Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hormel Foods Third Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. (Operator Instructions). This conference is being recorded today, Friday, August 20, 2010.
I would now like to turn the conference over to Mr. Kevin Jones. Please go ahead, sir.
Kevin C. Jones - Director, IR: Good morning. Welcome to the Hormel Foods conference call for the third quarter of fiscal 2010. 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 for the quarter, then Jody will provide detailed financial results for the quarter. The line will be open for questions following Jody's remarks.
Please limit yourselves to one question and one follow-up, if needed. If you have further questions, please go to the end of the queue, so everyone has an opportunity to ask questions. An audio replay of this call will be available beginning at 10.30 AM Central Time today, August 20, 2010. The dial-in number is 800-406-7325 and the access code is 4339593. It will also be posted to our website and archived for one year.
Before we get started with the results of the quarter, I need to reference the safe harbor statement. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed in or implied by the statements we will be making. Among the factors that may affect the operating results of the Company are fluctuations in the cost and availability of raw materials and market conditions for finished products.
Please refer to pages 32 through 38 in the Company's Form 10-Q for the quarter ended April 25, 2010, which was filed with the SEC on June 4, 2010 for more details. It can be accessed on our website.
Now I'll turn the call over to Jeff.
Jeffrey M. Ettinger - Chairman, President and CEO: Good morning, everyone. We are pleased to report another excellent quarter building upon the momentum of our strong first half of the year. We were able to grow both earnings and sales by double digits in what is still a challenging consumer environment.
Earnings per share increased to $0.63, up 11% from a year ago, fueled by segment profit gains in four of our five segments. Total dollar sales of $1.7 billion were up 10% from a year ago.
I will now take you through each segment. Our Grocery Products group reported a segment profit decrease of 23% and a dollar sales increase of 12% for the third quarter. The majority of the sales increase can be attributed to increased sales of products by our MegaMex Foods business. We are pleased with the success of MegaMex thus far as we continue to gain additional distribution in the retail trade channels.
The Grocery Products segment profit level, however, the higher sales of Mexican products and increased sales of our Hormel chili items were unable to offset the pressure from higher raw material costs on our SPAM family of products, our Hormel bacon toppings and our chunk meat brands.
Our Refrigerated Foods segment reported a segment profit increase of 11% aided by continued strong cut out margins and a sales increase of 12%. This year, strong cutout margins have given us the balance to continue growing earnings during a time of rising hog cost. Last year, our value-added products provided the lift we needed to continue to enhance segment profit.
On the retail side, we continue to generate strong sales growth from our Hormel party trays. In addition, our new item such as snack sticks and minis continue to drive sales growth of our Hormel pepperoni line. We also achieved additional distribution of our Natural Choice deli meats. Our team is doing a nice job with the integration of our Country Crock side dish business, capturing synergies and co-marketing these products with our Hormel refrigerated entr�e and with other product, such as our Lloyd's barbeque line.
Our Foodservice group has also had success growing sales of branded value-added products during the quarter. Sales of our Natural Choice deli meats, Austin Blues barbeque products and Caf� H ethnic products, and pizza-toppings all grew during the quarter. Jennie-O Turkey Store increased segment profit a strong 93% on flat total sales, while higher commodity turkey meat prices and lower feed cost helped, the primary driver of our results at Jennie-O was improved efficiencies across the entire supply chain and in our operations. Strong export sales of turkey thigh meat also aided results.
Sales of value-added products at Jennie-O Turkey Store grew in all three areas; deli, foodservice and retail, led by retail tray pack fresh turkey and rotisserie deli product. We spent heavily on advertising on the Jennie-O Turkey Store brand in the third quarter gaining additional exposure and building the strength of the brand.
Our Specialty Food segment continued its momentum this quarter by growing segment profit and sales 19% and 12% respectively. All three business units contributed to the results led by sales of sports nutrition products, private label canned meats and sugar products.
In our all other international segment, segment profit increased 3% and sales grew 13%. Continued excellent sales of our SPAM family of products were sufficient to offset pressure on our export sales from higher raw material costs.
We expect higher hog cost to continue in the fourth quarter, negatively impacting margins in our value-added Refrigerated Foods businesses and in our pork-based grocery products items. We also expect to continue to invest in our Jennie-O Turkey Store brand during the quarter through significantly higher advertising spending. On the positive side, we except our Jennie-O Turkey Store unit to continue to substantially outperform compared to a year ago, and so far in the fourth quarter, cutout margins have remained strong in Refrigerated Foods.
Taking these considerations into account and in light of our strong performance in the third quarter, we are, again, raising our full-year guidance range from $2.75 to $2.85 per share, up to $2.85 to $2.91 per share on an adjusted basis. It appears we are on track to achieve our long-term goal of growing earnings per share by at least 10% for the second consecutive year.
At this time, I will turn the call over to Jody Feragen to discuss the financial information related to the third quarter.
Jody H. Feragen - SVP and CFO: Thank you, Jeff. Good morning, everyone. For the third quarter of fiscal 2010, net earnings totaled $85.4 million or $0.63 per share compared to $77.2 million or $0.57 per share a year ago. Adjusted net earnings for the nine months of fiscal 2010 totaled $287.8 million or $2.13 per share compared to $238.9 million or $1.76 per share a year ago.
Adjusted net earnings exclude the one-time charges related to the plant closure and the tax impact of health care law changes that were incurred in the second quarter of this year. U.S. GAAP net earnings for this year-to-date through the third quarter of 2010 were $274.4 million or $2.03 a share.
Dollar sales for the third quarter totaled $1.7 billion compared to $1.6 billion last year, a 10% increase. For the nine-month, dollar sales increased 6% to $5.2 billion. Volume for the third quarter was 1.1 billion pounds, up 2% from 2009. Year-to-date, volume was 3.5 billion, also up 2% from fiscal 2009.
Selling, general and administrative expenses in the third quarter were 8.5% of sales compared to 9% last year. Year-to-date, selling, general and administrative expenses were 8.5% compared to 8.7% last year.
Advertising expenses were 1.8% of sales for the quarter compared to 1.6% in 2009. Year-to-date, advertising expenses are 1.6% of sales compared to 1.5% last year. As Jeff mentioned, we expect that advertising dollars will substantially exceed 2009 on a full year basis as we increase spending levels in the fourth quarter.
Interest and investment income was $310,000 for the third quarter compared to $6.4 million in fiscal 2009. As we expected, lower returns in 2010 on our rabbi trust investments drove the decrease. We also expect difficult comparisons in the fourth quarter of this year due to the stronger returns on our investments in 2009.
Interest expense for the quarter was $6.5 million compared to $7 million last year. Year-to-date, interest expense is $19.6 million compared to $21.3 million last year. We expect interest expense to be about $26 million for fiscal 2010.
Our effective tax rate in the third quarter was 35.8% versus 34.4% in fiscal 2009. The year-to-date effective tax rate is 36.5% compared to 34.7% last year. For fiscal 2010, we expect the effective tax rate to be between 36% and 37%.
The basic weighted average number of shares outstanding for the third quarter was 133 million. The diluted weighted average number of shares outstanding for the third quarter was 135 million. We repurchased 583,000 shares of common stock during the third quarter and we have 4.8 million shares remaining to be purchased from the 5 million share authorization currently in place.
Total debt at the end of the quarter was $350 million and was reclassified into current maturities during the quarter.
Depreciation and amortization for the quarter was $31 million compared to $32 million last year. For the first nine months of the year, depreciation and amortization was $92 million compared to $94 million last year. We expect depreciation and amortization to be about $124 million for fiscal 2010.
Capital expenditures for the quarter totaled $24 million compared to $25 million last year. For the first nine months of the year, capital expenditures totaled $64 million compared to $71 million last year. For fiscal 2010, we expect CapEx to be approximately $90 million to $100 million.
At this time, I will turn the call over to the operator for the question-and-answer portion of the call. Operator?
Operator: Farha Aslam, Stephens Inc.
Farha Aslam - Stephens, Inc.: Your Grocery Products sales were very strong in the quarter. Could you just give us some more color on what drove those results and how the core SPAM chili products are setting up for the fall?
Jeffrey M. Ettinger - Chairman, President and CEO: The lion's share of the increase is from the MegaMex added items. We've seen not only addition of the new franchises, we've enjoyed solid sales of our existing Mexican items. The rest of the Grocery Products portfolio is fairly flat for the quarter. Some up, some down, Hormel chili and Hormel hash were strong and we did have a weaker quarter for SPAM and for Dinty Moore. In terms of an outlook, we expect better sales from some of the canned items as we head into the traditional can season for this fall. We expect the momentum to continue in Mexican. Really the item I have my eye on the most that we really need to figure out a turnaround story on would be the Compleats franchise because we were again down slightly on Compleats this quarter. You are aware of our investment in Dubuque plant and how important that line is for the Company, and so we're confident that we're going to find the right recipe to regain growth in that franchise.
Farha Aslam - Stephens, Inc.: Then as a follow-up, your corporate expense was significantly lower this quarter than last year, do you expect this to be a new level and could you give us some more color on what exactly the lower employee costs were?
Jody H. Feragen - SVP and CFO: It was basically relating to truing up accruals for some compensation plans, Farha, and I would expect that in the 8.5% to 9% range would be where you'll see us for the fourth quarter.
Farha Aslam - Stephens, Inc.: 8.5% to 9% of sales?
Jody H. Feragen - SVP and CFO: Yes.
Farha Aslam - Stephens, Inc.: My final question is just on turkey; the recent increase in grain costs, when can we expect that to flow through your P&L, because I know you guys have hedging programs and the lifecycle of a turkey?
Jeffrey M. Ettinger - Chairman, President and CEO: As you pointed out, Farha, those are both factors in play. We've talked about that we're at any time hedged from 25% to 75%, and that is true of both our current picture and as we head into 2011 in terms of the lifecycle. I mean it's 22 weeks for the (indiscernible), which is the majority of the business there, and so to the extent you see higher spot market prices, if these stick the recent increase that kind of corn cost would start filtering through Q1 of next year, but again, we will have a significant portion of our grain needs hedged against that as well.
Operator: Christina McGlone, Deutsche Bank North America.
Christina McGlone - Deutsche Bank North America: I guess, in Jennie-O, I was wondering if you can maybe quantify the increase in advertising, because I wasn't sure if it -- it was a little bit less than I expected and I wasn't sure if it's because your leverage to commodity has fallen, because that's where you've cut or is it because of the higher advertising expense and how we should think about that for the fourth quarter.
Jeffrey M. Ettinger - Chairman, President and CEO: Jennie-O Turkey Store, the added advertising spend was in the $9 million range year-over-year in Q3 and we're planning the same kind of enhanced advertising program in the fourth quarter.
Christina McGlone - Deutsche Bank North America: Do you think that -- are you seeing the same sort of leverage in your model from the better commodity markets or because you've cut in that area, we shouldn't necessarily apply what we're seeing in the commodity markets?
Jeffrey M. Ettinger - Chairman, President and CEO: The commodity market effect for us is, it's a really harder to discern as we've talked about before solid breast meat pricing is supportive of the value-added business, but we don't really sell a lot of breast meat on the commodity market, and so that's less of a direct advantage. The thigh meat pricing, almost all of our dark meat, a significant portion does go out on that kind of the market basis and so those prices have been very solid this year, and they're down slightly from its peak and our expectation is that that should hold in place.
Christina McGlone - Deutsche Bank North America: Then in terms of grocery, it looks like the last two periods for -- and IRI data show some pricing from Hormel, but also some increase in promotion, and I know Sara Lee talked about a price increase in meats. So I was curious what -- I think before you had said maybe you wouldn't start pricing until the fall, is that coming earlier and what's the competitive climate like there?
Jeffrey M. Ettinger - Chairman, President and CEO: Christina, pricing for our company when it comes to market-based items and these would not necessarily be the grocery products items, but within more of the refrigerated portfolio and for foodservice, we definitely have been moving pricing on hams and bacon and fresh pork to correspond to these inflated markets. In the grocery area, we did announce price increases on Hormel hash and on corned beef related to tightening of supplies from South America, but on the pork-based items, we continue to be kind of in a wait-and-see mode. We're trying to create the balance between what we're encountering in terms of increased input cost, but also trying to be sensitive to what the consumers and our customers are looking for in terms of trying to hit certain price points.
Christina McGlone - Deutsche Bank North America: Last question, I think the CapEx budget dropped a little bit from the last guidance and I was wondering if that's just timing or if it's something else.
Jody H. Feragen - SVP and CFO: Purely timing.
Operator: Jonathan Feeney, Janney Montgomery Scott.
Jonathan Feeney - Janney Montgomery Scott: Jeff or Jody, I wanted to – looking forward to following fiscal year, fiscal '11, when I think about the earnings base for Hormel, the biggest area of vulnerability, it seems, would be this commodity cutout situation, which looks like according to government data is kind of year record penny profit. Can you talk about the dynamics that are allowing for those maximal cutout profits in the marketplace? How sustainable are they? Like, is something permanently changed or changed for some period of time? How should we think about that versus what's kind of a steady steep business for your Refrigerated Foods segment?
Jeffrey M. Ettinger - Chairman, President and CEO: Jon, I would take the position that the current commodity cutouts are not -- we're not counting on sustaining at these levels, just as we were hopeful that they weren't going to sustain at the negative levels that we encountered a few quarters ago. Traditionally, the needle moves and kind of settles in between and that gets us back into a position where we can drive long-term growth through our value-added items, and that's what we're counting on. This market's been hard on our value-added items, but we have been able to make up for a significant portion of that through these enhanced cutout margins in the short run.
Jonathan Feeney - Janney Montgomery Scott: What's driving that though? I guess maybe more pointedly, why aren't facilities that have historically sort of double shifting and triple shifting in these kinds of conditions doing that more quickly?
Jody H. Feragen - SVP and CFO: Jon, maybe I'll give you a little color. Our house supply is down 3% to 4%, and that's a global reduction, not just in the United States, and then we have unprecedented demand. It's been pretty strong domestically, but then the export markets have rallied back maybe not to their record levels, but certainly very strong, and we're, year-over-year, off a very weak 2009 when the recessionary things impacted us quite heavily. So the demand sector seems to be a big portion of what's driving the cutouts, and then couple that with low protein levels across the board with the exception of chicken. So we're in a tight supply situation.
Jonathan Feeney - Janney Montgomery Scott: If I could ask one detailed question, it seems to me like you now got cash kind of balancing on your short-term debts, so I mean sky is the limit or several hundred million dollars is the limit of potential share repurchase, could you refresh me on what are the structural inhibitions you have to share repurchase as they relate to the foundation?
Jody H. Feragen - SVP and CFO: I have 4.8 million shares left on an authorization for my Board of Directors and we will intend to use that strategically and opportunistically to repurchase our shares. Obviously, we'd rather been investing in things that grow our business and provide a better return for our shareholders, but in the meantime we'll continue to look at our dividend policy as well as our share repurchase.
Operator: Diane Geissler, CLSA.
Diane Geissler - CLSA: I have a question just about your long-term growth. If I look at your new earnings range that you provided this morning and then I look at consensus, which I think is somewhere around $2.99, that's suggesting 3% to 4% growth in fiscal '11 over fiscal '10. Is there anything that you see on the horizon that would prevent you from hitting your long-term 10% growth target next year?
Jeffrey M. Ettinger - Chairman, President and CEO: Diane, we haven't established our operating plan yet for next year. Our team is obviously actively working on that right now. We'll be reviewing that with our Board of Directors here this fall and we traditionally do announce that in November. The $2.99 number, that is generated from what the analysts have in place right now. That's their number. That's not our number at this point. We are not backing away from our long-term articulated growth goal of trying to grow earnings per share by 10% each year, but we've not established different levels for where we see 2011 coming in right now.
Operator: Adam Josephson, KeyBanc Capital Markets.
Adam Josephson - KeyBanc Capital Markets: On MegaMex, how much distribution does that business have nationally and how much more do you expect it can get over subsequent year or two?
Jeffrey M. Ettinger - Chairman, President and CEO: It really varies by item. They have a stable of brands, three large brands and another four or five smaller brands, and even the larger brands are in the 30% to 60% ACV range in many cases. So we think it has a lot of room to run. We have a really wide array of products. I sometimes get on the group of about it being a mile wide and an inch deep and I think we can get a lot deeper in a lot of these franchise areas and do a lot better with consumers there.
Adam Josephson - KeyBanc Capital Markets: If the economy remains weak, you mentioned Compleats has not been strong lately, also SPAM and Dinty Moore have not sold particularly well, would you expect SPAM and Dinty Moore sales to pick up again if economically this continues? What else might you think would change next year if this continues as is?
Jeffrey M. Ettinger - Chairman, President and CEO: It's interesting. It's been fairly volatile even within the stretch of time where the economy has been under pressure. Initially, we saw very strong sales in SPAM and Dinty Moore and Hormel chili and the canned items. We've seen some backing off, but that's on year-over-year and we're still – if you go back a couple of years, even the current SPAM numbers are pretty darn good. Those franchises should continue to do well. As we've pointed out, though, we have items that are far from bottom dollar items that are doing very well in this economy. Our party trays are doing great, our pepperoni minis are doing great and the pepperoni sticks, our Natural Choice items continue to gain distribution. So, it really seems to be category by category and what are you offering to the consumer who is looking for that category's items that makes the difference here. The other secular trend, I guess, that I can point to in our business is we are seeing continued improvement in the foodservice part, particularly with the branded value-added items. They had a nice quarter with those.
Adam Josephson - KeyBanc Capital Markets: Just one last one on the Grocery Products. You mentioned some price increases that you've announced. You mentioned next quarter will be somewhat weak as well given the higher raw material costs. Do you expect to return to historical normal margins next year in that business given the price increases that you are taking?
Jeffrey M. Ettinger - Chairman, President and CEO: Adam, we'll probably have a better outlook for that when we do the call next quarter when we can really give you the next year. The other wildcard with that, and we'll walk you through that at that time, is we need the MegaMex business we do get – we register 100% of the sales, but it's a joint venture, so it's only 50% of the profits that go through. So that will make a difference in terms of what the long-term target rates are for operating grocery, but we'll provide some better guidance on that when we head into 2011.
Operator: Lindsay Drucker Mann, Goldman Sachs.
Lindsay Drucker Mann - Goldman Sachs: I was hoping maybe you could provide a little more color on pricing Grocery Products. Would you expect that the price increases that you expect to take for the fourth quarter will be able to fully cover the input cost inflation that hit you in the third quarter? Jeff, you sounded mindful of balancing price increases to cover margins against a sluggish consumer demand backdrop, it seems. Is the biggest concern that consumers will trade down to private label, that retailers are pushing back, what's really causing you to be so careful about how much pricing you're able to take?
Jeffrey M. Ettinger - Chairman, President and CEO: Well, to us, key long-term driver of value in this Company is to continue to grow our value-added franchises. A year ago, it was in the third quarter call or was the fourth quarter, we talked about we would have a negative quarter in terms of sales, great quarter on earnings, but a negative quarter on sales. So we felt that that time and maybe we had pushed the balance a little too far in the direction away from sales. We're obviously very pleased with the double-digit increase we're at right now, and so it's a balancing act. You just continue to look at each of your segments and each of these franchises within the segment and try to figure out what's the optimal level to make sure you're still driving that value added growth. Of the items that we've announced that need activity against, the hash and corned beef items are brand new, so we really don't have any report on what impact that's going to have to sales. We have seen some slowdown, for example, in bacon this summer, where we were not able to be as aggressive on the features given how high billing markets have gone, and yeah, you don't do as much volume when you're not hitting the same feature price point you were able to hit in a different market environment.
Lindsay Drucker Mann - Goldman Sachs: Then also on the cutout side, Jody, you talked about some of the drivers that are boosting cutout margins this year, and then Jeff, you talked about an expectation that those margins might return to more normal levels next year, but it seems like the backdrop is actually shaping up to be relatively similar with tight supplies and probably some decent export demand and an overall tight protein backdrop. So is there any reason why we should expect next year in light of the similar situation that next year margins wouldn't be similarly strong?
Jody H. Feragen - SVP and CFO: Let me answer that question. The only cure for high prices is high prices. So at some point, you hit prices where the export demand and the domestic demand will fall off. Boy, I don't have crystal to tell you when that will happen, but as Jeff indicated, we would not expect these continue high cutout spreads for a lengthy period of time just like we didn't have the negative ones for -- although it was painful for every minute that it was negative. So I would expect that it's going to back onto equilibrium.
Operator: Eric Larson, Soleil Securities.
Eric Larson - Soleil Securities: A quick question kind of related to the last one. A few days ago, Mexico put pork on their retaliation list for violations by the U.S. of various NAFTA provisions that we were supposed to be providing. Given that Mexico is our largest export market, is this something that could slowdown the export picture and in particular does it do anything for ham pricing, I think we saw a lot of hams to Mexico, which is a big piece of the cutout margin?
Jody H. Feragen - SVP and CFO: You're absolutely right and we're still waiting to see what the impact of that tariff situation will have and that certainly could be something that would cause demand to decrease in the near term. Long term, I don't know how they will sustain themselves since we are their largest provider of that piece of protein.
Eric Larson - Soleil Securities: Sure, that makes sense. I am thinking more what could -- in the near term, in the next six to may be even 12 months, get that back to a more normalized margin. Then the second question which follows on that same line of thinking on cut-off margins, we're talking about relatively tight supplies and that has generally been incentive for the hog producers to raise more hogs, but now in the last six weeks, we've added a dollar or a bushel on corn pricing to their cost structure. Are you hearing anything from farmers? It seems that they might even be reluctant to move forward even with good margins if their cost outlook isn't that favorable. What are your thoughts on that?
Jody H. Feragen - SVP and CFO: Well, we are not heavily involved in raising them ourselves, but from what I understand, with the volatile grain prices, obviously, producers are a little leery of putting on additional capital, and I think the lenders would probably be as leery as well, so everything you stated is absolutely, how I would look at the world.
Operator: Robert Moskow, Credit Suisse North America.
Robert Moskow - Credit Suisse North America: Jody, on the CapEx, what was the project that got pushed into fiscal '11, because I remember the forecast for this year was like a $140 million originally for CapEx, so that's about $50 million down?
Jody H. Feragen - SVP and CFO: I know we have some and it wasn't one specific project, but there were some enhancements we were making to one of our facilities on the West Coast that probably got pushed off a little bit longer and they are in the process of getting those going. Nothing is of the large magnitude like Dubuque. That's kind of an once in every other decade-type thing for Hormel to do, but even some of our general maintenance CapEx was going through a tough year last year. People have learned to be creative and I've still got them in that mode. I was thinking they'd get to the purse strings faster than they have.
Robert Moskow - Credit Suisse North America: It's just interesting to me because this year you've raised guidance several times. So it seems like the Company is performing really well. Why would you…
Jody H. Feragen - SVP and CFO: We do not have any mandates to not spend, let me put it that way. So, as the projects come bubbling through the system, we're approving them and moving them on, but they take a while to get implemented.
Jeffrey M. Ettinger - Chairman, President and CEO: We did have kind of a burst if you look at it over a three or four-year timeframe. We added some fairly significant value-added capacity at Jennie-O three years ago, within our Dan's Prize operation, you had Dubuque. So there has been some pent-up demand before that for where we're going to put some of these lines, and so now we're more on a motive of trying to sell things that have available room. So that maybe has slowed down the overall average spending.
Robert Moskow - Credit Suisse North America: Still doesn't quite add up, though. You did have a plan for the year. Are you reacting then to a weaker demand environment by slowing down projects or are you just kind of like the projects are just taking longer than you thought? I'm still not quite…
Jeffrey M. Ettinger - Chairman, President and CEO: It's really the latter in this case. If you'd ask the same question a year ago, we would concede to you that we were being pretty aggressive about trying to slow people down and really do we have to do the project. That's not the mode we're in right now. Part of it is timing and part of it is reassessment of certain of the projects that had been on the docket, but there really isn't – we're not on a starvation diet when it comes to capital right now.
Robert Moskow - Credit Suisse North America: Then another question. On the Refrigerated division I estimate that about half of the profits came from the cutout margin, and then last year cutout margins were actually negative. Is that a fair way to look at it?
Jeffrey M. Ettinger - Chairman, President and CEO: They weren't negative for the year. In fact, it was only a short period of time that they literally went negative. They were worse than usual for most of the year.
Robert Moskow - Credit Suisse North America: What I meant is when I compare quarter-to-quarter, Jeff, in your 10-Q last year, you said that cutout margins were actually negative in the July '09 quarter. I'm trying to figure out how big this…
Jeffrey M. Ettinger - Chairman, President and CEO: For the quarter, you are right.
Robert Moskow - Credit Suisse North America: Maybe it was like negative $5 ahead a year ago and it is as high as maybe $15 ahead positive this quarter?
Jody H. Feragen - SVP and CFO: I don't think it's that high. If you look at the average spread for – if you just average the Western Corn Belt and the USDA cutout for what was our third quarter, it was around $7 I think.
Robert Moskow - Credit Suisse North America: $7, okay. So I can look at those USDA numbers and that gives me a pretty good estimation for your cutout numbers also?
Jody H. Feragen - SVP and CFO: That's where you get the floated market for the cutout, and then we use the Western Corn Belt because that's usually what most of our contracts are based on.
Robert Moskow - Credit Suisse North America: If I could just keep on this theme for a second, when I look at Tyson's cutout margins, they seemed to well exceed $7 in the quarter. Do you get a sense that you are performing in line with the industry on cutout margins?
Jody H. Feragen - SVP and CFO: Those are market numbers I gave you. Those aren't our specific numbers. I don't have those with me.
Robert Moskow - Credit Suisse North America: All right, I'll follow-up later. Your decision to hold off on pricing, was it influenced by the fact that you knew you were overdelivering in the quarter on the Refrigerated side? As Refrigerated margins normalize on the cutout side, would that play a role in your decision on when to take pricing elsewhere?
Jeffrey M. Ettinger - Chairman, President and CEO: No, Robert, I don't know. We certainly wouldn't have looked on a quarter basis. I would say there is an element of looking at the year and saying, okay, we earned $2.53 last year and we're on our way to having a very solid increase this year, and so we think we are in an okay position. Now if we keep – if the squeeze keeps happening and we start seeing more of our franchises having a hard time meeting the margin projections, we may have to reassess that. We try to do it over a longer timeframe, really even to implement retail pricing changes these days. It can take a couple months even. Then, once you do them aside from the market-based items, we'd expect those prices to then stick for a while. So, we really try not to make decisions based on a single quarter.
Robert Moskow - Credit Suisse North America: The reason I ask is that your margin in Grocery at 10.9% that's the lowest I've ever seen it. Surely your division doesn't find that acceptable. At what point is it unacceptable? Are you saying you can deal with it now from a corporate perspective or does that margin have to go higher in order for that division to feel like they've accomplished their goals?
Jeffrey M. Ettinger - Chairman, President and CEO: Our long-term expectations for the division would still be on an annualized basis and we do have some volatility in terms of seasonality with the business. On an annual basis we're still looking in the 16% to 18% range. Now that may change slightly with the MegaMex change. That's what I was referring to earlier that that could water down – I don't know – of 100 basis points or somewhere in that vicinity because we are only taking in half the profits of that. Overall, you are right, we would not be happy in the long run living at an 11% range.
Operator: Michael Hamilton, RBC Dain Rauscher.
Michael Hamilton - RBC Dain Rauscher: Jeff, could you comment in turkey, your branding initiatives, is there anything beyond overall branding tactically that you're trying to accomplish there?
Jeffrey M. Ettinger - Chairman, President and CEO: It's a strong multimedia effort that we see ourselves not only needing to drive the Jennie-O Turkey Store brand, make sure it has higher awareness levels with consumers, but frankly we see ourselves as sort of the lead player in trying to drive enhanced household penetration and household consumption in turkey. That's been flat for a number of years. We're really the only company out there advertising in the turkey segment. What consumers are articulating and a need for wanting just to have more and more healthful items and turkey certainly fits the bill for that, and so we're going after that in this environment.
Michael Hamilton - RBC Dain Rauscher: Then staying on turkey, any thoughts on supply outlook going forward here over the next six to 12 months?
Jeffrey M. Ettinger - Chairman, President and CEO: We think the turkey business has reached a good equilibrium and we're not certain -- we don't have any major expansion plans and have not heard others in that mode. So I think those conditions should remain favorable into next year.
Michael Hamilton - RBC Dain Rauscher: Do you care to define significant there?
Jeffrey M. Ettinger - Chairman, President and CEO: Which part? In terms of our…
Michael Hamilton - RBC Dain Rauscher: Just on volume outlook?
Jeffrey M. Ettinger - Chairman, President and CEO: I like them talking about really as ours, and in our case, we would be looking at no more than a 1% to 2% increase in total pounds.
Operator: Eric Larson, Soleil Securities Corporation.
Eric Larson - Soleil Securities: Just I want to follow-up with the fourth quarter, with your new guidance range of 2.85 to 2.91, it implies a fourth quarter, I believe, $0.72 to $0.78, and you earned $0.77 last year, and this year you've got an extra week in your operations, and then two years ago, obviously, two years ago, you had a difficult quarter, but then you earned $0.73 in the fourth quarter of the year before that. So it doesn't necessarily seem like we're up against a difficult complicate, except of maybe the cutout margins in the fourth quarter. Can you give me a little flavor for the why we shouldn't see a more significant up quarter if cutout margins hold where they are right now and we've got the comps from two years ago where you earned $0.73?
Jeffrey M. Ettinger - Chairman, President and CEO: Well, the comp that I would look at from that timeframe was $0.70. We did have $0.03 of extraordinary in that quarter. Your point is well taken in terms of the rollercoaster ride we took down to $0.50 and then up to $0.77. The other factors we're looking at here is we are doing a significant step up in marketing spend to try then particularly the Jennie-O Turkey Store brand. Now that will be to the tune of about $15 million increase in total spending during the fourth quarter, and then otherwise, that's our best outlook of how the assortment of the other businesses will do. We would agree that one potential upside to our number would be if these really high cutout levels continue, but we're still very early in the quarter on that.
Operator: Farha Aslam, Stephens, Inc.
Farha Aslam - Stephens, Inc.: Could you share with us your M&A costs, where your focus is right now and the environment that you see it right now?
Jeffrey M. Ettinger - Chairman, President and CEO: My sense is that maybe there is more dialogue now than there was during the sort of trough of the post the recession hitting. In terms of our priorities, they remain. We have kind of four key strategic areas of growth that we've identified for the Company, value-added meals, processed items, value-added fresh meat particularly in turkey and pork, and then solution products for the food service in deli. We work with bankers. We work with businesses that we identify on our own, and we certainly look for opportunities in any of those areas, and then we certainly have recognized that we're perhaps on the under-leveraged side in terms of international versus domestic, and so that's what we talked before that that's a particular area of interest to us to -- would be to look for investments in the international area, particularly in Asia.
Farha Aslam - Stephens, Inc.: Just as one more on the Turkey division, you've restructured that business. How much cost savings annually do you anticipate from the rightsizing of the business?
Jeffrey M. Ettinger - Chairman, President and CEO: I'm not hiding the ball. I don't know that I could even -- that I even have a specific number on that. There are certain elements of the change in production that will stick and be there, hopefully year after year. There are other elements that are going to depend on what the feed mix is, what the commodity mix is, and so forth, but we are comfortable that they are operating very well and that we should see another good year from them heading into 2011.
Operator: There are no further questions at this time. I'll now turn it back over to management for any closing remarks.
Kevin C. Jones - Director, IR: Thank you, all. I hope you all have a great weekend and feel free to call me with any follow-up questions. Thank you.
Operator: Ladies and gentlemen, this concludes Hormel Foods third quarter earnings conference call. You may now disconnect. Thank you for using AT&T Conferencing.