds, a 4% increase over fiscal 2011. Year-to-date, volume was 3.6 billion pounds even with last year. Selling, general and administrative expenses in the third quarter were 7.2% of sales compared to 8.2% last year.

Year-to-date, selling, general and administrative expenses were 7.4% compared to 8% last year. We expect selling, general and administrative expenses to be approximately 7.5% of sales for the full year. Interest and investment income was $844,000 for the third quarter compared to $139,000 last year. Year-to-date, interest and investment income was $4.8 million compared to $2.6 million a year ago.

Interest expense for the quarter was $3.2 million compared to $5.6 million last year due to lower debt levels and lower interest rate. Year-to-date, interest expense was $9.7 million compared to $19.4 million last year. We expect interest expense to be approximately $12 million to $14 million for fiscal 2012.

Our effective tax rate in the third quarter was 33.7% versus 29.3% in fiscal 2011. Last year's tax rate for the third quarter was favorably impacted by the resolution of tax matters with various federal and state tax jurisdictions. Year-to-date, our effective tax rate was 33.5% compared to 33% 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 third quarter was 263 million. The diluted weighted average number of shares outstanding for the third quarter was 269 million shares. We repurchased 302,000 shares of common stock during the third quarter, spending $8.6 million. We have 1.6 million shares remaining to be purchased from the current authorization in place.

Depreciation and amortization for the quarter was $28.9 million, down from $30.6 million last year. For the 9 months, depreciation and amortization was $88.6 million compared to $92.9 million last year. We expect depreciation and amortization to be approximately $115 million for fiscal 2012. Total long-term debt at the end of the quarter was $250 million, unchanged from last year. Capital expenditures for the quarter totaled $36 million compared to $20 million last year. For the 9 months, capital expenditures totaled $94 million compared to $63 million last year.

For fiscal 2012, we expect capital expenditures to be $120 million to $130 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] First question is from the line of Farha Aslam.

Farha Aslam - Stephens Inc., Research Division

I'd like to focus my questions really on Jennie-O. But the segment continues to perform very, very well particularly, I mean, your price mix this quarter was very strong despite the fact that commodity turkey prices have been quite weak. Do you anticipate turkey for that division to continue to have positive price mix going forward given the weakness that you've seen in commodity turkey?

Jeffrey M. Ettinger

Well at this stage, I mean, we're just going to talk through the end of this fiscal year. Clearly, we were very pleased with Jennie-O's quarter in the third quarter. Not the huge gains year-over-year that we saw in Q1 and Q2, but to be expected given both the pressures on the grain side and the pressures on the commodity meat side. They do have excellent momentum in terms of their value-added products, and we expect Q4 to be more similar to Q3 in terms of their operating results.

Farha Aslam - Stephens Inc., Research Division

Okay. And then I know you don't want to talk specifically about next year, but we have to address the current grain situation. Kind of how do you think that is going to affect that division going forward? Could you share with us a little bit about your grain positions and do you anticipate feeding wheat to your turkeys, and is that possible?

Jeffrey M. Ettinger

I can't get into the latter question. In terms of what the outlook is, clearly, that will be part of the planning process for next year. I mean, it is important to know in terms of the aggregate and looking at grain cost for the Jennie-O organization that you have -- there's an effective hedge positions. There's an effect in terms of the time to market for the turkeys, which, for the Tom turkeys is 22 weeks, so there will be some lag effect in terms of the price increases that you've been seeing in the -- cost increases you've been seeing in the marketplace. But no, clearly, that will be one of the major goals of that unit will be to do the best they can to balance off these significant cost increases on the grain side with the momentum they've been showing in value-added products and with the efficiency gains they've been able to generate in their business.

Farha Aslam - Stephens Inc., Research Division

And then my final question would be regarding your cash position. It -- I mean, you have net cash on the balance sheet. Do you think you're going to focus on M&A? Are you focusing on working capital? Would you increase your dividend? Can you just share with us your priorities of cash?

Jody H. Feragen

Farha, this is Jody. I certainly will. Obviously, first is to invest in our business, and we've done a lot more of that through internal investment with our CapEx spending this year. A portion of that was related to some general replacement, but we've also invested in some capacity expansions, as well as technologies that are driving new product introductions. We continue to focus on finding strategic M&A deals that would fit with us from both a strategic standpoint as well as being accretive, and those would be both domestic and international. And then certainly, we have our continued obligations to our shareholders with our dividends as well as share repurchase. So all those factor into our cash position. We have invested in some working capital, and I would expect that to decrease as we go forward.

Farha Aslam - Stephens Inc., Research Division

Okay. So you're making no changes in your cash allocation, given the rise in grain prices?

Jody H. Feragen

We'll probably -- just the nature of Jennie-O is, they’re holding higher grain prices that will be reflective of their inventories. We like to focus on making sure we have the appropriate quantity of inventories.

Operator

Our next question is from the line of Diane Geissler.

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

I guess inquiring minds want to know why you kept the range so wide for the full year at $1.79, $1.89. Your commentary on the fourth quarter suggests you expect the fourth quarter to be up year-on-year, but the bottom end of the range, which is something around $0.42 versus last year's $0.43. So I guess I'm a little conflicted about what you're trying to say about the fourth quarter and why there's still such a wide range, a $0.10 range given that you only have one quarter left.

Jeffrey M. Ettinger

True. I guess our philosophy on that, Diane, was we really have been trying to operate on an annualized basis. We moved away from giving quarterly guidance about 3 or 4 years ago. And as reflected in both the release and in my comments at the beginning of the call, we do think we're tracking well towards that annual operating plan. Our team is aligned against that plan. Our incentive programs are based on the achievement of the results within that annual plan. And so at this point, we just felt that, that was the number that was important to focus on both for external audiences and the internal audiences to what we're trying to deliver. And there certainly are opportunities depending on what happens during the quarter to be on the lower or upper end of that range, but we felt it’s still a comfortable area to have out there.

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

Okay. I appreciate the clarification there. And then, on the Grocery Products, you're sort of one of the few kind of packaged food companies that's actually showing some volume lift. So congratulations on that, x the Don Miguel. Can you just talk about -- it sounds like Compleats was doing well, I mean, that's kind of a higher-end product. SPAM seems like more of a value-oriented product. Can you talk about what you're seeing with the consumer base, what retailers are saying about the state of the consumer?

Jeffrey M. Ettinger

Sure. I mean, for our items, we're really -- we were very pleased with the breadth of the success of the Grocery Products results during Q3. SPAM would probably traditionally be looked at as more of a value item, with some of the excitement we've been able to build around that brand, both in-store and with our advertising and public relations effort. We're very pleased with the sales growth there. We've been working hard to restore growth to Compleats, and so that was -- it was very encouraging to see the upward trend in that market. And then very good results from the Mexican portfolio. I mean, the portfolio -- so forgetting Don Miguel for the moment, even the core items that had been part of MegaMex prior to that were up for the quarter, and so that's exhibiting good center of the store performance. And then Don Miguel and Wholly Guacamole are actually sold in different sections of the store, albeit still part of the Mexican portfolio, and Wholly Guacamole in particular had a very strong quarter. So it's -- so we're -- we have a lot of items that are connecting well consumers overall. I would agree that in talking with retailers, that's not the universal picture, that there are certain categories that they're still experiencing some difficulty in terms of volume comparisons. But we focus on the categories we're in and trying to partner with them to figure out ways to keep connecting more with consumers with those.

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

Okay. So despite continued weakness with consumers, you don't see any reason to sort of back off your long-term sales growth target of 5%?

Jeffrey M. Ettinger

Certainly for -- I mean, again kind of going into the next quarter, we think the momentum Grocery Products has should continue into Q4, and then we'll kind of give whatever clarification we see out there as we provide 2013 guidance at the November call.

Operator

Our next question is from the line of Akshay Jagdale.

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

Just wanted to follow up on turkey. I know you don't want to talk too much specifically about '13, but can you just help us frame fiscal '13 in the context of perhaps fiscal '08 when I guess there’s some parallels being drawn there because of the increase in grain costs. But I would just like to get your perspective generally for the turkey industry and your business going into '13 relative to, let's say, '08.

Jeffrey M. Ettinger

I guess the best I can give you on that, Akshay, is we do believe there are significant changes in our own operating philosophy and performance between 2008 and what we expect to have in 2013. We've been able to grow the brand significantly through the advertising campaign. One of the hallmark franchises that is supported by that campaign and has leading position in the marketplace would be our Fresh Product line. Because of the strength of that, we've added on a new line in our Pelican Rapids facility, that's one of the capital investments that Jody was referencing in her earlier comments. And so clearly, we wouldn't have added that line if we didn't think we have significant new business to be able to support that line. On top of that, the team has just done a very good job all across-the-board in terms of driving efficiency gains, whether it's at the farm level, bringing the product into the plant or in through the supply chain. So we'll provide you with what we see is our best picture for that segment and for the total business when we do get to the November call, but I do expect that, that will be a -- it's still going to be a significant jump up from 2008 levels.

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

Okay, great. And then just one on the consumer in general. I thought it was interesting that you're Compleats business did well this quarter. I don't remember it being on the positive side as much as it was this quarter for a while. Is there -- I mean, do you and your business and your product segments see a bifurcation in sort of the consumer where your SPAM business is doing well, but now it looks like Compleats is starting to do well again. I mean what are you really seeing from a consumer standpoint in terms of demand?

Jeffrey M. Ettinger

Oh, I mean it's been interesting really ever since the recession began to see the consumer dynamic against the franchise. It doesn't -- at least for our portfolio, it doesn't split neatly into value consumers versus more affluent consumers because we've seen great strength of items that you might consider value items, such as SPAM or initially Hormel chili. But we also have had excellent results from our party trays and Natural Choice items, which are probably aimed at a little bit more premium consumer. Compleats is kind of in the middle in that regard. It's not -- I don't know if it's regarded as an ultra value item nor as a premium item. What we have found is the packaged meal kind of sub-segment has been a little bit more of a struggle since the recession began. We've seen that both in Hormel Compleats and in our Hormel Refrigerated Entrees. So the effort then becomes, okay, how do you gain more households and how do you connect more with those items? And so it's a -- for Compleats, it's been a multifaceted approach of new advertising, new package designs, kind of segmenting the line into the red, blue and green varieties, new flavor varieties that some that are already in the market and the others that we're coming out with, such as our new cheesy pasta items. So it's -- the mission is just to keep growing that franchise, and we really don't see any reason why that can't happen. I mean, it still has very low household penetration. It's a convenience item in a convenience world. With our balanced model of being able to deliver both protein and packaged food, we're the ones delivering the simple, one-step product that has the protein component and other components in it. And so we're still very high on the line in the long run, and we're very pleased with the Q3 results.

Operator

Your next question is from Jonathan Feeney.

Mark E. Williams - Janney Montgomery Scott LLC, Research Division

This is Mark Williams Michael on for Jon. I wanted to ask about your -- I was surprised by the management of profit expansion in Grocery. Can you just talk about the drivers there and what drove that?

Jeffrey M. Ettinger

We've -- the Grocery portfolio, if you look at it over the last 3, 4 years has had a swing, a couple of hundred basis points over a longer haul off and on; based somewhat on inputs and somewhat on mix. They've had some fairly significant stresses on the input side in prior quarters, and those improved during the most recent quarter. And then over time, we have seen the solid growth of some of the key items that's been helping a lot as well. SPAM is a great item for us, as well as the Mexican portfolio.

Mark E. Williams - Janney Montgomery Scott LLC, Research Division

Okay. And would you -- could you please provide just your outlook on the turkey supply and pricing dynamics and what you see going forward?

Jeffrey M. Ettinger

Okay. Well, it's probably somewhat in flux. When we last talked, grain was at a quite different level than when we're talking 3 months later. And so I would imagine the other participants within the industry are probably looking at that and making decisions as to what they think they're appropriate production levels are. They're clearly -- there have been a couple of expansions in the industry that are probably going to go forward. I mean, they were already in the midst of building plants and adding onto farms. But beyond that, I would assume every business has to kind of assess, okay, what's your profitability picture with this kind of a grain environment. At Jennie-O Turkey Store, we’ve tried to keep supplies tight. It really fits well with our emphasis on the value-added branded items. And in terms of that outlook, I mean we would anticipate -- we'll continue to maintain that kind of tightness. We need enough meat to support the growth of the value-added items, but we're not looking to have a lot of surplus meat to sell on the commodity market.

Mark E. Williams - Janney Montgomery Scott LLC, Research Division

Great. And my last question pertains to the pork cutout margin. As you noted, that has expanded some in recent weeks. Do you see that as a temporary phenomenon driven by maybe some farmer that can afford the cost of feed that are sending their hogs to slaughter or do you see that as a more durable driver?

Jody H. Feragen

This is Jody. I'll try to handle that one. Yes, thankfully, they have turned to be positive from quite negative averages over the previous quarters. Hog supply seasonally is stronger in the fall, just kind of the nature of that industry. So we would expect that to continue into the fourth quarter. And we would expect the spread between the hog cost and the USDA cutout to be positive, probably not as positive as it was in the fourth quarter of 2011.

Operator

And our next question is from the line of Tim Ramey.

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

Jody, the -- I don't know, did you say how -- what your hedge position looks like now relative to either corn or hogs?

Jody H. Feragen

I think -- we hedged our grain input for Jennie-O, and as we indicated on the call last quarter where our range is typically the 25% to 75%. And for fiscal 2012, we're planning in the middle, if you will.

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

Okay. Are you experiencing -- I mean, certainly the Minnesota farmers are experiencing a better crop than on average. How is that impacting you? Is that helping basis or how do you think about that?

Jody H. Feragen

I -- we have seen some tightening of the basis, so I don't know that it's been as big a benefit as maybe in prior years. But you're right, the crops up here do appear better than the ones that have been noted in the southern part of the states.

Jeffrey M. Ettinger

They're also not in yet, and so often basis can really swing more on true delivery and what kind of spread there is. The other wild card to basis this year is going to be traffic on the Mississippi River and if there's some constriction there in terms of ability to ship, that could make a difference as well.

Operator

And our next question is from the line of Christine McCracken.

Christine McCracken - Cleveland Research Company

I know you don't want to talk about the forward outlook, but I'm just wondering with the increases that we're seeing in grains and then presumably, in the proteins, I'm wondering if you're having conversations with your customers relative to pricing. How far in advance do you have those discussions especially as you look at annual contracting and expectations for '13?

Jeffrey M. Ettinger

Well, to the extent we engage in annual contracting, which would be limited more to certain areas of the Foodservice business, then yes, we're clearly reflecting our best expectation of what markets are going to be both for the protein and for the input. That's not a huge percentage of our overall business, though. In terms of retail pricing, absent the market-based items, whole turkeys and bacon and fresh pork, we really don't have any current announcements to make in terms of pricing. But clearly, that will be one of the team's overall assessments that we have to make as we complete our planning process here is what do we see as the likely cost input level for different commodities and for different products, and what are we going to do to either mitigate those or in terms of pricing reflect those in the area of pricing.

Christine McCracken - Cleveland Research Company

Are you getting the sense that -- how quickly could you adjust? Is it kind of 30, 60 days kind of pricing adjustment or is it longer? I'm just wondering when we look back at when we’ve seen this kind of cost sensation in the past, it's always been about the past year of pricing, resistance to pricing and how quickly we can get it through. I'm just wondering if you get in front of it this time.

Jeffrey M. Ettinger

Yes. I mean, on a -- from a retail standpoint, 60 days is probably not a bad rule of thumb in terms of the kind of notice and making sure you honor your features and so forth. But you have to have -- again, absent those market items that move on a more aggressive basis. There's a lot of things to weigh in terms of timing. One example you probably -- that's been talked about in the marketplace has been a little level -- some level of liquidation on the beef side. So I mean, in the short run, the cost inputs on beef may not be up at all. And so that we wouldn't obviously be then walking in and looking for price increases related to those items until it was needed to be reflecting the cost. But that's all part of what we'll need to weigh when we establish our plan.

Christine McCracken - Cleveland Research Company

All right. And just one more technical question. Receivables were up in the quarter. Anything specific behind that, Jody, or...

Jody H. Feragen

No, I wouldn't say there was anything specific behind that.

Operator

Our next question is from the line of Ken Zaslow.

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

So just going over Refrigerated Foods a little bit, your profitability was a little bit higher than we expected and despite the whole wheat, fresh pork margins. But it sounds like it was driven by the value-added side of it. So if the improvement in fresh pork is going to be a little bit more sustainable, and assuming that your value-added portfolio is not going to decrease, it's going to continue going the same -- in the right direction, why wouldn't your refrigerated profitability in the fourth quarter, at least the margin structure, continue on this path given that you have this similar tailwind on the improvement in the fresh pork and assuming that's -- the value-added stays the same?

Jeffrey M. Ettinger

There's some logic to that. The comp of the pork cutout from last year was really quite favorable in Q4, and although it's improved this -- from negative, it's still a lot lower than what last year was. But I would agree on the momentum side in terms of the value-added products. We were very pleased with a wide array of the retail items being up for the quarter and having really good years. So overall, that is the game plan for Refrigerated Foods is to drive growth through their Foodservice and Meat Product segments and to then respond as well as they can to what happens in the cutout arena.

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

But even in the third quarter, the profitability was higher year-over-year but the fresh pork was obviously much lower year-over-year.

Jeffrey M. Ettinger

That's correct.

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

But is there something more going -- I mean, it seems like there's something maybe going on a little bit more structurally, is that a fair point, that maybe we shouldn't be looking to fresh pork margins as much anymore? It just seems like it was the fresh pork margin for the quarter for -- to say this bluntly as possible is dismal at best. So I'm just trying to figure out, you guys did not have that impact on your earnings, and just trying to figure out why is it more sustainable than we should kind of think of it more like what has happened on the turkey side since '08 as well.

Jeffrey M. Ettinger

Well, I mean, this hasn't been from our doing, but what does seem to have changed structurally is that we're even having to talk about cutout margins. Because I mean it used to be they were just kind of a fairly benign, you didn't expect to make much money in that part of the business, but that was part of the assets you had to invest in order to control your own supply. They've been very volatile over the -- not just this year, over the last several years. So on any given quarter, I may have to ask Kevin to do a little follow-up with you on that. But a lot of it can be well what are the comps -- the first 2 quarters of the comps were just breathtaking. I mean they were extremely positive the year before and then swung to extremely negative this year. We've had good value-added results all year long. I think those were shrouded by that huge swing in the first half and then they were able to kind of emerge and, at least, deliver some growth in Q3. And we're hoping to see somewhere along those same lines in Q4.

Jody H. Feragen

And I guess to follow up to Jeff's comment, fourth quarter of 2011, I think the pork P&L margin was close to $8, and we're not certainly seeing those today. So we've got more difficult comps than last year.

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

You will have the same comp comparison though in third quarter now, relative comp comparison. I'll take it offline. It just seems like it was a much better result and it seems like there's something underlying it. I'll take it off-line, no problem.

Operator

And our next question is from the line of Ann Gurkin.

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

I thought you could help me understand something. I guess, what is the potential or likelihood that you could get in your term tailwind from lower pork input prices? I mean, I guess have you locked those prices or is there opportunity to take advantage if there are a number of hogs brought to market and if we see these prices decline near term, what is the possibility of that positively helping you all?

Jeffrey M. Ettinger

We haven't historically taken a lot of positions on the pork side in contrast to what Jody explained on the cost side for grain inputs for Jennie-O. It certainly -- that's one of a number of things the team can assess over time as to whether they think we ought to treat that differently given certain market dynamics. But it's -- we don't have anything to announce in that regard right now.

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

But could you potentially have a tailwind here in the near term?

Jody H. Feragen

Input costs are lower traditionally, that helps some of our value-added franchises. But there's a lot of moving parts that go along with it.

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

Okay, fair enough. And then in terms of Foodservice, any change to how you approach that business over the next 12 months?

Jeffrey M. Ettinger

No. I mean, we really like our strategy in regard to Foodservice. With the core Hormel Foodservice unit, it's all about their branded items and finding solutions for operators. They continue to do a great job of connecting with both the commercial and noncommercial segments with those items. And then our -- we also have strong Foodservice components within both Specialty, Jennie-O and international. And those were experiencing reasonable results as well.

Operator

And our next question is from the line of Mark Warner.

Unknown Shareholder

This is a bit of an odd question, but with the lack of demand perhaps for Europe for pork products or beef products, you all have an alternate source for the pork especially from maybe South America or somewhere else where it would be cost efficient for you all to use that in your processing versus growing your own swine, turkey, et cetera?

Jeffrey M. Ettinger

Really -- I mean, I can't really talk to what the industry would think of that. I can just tell you though that that's not our model, both for Jennie-O and for the Hormel operation. They're domestic-based operations that we have either ownership positions or long-term contracts in place to provide our plants with the domestic source, and that's how we intend to continue to run the business.

Kevin C. Jones

Mark, this is Kevin Jones. Could I bother you to tell us who you're with?

Unknown Shareholder

I'm just an individual investor, but I just know enough about farming even though I'm not a farmer to know that if this situation continues here -- I'm actually in the horse business, and I know the cost of feed price is going up. So my concern as a stockholder is, long term, if you all are looking to maybe expand that model and try to get proteins from elsewhere because I've seen what's happened to feed prices feeding horses.

Operator

Our next question is from the line of Alan Brochstein.

Alan Brochstein

I just -- Jody, it seems like every quarter you get the same question and give the same answer on capital. The only difference is it just -- your cash balance is getting bigger and bigger. And I was wondering on that front, you talk about the potential for acquisitions? Are there -- have you had any serious discussions, is that something that we can expect in the next 3 to 6 months?

Kevin C. Jones

Alan, can I just interject? Could you please help me know where -- I missed your last name.

Alan Brochstein

I'm sorry, it's Alan Brochstein, Kevin. I've visited you 2 years ago. I'm with AB Analytical. Sorry about that. Did you hear the question, Jody?

Jody H. Feragen

Oh, yes, I did. And I really can't comment about any acquisition at this point in time.

Alan Brochstein

So given that, that remains a long-term strategy but it seems like for the last few years, your acquisitions really haven't used that much capital, what is your thought about a one-time dividend to shareholders given how high your cash balances have gotten?

Jeffrey M. Ettinger

I wouldn't disagree with your comment about not using a lot of capital. But we have had some very beneficial acquisitions over the past 2 years. Just tonight, in fact, we're going to be celebrating the retirement of Bill Burke. We bought the Burke operation 5 years ago. That's been an outstanding addition to our Refrigerated Foods portfolio. We've created our MegaMex venture and made 2 other acquisitions there, the Don Miguel and Wholly Guacamole lines. We added Country Crock to our portfolio of Refrigerated items, and those have all been really great additions. And we -- we're always active in looking in multiple areas for potential things that could fit the growth model of Hormel Foods. But acquisitions, at least from our experience, by their nature, they don't just kind of come when you want them. They can tend to come in spurts, you put a lot of feelers out there and up to whether there's a meeting of the minds as to timing and price and a lot of things. So we intend to continue to pursue various ways to grow our business. The acquisitions is one of them, new product innovation is another and we continue to have success there. We do have to spend money to add onto our plants and buy new technology to support growth as well, as I mentioned at our Jennie-O facility. So I think we've mentioned on past calls, I mean, if at some point we're sitting and our cash position is mounting to $1 billion and we're -- and it's just not going anywhere, then maybe we'll have to make a different assessment as to how we've handled our cash management practices. But we're not ready to push that button at this time.

Alan Brochstein

All right, well, maybe I can ask one more final question, and maybe it's too technical, but you guys have a modifier on your short-term bonuses that -- by the way, I think you guys have an exceptional compensation plan as an aside. But this modifier basically penalizes you or would -- it takes into account your -- the capital that you use. As I read it, I don't think that there's any penalty for holding cash. Is that an accurate assessment or should I follow up with that off-line?

Jeffrey M. Ettinger

That's correct. We all -- we have modifiers in place both for segments and for the total company. We manage total cash on a total company level, so the modifier at the segments clearly would not have that be a factor. And at the total company level, our assessment has been that there just -- there's a very tight number of people that really have any decision-making authority over cash, and that it just really wouldn't be an appropriate element to have in there for the total company to be weighed off of.

Operator

[Operator Instructions] We do have a follow-up from Diane Geissler.

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

Just -- pricing has had a pretty good strategy with being sort of short to the market in the chicken business, and that's been -- they've done some pretty good margins on the value-added side. Just wondering what is your outlook for turkey? I mean, you talked about you didn't want to have a lot of commodity meat exposure, but is that a strategy that you think you could pursue, let other people raise it at $8 a bushel on corn and then you buy it on the commodity market and value-add?

Jeffrey M. Ettinger

Well, it's not something we're looking at on a broadscale basis because you make long-term commitments and put assets in place. But in any given year, I mean yes, there’s a certain level of fluctuation that within your system you can tolerate. And I think that is indeed -- that would be part of the equation that the Jennie-O team would be setting next year is if you have any incremental questions as to how many eggs or poults to put in the system if you can do better buying from someone else at certain times of the year, that's something they definitely should entertain.

Operator

Thank you. And we have no further questions at this time. I'll turn it back to Kevin Jones for any closing remarks.

Kevin C. Jones

Thank you for all of your questions and your interest in our company. Please feel free to follow up with me with any follow-up questions that might occur to you. This is Kevin Jones again. And otherwise, everyone, have a great day.

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