Hormel Foods Corporation HRL
Q2 2013 Earnings Call Transcript
Transcript Call Date 05/23/2013

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Hormel Foods' Corporation Second Quarter Earnings Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions.

I will now hand the conference over to your host, Mr. Kevin Jones. Please go ahead, sir.

Kevin C. Jones - Director, IR: Good morning, everyone. Welcome to the Hormel Foods' conference call for the second quarter of fiscal 2013. We released our results this morning before the market opened around 6.30 a.m. Eastern Time. If you did not receive a copy of the release, you can find it on our website at www.hormelfoods.com, under the Investors section.

On our call today is Jeff Ettinger, Chairman of the Board, President and Chief Executive Officer; and Jody Feragen, Executive Vice President and Chief Financial Officer. Jeff will provide a review of the operating results for the quarter. Then Jody will provide detailed financial results. The line will be opened for questions following Jody's remarks.

An audio replay of this call will be available beginning at 10.30 a.m. Central Time today, May 23, 2013. The dial-in number is 800-406-7325, and the access code is 4617224. 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 28 through 35 in the Company's Form 10-Q for the quarter ended January 27, 2013, for more details. It can be accessed on our website.

In order to assure that everyone has an opportunity to ask their questions, please restrict yourselves to one question with one follow-up.

Now, I'll turn the call over to Jeff.

Jeffrey M. Ettinger - Chairman, President and CEO: Thank you, Kevin, and good morning, everyone. We announced second quarter earnings this morning of $0.46 per share, down 4% from last year. Sales were $2.2 billion, an increase of 7%. Total volumes increased 4% despite a planned reduction in harvest levels at both our hog processing and turkey processing operations. The addition of SKIPPY peanut butter sales and the consolidation of our Don Miguel sales in our grocery product segment were a significant contributor to the sales gains. This will be the last quarter of comparison to quarters without Don Miguel product sales.

I will now take you through each segment. Our Grocery Products segment delivered a good quarter. Segment profit increased 10% and sales grew 49%, including sales of SKIPPY peanut butter and Don Miguel products. We were pleased that sales by Grocery Products were up 4% even excluding SKIPPY peanut butter and Don Miguel products. Sales gains in Grocery Products were led by CHI-CHI's and HERDEZ products, HORMEL Compleats microwave meals, and Dinty Moore stews. Sales of our HORMEL Compleats microwave meals increased for the second consecutive quarter, as our new cheesy pasta items helped to drive growth.

Segment operating profit for Refrigerated Foods was up 3% as overall improvement across most of the business modestly offset losses in live production operations. Our affiliated business units, which include Farmer John and Burke among others, showed significant growth. Sales for Refrigerated Foods declined 2% in the quarter, primarily attributable to the planned reduction of harvest levels in our hog processing operations and from exiting our feed sales business.

We saw growth in retail sales of Hormel party trays, Hormel convenience bacon and LLOYD'S ribs, and in foodservice sales of Hormel Natural Choice deli meats, HORMEL pecanwood bacon and our new HORMEL FIRE BRAISED Meats. We are excited about the potential growth that our new HORMEL REV snack wraps will bring to our Refrigerated Foods sales. These products are arriving on shelves at retailers nationally and we will launch a significant advertising campaign starting in July to support this new product line.

Segment operating profit Jennie-O Turkey store declined 26% on a sales decline of 2%, as we faced significantly higher grain costs and lower commodity turkey meat prices. Increased sales of our value-added products in the retail and Foodservice trade channels were insufficient to offset these headwinds.

Nonetheless, sales of our Jennie-O Turkey store fresh tray pack items and turkey bacon remained particularly strong as we continued to benefit from our 'Make the Switch' advertising campaign over the past three years. Harvest levels at Jennie-O declined more than 2% during the quarter, which reduced our exposure to weak commodity turkey prices.

Our Specialty Foods segment achieved another strong quarter, with operating profit up 24%. These results were attributable to significant sales growth as the team has done a nice job expanding the customer base. Sales grew 7% during the quarter, led by ingredients, ready to drink beverages, nutritional products and sugar. The agreement allowing Diamond Crystal Brands to sell SPLENDA sweetener into the Foodservice trade channels will expire at the end of June. Our Specialty Foods segment will be challenged by the loss of these sales in the back half of the year.

We also regret to report that this loss of business will necessitate Diamond Crystals closing of its Perrysburg, Ohio plant. Diamond Crystal will be offering severance payments and priority status for employment opportunities at their other facilities to those impacted by this action…

Our International and Other segment continues to thrive. Operating profit grew a robust 21% on a 21% increase in sales. These results were led by increased sales of our SPAM family of products, improved profitability of our fresh pork products and better results from our China operations. We're excited about the benefit of the SKIPPY peanut butter business will bring to our sales and profitability in this segment. The integration of international sales outside of China that were part of the closing on January 30th is progressing well. We still expect to close on the sales within China and the operation located in Weifeng by the end of our fiscal year.

We expect a strong overall finish to fiscal 2013. In our Grocery Products area, we are seeing solid momentum in all four key product platforms, including our core canned items, our Mexican products, our microwave meals and SKIPPY peanut butter. Regarding SKIPPY we're pleased with the progress we're making in gaining new distribution and in attainting strong execution at the store level. Our outlook remains bright for our International and Other segment as well as we start to attain the benefits of distributing our SPAM family of products and our new SKIPPY line together. We also expect continued sales growth and efficiency gains from our business in China.

At Jennie-O Turkey Store we are looking for improved results in the second half as pressures from higher grain costs and weaker commodity turkey prices begin to moderate. We are encouraged by the continued strength of our Jennie-O value-added product. For Refrigerated Foods, the processing margins in pork have been weaker than we had anticipated this year. This segment has experienced some of the same challenges as Jennie-O in terms of higher grain costs in live production areas and weaker commodity pork prices. However, we do expect the balance to eventually return to this area.

We believe the investment we are making in the REV snack wrap rollout will establish the foundation for a beneficial new product platform for the Refrigerated Foods group.

After a great first half our Specialty Foods segment will now be tasked with replacing the lost SPLENDA sweetener business. We have a number of initiatives underway aimed at building their other businesses.

Taking all of the foregoing significant factors into account, we are maintaining our fiscal 23 earnings guidance range of $1.93 per share to $2.03 per share.

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

Jody H. Feragen - EVP and CFO: Thank you, Jeff. Good morning, everyone. Earnings for the second quarter of fiscal 2013 totaled $125.5 million or $0.46 per share compared to $127.9 million or $0.48 per share a year ago. The results for 2013 include nonrecurring costs incurred in the SKIPPY acquisition of about $9 million.

Dollar sales for the second quarter totaled $2.2 billion compared to $2.0 billion last year, a 7% increase. Volume for the second quarter was 1.2 billion pounds, up 4% from the same period last year. Selling, general, administrative expenses in the second quarter were 8% of sales, up from 7.4% of sales last year. Selling, general, administrative expenses were higher due to SKIPPY-related transition and transaction cost in the second quarter. We expect a minimal impact on selling, general and administrative expenses from the China closing of SKIPPY.

SG&A expenses are expected to be around 7.5% of sales for the full year. Interest and investment income was $1.1 million for the second quarter, compared to $2.3 million last year. Interest expense for the quarter was $3.1 million, down from $3.3 million last year. We expect interest expense to be approximately $12 million to $14 million for fiscal 2013.

Our effective tax rate in the second quarter was 31.5% versus 33.5% in fiscal 2012. The lower tax rate is primarily due to settlements with various foreign and state tax jurisdictions. For fiscal 2013, we expect the effective tax rate to be between 33% and 34%. The basic weighted average number of shares outstanding for the second quarter was 265 million. The diluted weighted average number of shares outstanding for the second quarter was 271 million. We repurchased 200,000 shares of common stock during the second quarter, spending $7.9 million. We have 11 million shares remaining to be repurchased from the current authorizations in place.

Depreciation and amortization for the quarter was $31 million, up slightly from $29 million last year. We expect depreciation and amortization to be approximately $120 million to $125 million in fiscal 2013. Total long term debt at the end of the quarter was $250 million, unchanged from last year. Capital expenditures for the quarter totaled $23 million, compared to $28 million last year. For fiscal 2013 we expect capital expenditures to be approximately $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. Operator?

Transcript Call Date 05/23/2013

Operator: Ken Zaslow, BMO Capital Markets.

Ken Zaslow - BMO Capital Markets: Just one housekeeping question. When you said Jennie-O's improved results will be improved in the back half, is it sequential or year-over-year?

Jeffrey M. Ettinger - Chairman, President and CEO: We are talking year-over-year comparisons. So for the first two quarters clearly significant drops from the prior year. As we had indicated when we headed into the year, we knew last year had really strong commodity turkey prices in the first half of the year and we were in a much more beneficial position in terms of grain costs both in terms of the actual and daily cost and with our hedges from the prior year. So we have dropped nearly kind of $18 million a quarter year-over-year for the first two quarters. We expect that to improve significantly in the second half. Getting back to even and then gaining as the half proceeds.

Ken Zaslow - BMO Capital Markets: Then my bigger picture question is, can you talk about your input costs and your ability to price for the Grocery Products business and how you think about that going into the back half of the year but also going into 2014?

Jeffrey M. Ettinger - Chairman, President and CEO: We don’t have any 2014 pricing relating guidance yet and we certainly – it's sort of a franchise by franchise approach when it comes to the Grocery group right now in terms of costs. I mean it ranges anywhere from pressure we are getting in costs on beef and chicken related items to frankly the pork side costs have been fine. We've had favorable avocado costs. We're new to the peanut butter business, but we've had favorable peanut costs thus far. In terms of announced pricing actions right before we closed on the deal, we did follow a price decline on peanut butter and so that's enacted in the marketplace. There is no further pricing actions that we have at this time on that franchise. We did take a price increase on HORMEL COMPLEATS. That was the first one in several years. We wanted, I think as we've talked about in prior calls, wanted to get that franchise humming again, get the right marketing support, get the right product mix and we're happy with what the team has done in that regard. So, we just have now coupled that with sort of a catch-up price increase on that item. But at this point, otherwise, we don't have any broad pricing actions in store for Grocery Products.

Ken Zaslow - BMO Capital Markets: So, the volumes should be relatively at historical levels. There wouldn't be any dislocations with volumes throughout the next, call it, six to 24 months we could say?

Jeffrey M. Ettinger - Chairman, President and CEO: We have really great momentum right now on Grocery. I'm expecting very solid results on both the top line and bottom line for Grocery for the remainder of the year.

Operator: Christine McCracken, Cleveland Research.

Christine McCracken - Cleveland Research: Jeff, you said that you had really strong margins on your export business and it's a bit curious given some of the trade interruption that we saw in the quarter and I'm just curious if it was a delayed response if that product had already been sold or if those markets to Russia and China just aren't a big deal for you?

Jeffrey M. Ettinger - Chairman, President and CEO: It's more of the latter. I mean, we're really kind of a niche player when it comes to exports. We tend to sell more of the off all based items when it comes to fresh pork. Clearly, SPAM is also a major export component of our overall portfolio for International, and in that case, those margins of sales have been solid contributors to the growth that International has been providing.

Christine McCracken - Cleveland Research: And are you anticipating any retaliatory action on this COOL legislation here – I guess, the deadline's today – in terms of Canada and Mexico and what that could mean to your overall pork market?

Jeffrey M. Ettinger - Chairman, President and CEO: Well, I mean we've been supporters of the American Meat Institute and other trade associations' articulation to our government that we really felt that a modification to the Country of Origin Labeling Program would be beneficial, frankly, to us as well as the trading partners in North America. It's kind of hard to read whether that's falling on deaf ears or whether there's going to be at least some progress in that, but in terms of retaliation, I don't have any greater sense, Christine, I guess than anyone else as to what might happen in reaction to that.

Operator: Eric Larson, CL King & Associates.

Eric Larson - CL King & Associates: Jeff, could you give us a little flavor – this is on the turkey side. We've seen a relatively steady increase in sort of the production metrics for the industry over the last, let's say, four to six quarters in egg sets, et cetera, and it looks like it finally kind of started catching up on the commodity pricing in that sector. Could you give us a little feel of where you think the production numbers for the industry will be and why that should start, maybe even getting better in the second half?

Jeffrey M. Ettinger - Chairman, President and CEO: Well, I think you're right in terms of – sort of the long-term ramp that's occurred in the turkey business, but there has been kind of a reaction as things have moderated as the commodity markets are less favorable as grain costs have gone up. So our read of the industry numbers is we're looking at kind of down 2% to 3% numbers. Of course, as we announced at the beginning of the year in terms of what our production levels were going to be, we've sought to put our production levels at about a 2% decline on a year-over-year basis. So that's a fairly favorable outlook heading out for the remainder of the year. We know there is one new plant coming online starting next year, the Farbest organization in Indiana, and so that you may at some point see a tick-up in egg sets and whole placements related to the filling of that facility, but otherwise, I think we're in a fairly benign environment for the balance for turkey.

Eric Larson - CL King & Associates: Just to follow-up on that. Do you expect your harvest numbers for turkey to be kind of down that low-single percentage range for your second half? Then also your harvest numbers in pork, what would be the second half outlook for harvest numbers for that division as well?

Jeffrey M. Ettinger - Chairman, President and CEO: I think we'd stick with the full year number we've given you. Though we'll admit it's – we don't always hit it exactly on the nose. I mean, turkey is a good example of that, and we talked about 1.5% to 2% decline on an annual basis. In the first quarter, the weights came in a little more favorable than we thought, and so we didn't – it wasn't that steep a drop. The second quarter was actually steeper than 2%, but on average, we're still, for both the whole supply chains, looking at that range.

Operator: Diane Geissler, CLSA.

Diane Geissler - CLSA: Could you tell me please how big the SPLENDA business is, obviously its material if you had to close the plant but I am just trying to get an idea about revenues coming from that business and its contribution on an operating profit basis?

Jeffrey M. Ettinger - Chairman, President and CEO: We really don't do line by line either sales or our operating profits. I mean, in terms of – we're trying to give you a little bit of a sense magnitude of impact for Specialty Foods by virtue of our comments that here there are really strong growth numbers that they managed to deliver in the first half. What we're saying it's going to be much more of a challenge in the second half. So it's significant, but I can't give you a precise number of that. I will also add though that when it comes to kind of the bottom line impact, our overall guidance and maintaining our annualized range is baking in everything we see coming in terms of the impact from the loss of that business for 2013.

Diane Geissler - CLSA: And what is the ACV on the Rev product at this point?

Jeffrey M. Ettinger - Chairman, President and CEO: The reported ACV from the team is in the 70% to 80% range, but they're telling – that's kind of the acceptance level. I mean, I'm not sure Nielsen when you scan (that yet), there can be as much as a month lag sometimes from when a customer says, okay, I'm taking it to when it actually shows up on the shelf. But those are the kind of numbers we expect to have in place here, I would assume, by next month, and for sure we want them in place by July when the advertising kicks off and our team seems to be very confident we're going to hit that.

Diane Geissler - CLSA: And how many SKUs are on that product platform and are the retailers taking all of the SKUs or…?

Jeffrey M. Ettinger - Chairman, President and CEO: There are eight varieties and most retailers are taking all of them. There are a few that have taken five or six versus all eight. And many cases we're getting double-facings for each item, and so we're very excited about where – for the chains that we already see it on shelf and how they're executing it, it's in a good position. And our repeat numbers; we've kept the test markets, the three markets that we started last fall, we've continued to have those markets in place with the product and the repeat numbers are still very strong for that item, so that's very encouraging as well.

Diane Geissler - CLSA: And the price point on that is what?

Jeffrey M. Ettinger - Chairman, President and CEO: It's plus or minus $2. You'll see some in the high 1s, you'll see some in the low 2s.

Operator: Akshay Jagdale, KeyBanc.

Akshay Jagdale - KeyBanc Capital Markets: First question, is just on Refrigerated Food volumes, and even Jennie-O Turkey actually. So, it's two parts. Can you break down the volume decline in terms of value added versus commodity from what I understand, the hogs process weren't down – they were down like 1% or something, so, just trying to understand the dynamics there, if there's anything going on, on the value added side that we need to be maybe concerned about.

Jody H. Feragen - EVP and CFO: I guess, I'll take the Refrigerated Foods side Akshay. Well, we did see the reduction in harvest volumes as well as some feed sales that we had been doing that we are no longer in that business, so those would be the two big impacts on volume for Refrigerated Foods. As far as the value added franchises, obviously, the fresh pork business moves up and down with the harvest volumes. So, you're going to see reductions there when, the harvest is lower, but we're excited about some of our value added franchises in the Refrigerated Foods section, we saw great results on our party tray business, so we continue to look for those to deliver along with the rev products that will be hitting in the back half of the year.

Jeffrey M. Ettinger - Chairman, President and CEO: So, for Jennie-O, clearly the total pounds processed were down, the total pounds sold were down but most of the drop in sales really came out in the commodity side of it. Our value added volumes were actually up for the quarter. Very significant gains continuing on the retail side and solid gains on food service. A little less so on the deli components. So those are kind of our three go-to-market, value-added components. But overall, from a Jennie-O franchise basis, we're still in very good shape in terms of our sales volumes through to consumers.

Akshay Jagdale - KeyBanc Capital Markets: Just one on SKIPPY, so can you talk about sort of longer-term? I know you haven't owned that business for that long, but for the time that you've owned it, what have you learned, like top two maybe positives relative to your expectations and two – one or two sort of negatives relative to your expectations?

Jeffrey M. Ettinger - Chairman, President and CEO: Sure. Well, I don't have any negatives right now, Akshay. I guess that's a good thing. From a positive standpoint, our team's done a great job of getting ahead of the curve in terms of the integration aspect. So we had a five-month transition agreement in place with the seller that we ended up getting out of in three months because we were ready to go, both from a plant standpoint and an order to cash standpoint. The sales team is very excited about having this franchise. They're working on a customer-by-customer basis to see if there were distribution voids or opportunities, to see if they can promote the product better. In some cases, this is what we said when we announced it, this was going to instantly be our single largest Grocery Products franchise. So in some markets, we're finding – I mean, this has really made us a much more major distributor and supplier to certain retailers, and so it really kind of elevates our game in terms of what we can talk about there. One of the things sort of yet to come in terms of the SKIPPY franchise is our assessment on the marketing and the advertising side. We're starting to study that, what would be a good proposition there, where would that rank compared to our other opportunities in the Company, and we'll certainly have some guidance and information on that as we head into 2014. But that's a task for the remainder of – kind of middle and fall of this year.

Operator: Farha Aslam, Stephens Inc.

Farha Aslam - Stephens Inc.: First, just a quick housekeeping. SKIPPY sales, are you willing to disclose what they were in the quarter?

Jeffrey M. Ettinger - Chairman, President and CEO: We really don't do line by line sales. I mean we gave you a sense of those sales though for on a – kind of U.S. and foreign basis when we closed the deal, and it's consistent with – it's not a particularly seasonal product, so I mean you can certainly get close to the number by looking at it that way.

Farha Aslam - Stephens Inc.: And then just following on to Diane's question regarding that Specialty Foods in the second half. Do you expect operating profits to still be positive for that segment or do you think year-over-year we should build in some cushion and anticipate some downside risk?

Jeffrey M. Ettinger - Chairman, President and CEO: Well, I mean based on the announcement today, you can see there is an element of a ramp-down to it. The business, we end up leaving our facility and our sales organization at the end of June, so that takes us – we still have it for two periods of third quarter. So, I mean I think you can look at – third quarter, there'll be less of an impact and fourth quarter there'll be more of an impact.

Farha Aslam - Stephens Inc.: And then…?

Jody H. Feragen - EVP and CFO: But to clarify, the thing that we'll be profitable.

Farha Aslam - Stephens Inc.: No, of course, the segment will be profitable, but year-over-year, you expect profits in that segment, particularly in the fourth quarter, to be down?

Jody H. Feragen - EVP and CFO: I would expect that.

Jeffrey M. Ettinger - Chairman, President and CEO: That's the first segment, yes.

Farha Aslam - Stephens Inc.: And then just going forward on now that SKIPPY is largely integrated, looking at your balance sheet and cash flow and organization, do you feel like you're ready to look at incremental M&A opportunities? And could you just share with us any color you can about that M&A landscape?

Jody H. Feragen - EVP and CFO: Sure. Yes, we're very pleased with the domestic integration of SKIPPY. We still have the international piece that will come later this year and we believe we have all the teams in place to get that done successfully. So, certainly a great testament to the people putting a lot of effort behind that and we're absolutely willing and able to take on additional opportunities as they present themselves and we continue to look for things that fit with our strategic areas of focus and we will continue to do that and I believe that we have plenty of capacity.

Operator: Robert Moskow, Credit Suisse.

Robert Moskow - Credit Suisse: I wanted to know if you're looking at the next couple of quarters, maybe four quarters you're guiding to higher turkey prices, lower grain cost headwinds, both in refrigerated and in turkey. Can we add lower input prices for peanut butter in there as well?

Jeffrey M. Ettinger - Chairman, President and CEO: Certainly, for the remainder of the year I mean, we really haven't frankly done a lot yet with '14.

Robert Moskow - Credit Suisse: It is possible it could spill over into '14 like all of these factors?

Jeffrey M. Ettinger - Chairman, President and CEO: Sure.

Robert Moskow - Credit Suisse: Then maybe just to follow-up on refrigerated, I don't remember the last time that increased grain cost showed up as a negative to profits in Refrigerated Foods. Can you remind us like what your live production operations are in terms of size and what's the strategic value of holding on to those?

Jody H. Feragen - EVP and CFO: Sure. Perhaps about less than 20% of our production comes from our live production units that are based in the Western part of the United States or contracts that we have with growers that include a grain-based component. I would expect some of those grain-based contracts will end at the end of this year, but I do think that we'll keep a component of those going forward. From a strategic standpoint, we continue to evaluate all our operations and look to sustain those that provide the best shareholder returns. So I don't have any specific comment on our live grow operations at this point.

Robert Moskow - Credit Suisse: Jody, what about the packing margins in the quarter? Did you say what those were? Whether they were – how they were different versus a year ago?

Jody H. Feragen - EVP and CFO: Boy, the comparisons have become much more difficult with the USDA changing the mandatory price reporting, I think, effective in April. So we're no longer getting the comparable voluntary price reporting, as well as the USDA changed the methodology used in building up that USDA cutout. So year-over-year comparisons are a little difficult. If I look at just our business and the way we do it, I would say it would be a net even to last year. We do expect the industry to get back into some more moderating and normalized levels in the back half, and that there should be some improvement, but given year-over-year is difficult at this point.

Robert Moskow - Credit Suisse: How do you feel about your processing capability there, the efficiency of your packing, the strategic value of doing that? Do feel like you're – I've noticed very good numbers from Tyson in that regard, like do you feel like there's a way for you to close that gap in terms of improving your efficiencies?

Jody H. Feragen - EVP and CFO: Well, we have two, three plants that basically do live harvest, and we've looked at our Farmer John plant to really bring in the number of heads that equals the amount of value-added product that they need, and they've done a great job of reducing costs in that area by doing that. Sure, our Fremont plant probably could be a little more efficient because it's only a single harvest, but it better matches what we need for our value-added. So, I would say that having those processing capabilities to provide our own sole source of raw materials is valuable to us at this point.

Operator: Christine McCracken, Cleveland Research.

Christine McCracken - Cleveland Research: I just wanted to see it was an awfully cold spring we've had snow as you probably until late May in a lot of areas. I'm wondering as you look at your Grocery portfolio, curious if there is any aspect on overall sales, you think from the colder weather?

Jeffrey M. Ettinger - Chairman, President and CEO: Boy, maybe in Denimore otherwise of the items that we're carrying the day, no I mean, Mexican really has very little seasonality. We've learned that peanut butter has very little seasonality. Microwave meals, if anything, skew to back-to-school in that kind of time range. So, no, I guess I really don't see that as having that kind of impact on our Grocery portfolio.

Christine McCracken - Cleveland Research: Then if you think about the consumers right now, we're getting a lot of I think, a pretty wide array of data points in terms of consumer strength, especially in the protein area, where prices have gone up quite a bit. You obviously still have record high beef prices and I think turkey has had a bit of pushback from the higher prices. Just curious how would you, can you put any color around what you're seeing in terms of buying patterns, are they going towards the value end of the portfolio or has there been any pushback in terms of these price increases that you have needed to put through?

Jeffrey M. Ettinger - Chairman, President and CEO: Well, I mean, it really seems to vary item by item, and I suppose our items probably have different consumer targets or different consumers who frequent those areas. So let's just take turkey as an example. I mean our fresh tray pack items are still growing very solidly. We have had to take pricing on them on a fairly steady basis, unfortunately, with the – not just this year's increase in grain cost, but a multiple year increase in it. Yet, I think we've done the right things in terms of marketing that brand and appealing to the health element for that consumer, and so that's – it's still growing great. Behind the glass, deli sales of turkey, those are softer, and I do think price point is a factor in that, as both the retailer and the manufacturer unfortunately had to push those up some. I do think there's been some migration by consumers to other choices there. So it seems to vary by item. I just look at the overall franchises of the Company, and I'm just pleased that we have so many of them that are in solid volume positions, and so overall, I'm satisfied with where we're at in terms of our pricing.

Operator: Tim Ramey, D. A. Davidson.

Timothy Ramey - D. A. Davidson & Co.: Jody, could you parse the 7% sales number into acquisition, volume and price mix or anything like that? I don't see that you did that but if I did – if you did, I'm sorry.

Jody H. Feragen - EVP and CFO: We split out the sales numbers on – I don't – you know what, Tim, I don't have that off the top of my head.

Timothy Ramey - D. A. Davidson & Co.: I see you did a lot of that in the segments, but just trying to avoid the math. Also, on the SKIPPY one-time charge, is that a net of tax number, or was there a tax cost associated with that, or a tax benefit associated with that?

Jody H. Feragen - EVP and CFO: That's the before-tax number, so that's what would be included up in the segment.

Timothy Ramey - D. A. Davidson & Co.: Right, and so – and a normal tax rate…?

Jody H. Feragen - EVP and CFO: (indiscernible) to be generally deductible from a tax standpoint.

Operator: Ann Gurkin, Davenport & Company.

Ann Gurkin - Davenport & Company: Wanted to start with SKIPPY and the conversation about the one-time charge of $9 million in the quarter, should we expect any more charges in the back half? I know you commented on China, but is there anything else to think about?

Jody H. Feragen - EVP and CFO: Nothing that would be substantial, so that would be the major portion, and a lot of that's paying current legal fees and due diligence fees, so those are already done even for the China side.

Ann Gurkin - Davenport & Company: And then any changes in anticipated synergies from SKIPPY?

Jody H. Feragen - EVP and CFO: No. In fact, we continue to reevaluate potential opportunities for synergies.

Ann Gurkin - Davenport & Company: And then if we could just walk through the outlook for the year, you maintain your outlook, which includes the SKIPPY cost, I would assume, the lost SPLENDA sales. So what is the offset for that lost SPLENDA sales, and can you walk me through the different components? And what's maybe changed in the different segment outlook as a component of the overall Company outlook?

Jeffrey M. Ettinger - Chairman, President and CEO: Okay. Well, here's how we look at second half. We see Grocery Products in a position to deliver very strong results. They're really hitting on all cylinders in terms of their different franchise. We have good MegaMex business; the canned business is by and large growing. Microwave is now – has restored growth. And then SKIPPY quickly will kick in a contribution to that as well. The other segment that we're expecting a really solid second half from would be International. I think historically people have looked at our international and thought, oh geez that's kind of small and maybe doesn't have as big of an impact. But I pulled the comparison just on a three-year basis for the first half, so this year first half segment profit for international is $32.7 million, in 2010 it was $11.8 million. I mean it's become a major contributor to us and we expect the growth in the second half for international to be every bit as strong as it's been in the first half, they've got good SPAM momentum, they've got good nice pork items, China is doing well and again SKIPPY will kick in. Obviously we don't have the sales in China yet, but for the international sales that are outside of China. When it comes to Jennie-O and refrigerated, I mean we're looking at them being contributors to growth in the second half, but not barnburners. In Jennie-O's case that is a positive overall to our outlook, because as I mentioned at the outset, obviously we had some fairly significant deficits year-over-year coming out of Jennie-O in segment profit for the first half of the year as we have anticipated. And so, we should now be back in a position where Jennie-O can hold its own and grow a little bit. In Refrigerated Foods it's kind of in that mode as well. I mean, overall refrigerated has probably been a little bit under our expectation for the first half. And so, we're not seeing a huge gain out of them in the second half, but certainly, a gain. So, all those positives, obviously as you pointed out and as we've talked about earlier in the call, the event was SPLENDA and the Specialty Foods was not something we had anticipated when the year began, but we now know what's coming and feels that the other four units are going to be able to more than cover any declines that are related to the loss of the SPLENDA business.

Operator: Akshay Jagdale, KeyBanc.

Akshay Jagdale - KeyBanc Capital Markets: Just on SKIPPY, can you just remind us, in terms of your guidance for next year, I'm assuming it's not changed from your previous guidance. But more importantly, what type of assumptions do you have in there for peanut costs? Like this quarter, I'm assuming we didn't see a benefit to their margins from peanut costs. Can you just help me with that?

Jeffrey M. Ettinger - Chairman, President and CEO: I can't do much for you at this point with 2014 yet. I mean, we just really on a company-wide basis have not gotten into laying down our business plan, and therefore, being able to compare, gee, how does that look versus the 2014 guidance we provided when the acquisition was announced. I don't know of any material problem related to that range, but we have not updated it. In terms of what's going on this year, those peanut costs have been favorable. There was an element of that that was positive to the business during the second quarter, but obviously, we had a lot of one-time charges in there as well that mitigated that. But during the second half of the year, that will be beneficial to both the Grocery Products and international franchises.

Akshay Jagdale - KeyBanc Capital Markets: And just one for Jody – a couple for Jody just on SKIPPY itself. Your guidance for D&A, how much of that in '13 is just related to deal-related amortization and sort of what should we expect on a full-year basis on deal-related amortization for SKIPPY?

Jody H. Feragen - EVP and CFO: We took the range up, I think, this quarter, and that would include any amortization related to SKIPPY, amortizable intangibles and any additional depreciation. We have not finalized our purchase accounting, so there may be some adjustment in there, but I feel pretty comfortable with that range I gave you.

Akshay Jagdale - KeyBanc Capital Markets: But is it fair to assume that the change is related to the acquisition or not necessarily?

Jody H. Feragen - EVP and CFO: The majority of the change is related to the acquisition. There's some other minor things, but that would be.

Operator: Diane Geissler, CLSA.

Diane Geissler - CLSA: Just a further question on the SPLENDA. In terms of Diamond Crystal, is SPLENDA the biggest component of Diamond Crystal? I know you have other condiment businesses, et cetera, in there, but if you could answer that question. And the other thing is what exactly happened with the contract? Was it just that you were so successful, the owner of the property wanted to keep it? Was it a failure to come to an agreement on the split in terms of the economics? If you could give us some color on why it was a surprise and what exactly happened.

Jeffrey M. Ettinger - Chairman, President and CEO: Sure. I can't quantify precisely for you in terms of the segment impact other than to tell you, obviously, it was significant enough in the total volume of Diamond Crystal that it prompted us to make a very tough decision in terms of the production facility, and obviously significant enough in terms of profit delivery that we're going to go from a year that's been very solid for Specialty Foods to a second half that's going to be more troublesome. In terms of what happened, I mean it's a franchise that we've been involved with now for a number of years. The owner of the brand had the right to bring it back in-house upon an expiration of a contract. We had been in discussions with them with hopes to extend that contract, and ultimately, the decision was made that they wanted to bring it back in-house and go their own route. And so we will now look for other opportunities. That will be one of the things we outline in Investor Day here in June. Don Kremin who runs that area will be one of the presenters, and he will be able to outline for you kind of, okay, what does Diamond Crystal look like and what kind of things there will they be pursuing now that this contract arrangement is no longer in place.

Operator: Eric Larson, CL King.

Eric Larson - CL King & Associates: Just one quick question on your guidance. I just want to find out what is in your guidance and what isn't? Your $9 million or $0.02 per charge for SKIPPY integration and those costs are in your guidance, I believe. Is any severance cost for the shutdown of your plants with Diamond Crystal, are those costs included in your guidance as well or will that be a separately disclosed item?

Jody H. Feragen - EVP and CFO: Eric, everything is baked into the guidance range. So we've included the nonrecurring costs related to the acquisition of SKIPPY, as well as any charges for shutdown of a plant and severance, including the lost business related to SPLENDA. So everything is in.

Operator: Thank you. There appear to be no further questions. Please continue with any other points you wish to raise.

Kevin C. Jones - Director, IR: Thank you everyone for participating in our conference call this morning. Please feel free to follow up with me with any additional questions you may have, and we thank you for your time. Have a great day. Bye-bye.

Operator: Thank you. Ladies and gentlemen, this concludes the Hormel Foods Corporation's second quarter earnings conference call. Thank you for participating. You may now disconnect.