Hormel Foods Earnings Call INSIGHTS: Jennie-O, Grocery Products

On Thursday, Hormel Foods Corporation (NYSE:HRL) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Jennie-O

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

A Closer Look: Hormel Foods Earnings Cheat Sheet>>

Jeffrey M. Ettinger – Chairman, President and CEO: At this stage we’re just going to talk through the end of this fiscal year. Clearly, we were 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.: Then I don’t want to talk specifically about next year, but we have to address the current grain situation. How do you thing that is going to affect that division going forward? Could you share with us a little bit about your grain position and do you anticipate feeding wheat to your turkeys and is that possible?

Jeffrey M. Ettinger – Chairman, President and CEO: 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. I mean, it is important to note in terms of the aggregate and looking at grain costs for the Jennie organization that you have, there is an effective hedge position. There is an effect in terms of the time to market for the turkeys which for the time 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. 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 what the efficiency gains they’ve been able to generate in our business.

Farha Aslam – Stephens Inc.: Then my final question would be regarding your cash position. 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 dividends? Could you just share with us your priorities of cash?

Jody H. Feragen – EVP and CFO: 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 expansion as well as technologies that are driving new product introductions. We continue to focus on finding strategic M&A deal that would fit with us from both the 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 are dividends as well as share repurchase. So, all those factor into our cash position. We have invested in working capital and I would expect that to decrease as we go forward.

Farha Aslam – Stephens Inc.: So, you’re making no changes in your cash allocations given the rise in grain prices?

Jody H. Feragen – EVP and CFO: Just the nature of Jennie-O is, if 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.

Grocery Products

Diane Geissler – CLSA: I guess inquiring minds want to know why you cut range so wide for the full year at $1.79, $1.89. Your commentary on the fourth quarter suggest you expect the fourth quarter to be up year-on-year, but the bottom end of the range gives you 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 still is such a wide range, a $0.10 range given the only one quarter left?

Jeffrey M. Ettinger – Chairman, President and CEO: 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 three, four years ago, and as reflected in both the release and 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 – CLSA: Then on the Grocery Products, you’re sort of one of the few packaged food companies that’s actually showing some volume lift, so congratulations on that, ex the Don Miguel. Can you just talk about and it sounds like COMPLEATS was doing well, that’s kind of a higher-end product, SPAM seems like a 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 – Chairman, President and CEO: 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 traditionally be looked at as more of a value item, but 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 pleased with the sales growth there. We’ve been working hard to get store growth to COMPLEATS, so it was very encouraging to see the upward trend in that market. Then, very good results from the Mexican portfolio, 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 centers of store performance, and then Don Miguel and Wholly Guacamole are actually sold in different sections of the store, albeit they are part of the Mexican portfolio and Wholly Guacamole in particular had a very strong quarter. So, we have a lot of items that are connecting well with consumers overall. I would agree that in talking with retailers that’s not the universal picture. There are certain categories that are still experiencing some difficulty in terms of volume comparisons. We focus on the categories we are in and trying to partners with them to figure out ways to keep connecting well with consumers with those.

Diane Geissler – CLSA: 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 – Chairman, President and CEO: Certainly, for – and now again going into the next quarter, we think the momentum of Grocery Products has and should continue into Q4 and then we’ll give whatever clarification we see out there as we provide 2013 guidance at the November call.