Jana Haynes Jeffrey M. Ettinger - Chairman, Chief Executive Officer and President Jody H. Feragen - Chief Financial Officer, Executive Vice President and Director.

Jeremy Scott - CLSA Limited, Research Division Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division Eric J. Larson - CL King & Associates, Inc., Research Division Rachel Nabatian Kenneth B. Zaslow - BMO Capital Markets U.S. Farha Aslam - Stephens Inc., Research Division.

Ladies and gentlemen, thank you for standing by. Welcome to the Hormel Foods Corporation First Quarter Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, February 20, 2014. And I will now turn the conference over to Jana Haynes, Director, Investor Relations. Please go ahead..

Thank you. Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2014. 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, February 20, 2014. The dial-in number is 1 (800) 406-7325 and the access code is 4664913. 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. 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 costs and availability of raw materials and market conditions for finished products. Please refer to Pages 26 through 30 in the company's annual report for the fiscal year ended October 27, 2013, for more details. It can be accessed on our website.

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

Thank you, and good morning, everyone. We announced record first quarter earnings this morning of $0.57 per share, up 19% over last year. Operating profit increased by 20% with 4 of our 5 segments registering gains this quarter. In terms of the top line, we generated record sales of $2.2 billion, an increase of 6% over last year on volume growth of 2%.

I will now take you through each segment. Our Grocery Products segment profit increased 13%, and sales grew by 20%. Sales for Grocery Products in the quarter were down 2% excluding Skippy products. Sales gains in Grocery Products were led by Skippy peanut butter, Hormel chili, Hormel bacon toppings and the HERDEZ line of salsas and sauces.

We are particularly pleased with our team's success in securing increased distribution and feature activity for our Skippy peanut butter products. While our Grocery Products segment profit increased during the quarter, there were some challenges.

Higher beef and pork input costs pressured the margins of some of our core products, and sales of our SPAM family of products and Hormel Compleats microwave meals were soft during Q1.

Segment operating profit for Refrigerated Foods was up 59%, driven by positive pork operating margins and growth in both our foodservice and retail value-added franchises. Sales for Refrigerated Foods increased 6% led by retail sales of our Hormel BLACK LABEL bacon, LLOYD'S Ribs and Hormel REV Snack Wraps.

We also enjoyed sales growth in our foodservice business, including such items as our Hormel FIRE BRAISED Meats and Old Smokehouse Pecanwood Smoked Bacon. Segment volume for Refrigerated Foods declined 1% due to increased internal utilization of raw materials and the impact of our exit from the animal feed business in the second quarter of 2013.

Segment profit at Jennie-O Turkey Store increased 1%. While we benefited from more favorable feed cost this quarter, the savings were offset by weaker live production performance due to the sustained extremely cold temperatures we have experienced this winter.

The unusually cold weather has also caused national propane and natural gas shortages driving up the cost of these fuels significantly, which will negatively impact our raw material costs in the second and third quarters.

Sales of our Jennie-O turkey Store lean ground turkey chubs and tray packs were strong in the first quarter as we kicked off a new Make The Switch media campaign in January, featuring lean ground turkey as an ingredient in tacos. Overall, the Jennie-O turkey Store segment reported sales growth of 2% on flat volume.

Timing differences of whole bird shipments for the holiday season year-over-year masked some of the value-added sales increases we enjoyed during the quarter.

We are pleased with the sustained growth of our value-added turkey products in retail, foodservice and deli as consumers continue to find better food solutions in our portfolio of turkey products.

Our Specialty Foods segment reported an operating profit decrease of 11% and a sales decrease of 16% driven by the expiration of the agreement last summer, allowing Diamond Crystal Brands to sell certain sugar substitutes in the foodservice trade channels.

The decline from the contract expiration more than offset gains in our sugar and Hormel health labs businesses. Our Specialty Foods team is focused on rebuilding its product portfolio and providing sales and operating profit growth as soon as possible. Our International & Other segment profit increased 32%, and sales grew 24%.

Strong export sales of the SPAM family of products and Skippy peanut butter drove the positive results. Our China operations also continue to augment segment sales growth. As we move into the second quarter, we will kick off national media campaigns and promotional activity to support our SPAM family of products and Compleats microwave meals.

We also expect continued positive momentum when it comes to our Skippy brand. Pork operating margins continue to be favorable. Bacon demand remains strong, and we are very pleased with the performance of our Hormel REV Snack Wraps, which are exceeding our expectations with excellent repeat purchase rates.

The PED virus has impacted our internal farm operations and several of our independent hog suppliers. Our Refrigerated Foods team is closely monitoring the effects on our pork raw material supplies. Based on the timing of the virus breaks in our supply chain so far, we anticipate tighter pork raw materials in the summer months.

We are taking steps now to ensure we will be able to meet the needs of our customers during this time period. We continue to expect year-over-year sales and profit growth from Jennie-O Turkey Store, but profit growth will be at more modest levels than initially anticipated due to fuel costs.

Finally, we are enjoying significant growth in our International & Other business segment and look for this to continue going forward. Taking all of these significant factors into account, we are maintaining our fiscal 2014 earnings guidance of $2.17 to $2.27 per share.

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

Thank you, Jeff. Good morning, everyone. Earnings for the first quarter of fiscal 2014 totaled $153.3 million or $0.57 per share compared to $129.7 million or $0.48 per share a year ago. Dollar sales for the first quarter totaled $2.24 billion compared to $2.12 billion last year, a 6% increase.

Volume for the first quarter was 1.27 billion pounds, up 2% from the same period last year. Selling, general and administrative expenses in the first quarter were 7.4% of sales, unchanged from last year. Selling, general and administrative expenses are expected to be between 7.3% and 7.6% of sales for the full year.

Equity and earnings of affiliates was $4.7 million in the first quarter versus $9.8 million last year. The decrease is the result of unfavorable exchange rates and lower earnings at our MegaMex foods joint venture, which experienced higher input costs. Advertising expense for the quarter was $36.1 million compared to $24.7 million last year.

The increase was the result of the new Make The Switch ad campaign for Jennie-O Turkey Store and the national advertising campaign for Hormel REV wrap. Additionally, advertising campaigns are planned for Skippy peanut butter, our SPAM family of products and Hormel Compleats microwave meals.

Interest and investment income was $1.2 million for the first quarter compared to $1.8 million last year. Interest expense for the quarter was $3.1 million, unchanged from last year. We expect interest expense to be about $12 million to $14 million for fiscal 2014. Our effective tax rate in the first quarter was 34.3% versus 33.5% in fiscal 2013.

For fiscal 2014, we expect the effective tax rate to be between 34% and 35%. The basic weighted average number of shares outstanding for the first quarter was 263.8 million shares. The diluted weighted average number of shares outstanding for the first quarter was 270.2 million shares.

Depreciation and amortization for the quarter was $31.8 million, up from $29.8 million last year. We expect depreciation and amortization to be approximately $125 million to $128 million in fiscal 2014. Total long-term debt at the end of the quarter was $250 million, unchanged from last year.

Capital expenditures for the quarter total $37 million compared to $22.1 million last year. For fiscal 2014, we expect capital expenditures to be approximately $130 million to $140 million.

At the beginning of the first quarter, we completed the acquisition of the Skippy peanut butter business in China, spending $41.4 million and using our available cash balances for the transaction. The integration of this business into our current sales and distribution operation has been completed by our international team.

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

Luke?.

[Operator Instructions] Your first question today will come from the line of Jeremy Scott of CLSA..

Can you give us an update on the REV product line? How are consumers responding? And how is it performing versus your expectations? And then maybe an update on the Compleats breakfast line as well..

Very good. We're very pleased with how REV is performing in the marketplace. As we exited the holiday season and got into kind of back-to-school time frame for the winter semester at schools, we're seeing good sales response. We're ahead of schedule in terms of our repeat measures on this product line.

We continue to have excellent distribution in the marketplace and would expect that our relaunch consumer advertising campaign will also add to sales within the REV line. When it comes to breakfast Compleats, we've had reasonably good success getting the product landed at a number of retailers.

It's becoming one of the better selling items of the Compleats line, a few of the varieties, and so we're pleased in that regard.

Overall, I have to concede the Compleats didn't fully live up to our expectations for the quarter, but we do between the advertising that's kicking in for Compleats and some better feature activities that we know we have on the books for the upcoming 2 quarters, we expect some improvements on the Compleats line and breakfast Compleats will be part of that..

Great. And I appreciate it's pretty difficult to track, but on PED, can you talk about your exposure relative to the industry? It seems like a lot of the barns affected are from your primary sourcing areas. And then maybe get into how -- what's the volume impact for the summer months and how the margin volatility is going to play into your guidance..

Wow, that's a lot of questions in one question. Certainly, the industry condition leaves supplies uncertain for, I think, a lot of folks in the industry, and we would expect higher hog prices to result from that. And that's pretty much reflected in what we're seeing in the futures market.

Our team has worked hard to identify gaps that we see in our supply chain, along with our internal supply, as well as our producers. And we will look to make sure that we try to secure enough production to make sure that we can meet our customers' needs and the needs of our value-added businesses.

Did that answer all your questions? I'm trying to remember what the rest of them were..

Just what the -- what your expectations for a volume impact may be in the summer months when the shortages really come to -- into play..

Boy, I don't really have a specific decline number for us because, as I'd indicated, we've been working to fill some of those gaps, so might be even a little early to tell. The benefit is, is that it's moving across the country, if you will, in waves so that it's not all going to absolutely hit one particular period..

Your next question will come from the line of Akshay Jagdale of KeyBanc..

First question is on Jennie-O Turkey, can you -- you mentioned the fuel cost and just the tough -- the cold weather and the impact that's having on the operating profit.

Can you help us quantify that in anyway?.

I guess, the best I can tell you, Akshay, would be that our original expectations for Jennie-O Turkey Store were reasonably solid gains year-over-year in segment profit for most of the quarters. As you saw in Q1, it was a much more modest gain. That's probably more of the mode we would expect now for the next couple of quarters.

And then by the fourth quarter, we do expect the division to be in a position to be more solidly up. So you know the fuel costs and live production were somewhat unexpected, and it was some significance we do recognize, so obviously, there are some benefits in terms of total feed costs.

They're on a relatively healthy position when it comes to the commodity meat markets within the turkey complex. And we're really quite happy with their value-added growth.

I mean, even though the aggregate growth for all of Jennie-O in sales was 2%, as I mentioned some of that was related to some whole bird timing, and so notwithstanding the whole birds, our value-added businesses were up more in the 4% to 5% range. So we're very happy with that..

So the underlying sort of profitability of the business continues to move in the right direction. It's I would -- is it fair to say that this issue should be transitory? And it seems like a couple more quarters is sort of what you're expecting..

Yes..

Okay. And then on refrigerated, I thought it was a very good quarter if you look at margins on a per-pound basis, probably the best one you've had in couple of years.

So was it really that good? And then how do I parse out the -- or reconcile the commentary on the REV wraps and the volumes being down? I know there's a lot of moving parts, but clearly, the REV business is doing well, but will it start to show up in the revenue numbers? Or -- and if so, where? I'll pass it on..

Sure. For Refrigerated Foods, I mean, it was a good quarter. I kind of look at 3 things going well within the refrigerated group, I mean, clearly, the basic cutout margins were a lot more favorable this year than what we had experienced a year ago.

Secondly, some of the more kind of market-based supply chain type items, if you recall, we talked about those last year at the Investor Day, is bacon, for example, is being challenging circumstance for part of last year. That complex is in much better shape right now. And then our higher value-added items are all -- are really doing quite well.

And again, I -- in terms of the masking effect of the change in feed sales and then some of the internal transfers, I mean, if you just kind of look at the retail value-added franchises, they were up solidly above 5% growth in the aggregate with several items doing well. REV is part of that.

We're -- as we've mentioned earlier, we're happy with where REV is showing up, and we do expect to see a time where you'll see that top line reflected as part of the total Refrigerated Foods results..

Your next question will come from the line of Eric Larson of CL King..

Just a quick follow-up on the cutout margins, Jeff. For the kind of the upcoming quarters, I think all of us pretty much anticipate you're going to have a tighter hog supply.

Is there enough room at retail for the cutout margin -- for the prices to at least be able to offset your higher costs? In other words, can you at least maintain your cutout margin for the -- for, let's say, the next 2, 3 quarters?.

The cutout margins were quite favorable in Q1. In our very current environment, they remain favorable, but -- and we've known from the last 2 years that, that can be mercurial.

I mean, it -- and when you add in the effect of PED and what kind of a variable that might be is, I guess we're not counting on cutout margins staying at today's level, but that's where they are today..

Okay. Yes, I just didn't -- I'm just trying to get a feel for whether there's enough room in the whole meat complex. Obviously, you've got very high beef prices, and chicken prices have moved up, too, because your supplies have been constrained there as well.

So it seems like there's the ability at retail to get to pricing that you need to offset that lower supply. But that's just my observation..

Okay..

And number two, could you talk a little bit about -- more about MegaMex? Obviously, your equity earnings in the quarter were about half of what they were a year ago.

And is it just a margin issue with input costs? And are they going to price to try to pick some of that back up in the back half or the final 9 months of your year? Or how should we look at that equity line?.

Well, MegaMex, I mean, we talked last year about an earnout composition related to the Fresherized Food piece, and so really, for the remaining quarters of this year, that was still, on a percentage basis, hold down what ultimately MegaMex will contribute to the company. Otherwise, I mean, you have -- it's -- there are quite a few factors.

I mean, there's peso exchange factors. There are some supply factors. We've had some uneveness in terms of business performance. The Don Miguel piece was a little bit softer in this quarter both in sales and in terms of some margin squeeze.

On the other hand, the HERDEZ line was really quite strong, and we're happy with the sales of the Wholly -- the fresherized, the Wholly Guacamole item.

So overall, we're still very high on what MegaMex is going to be able to do for the company, but we're kind of swimming through some choppy seas in terms of that equity and earnings line for probably the next couple of quarters..

Your next question will come from the line of Rachel Nabatian of Crédit Suisse..

First question is a follow-up to Akshay's.

On Jennie-O, are you running the business as well as you thought you would internally? The cold weather and fuel costs are things that we've heard about the commodity chicken operators, but the depths and the expected duration of the negative impact, hasn't been to the same extent as what you have discussed today..

Okay. Yes, I mean, we're -- we think the team up there really does a very good job in terms of trying to anticipate potential challenges. I mean, the whole situation related to propane and we've got into a mode here during January where we were a little bit concerned as to whether we would even get any propane.

And when you have live turkeys in a barn, that's a very significant problem. We did survive through that time frame but with much more significant costs than what our initial plans had been built around.

We do believe that there'll be somewhat of a transitory effect of those costs as we finally get out of the cold weather and hopefully, the markets return to some normalcy. We're seeing some improvement on the natural gas front already in terms of the market coming back a little bit more normal situation and would expect propane to follow.

But overall, I mean, it's -- I would agree that we would have even a stronger quarter at Jennie-O but for those conditions, but I think the team's doing what they can to weather those..

Okay, that's fair. And then just one follow-up question on REV wraps and protein snacking trends. So I just got back from CAGNY, and almost every presenter had a focus on protein. And then Kraft and Hillshire Brands were introducing meat plates, plates with meat, nuts and cheese or chicken with dipping sauce.

And so I guess I just wanted to know your thoughts on this and if you think it's a positive since it'll grow the category. I believe these products are generally next to REV wraps in-store..

Okay. Well, I mean, it's early to tell. I mean, some of those products are just going to get in market this spring.

I mean, they've been shown to the retailers, but in terms of actual shelf impact, we obviously believe in the concept that meat or meat and cheese combinations could be a positive element for consumers when it comes to snacking opportunities.

And so it's certainly not stunning to us that others have looked at the marketplace the same way and have come up with different offerings.

I mean, it's -- I think the offerings that I've seen are really all quite different from each other, so there certainly is the possibility that they could well be complementary and hit consumers at slightly different occasions or maybe a slightly different age audience.

But in terms of what we're looking to accomplish with REV, we're happy with what we've seen, and we continue to gain shelf placements even in the environment of others offering -- introducing new items..

Your next question will come from the line of Ken Zaslow with Bank of Montréal..

Sorry to beat a dead horse here.

But if I kind of think about the turkey business, is it fair to say about $20 million over a 3-quarter period is kind of the estimated cost associated with this? Is that a fair number?.

You're talking about fuel alone?.

Yes. Just from a 3-quarter impact, first, second and third quarter..

If you're looking just fuel cost by itself, that number is low. But we obviously have other things offsetting some of the fuel, unexpectedly high fuel. But as we -- we use a significant amount of fuel in the operation. So it was north of $10 million for -- on a 1-quarter basis..

Okay. So actually, the more interesting question I hope is, all right, so now you had greater pressure from that, which was unexpected.

What was better than expected to offset this throughout the whole organization? Because if you're saying $20 million to $30 million is low, obviously, you've had other successes that may not -- were not in your forecast as well.

So what actually is exceeding your expectations across your portfolio?.

Okay. Refrigerated Foods ended up doing a little bit better than we thought. We knew they were going to have a positive year, but the overall total in terms of their gain year-over-year was more significant than we had originally planned.

And we are attaining kind of better than pro forma benefits from Skippy peanut butter in both the grocery and international segment..

Great. And my final question is on the Compleats, what is the -- I mean, in SPAM, what do you think the progress will be throughout the year in terms of the build? Because it seems like this is again another -- one other piece of your portfolio that has not been as good as we would have expected, but it sounds like you guys are addressing it again..

Ken, I don't have a real clean answer for you on that. I mean, it's been a little bit of a puzzle even internally. We thought maybe we had turned the corner a little bit last year. We had a couple of really pretty strong quarters with Compleats heading into Q4, and kind of later in the year, it was a little softer.

And then Q1, clearly, it did not meet our expectations. So we're hopeful that the new marketing effort and the new -- and some of the promotions we have with the customers will get that back on the right trajectory. We think we've introduced some items that consumers like in terms of the breakfast Compleats items. But time will tell here.

I mean, I would agree with you that, that's been one of our franchises that's been a little bit more of a struggle for us..

[Operator Instructions] Your next question will come from the line of Farha Aslam of Stephens Inc..

A question around the very strong margins in fresh pork and kind of how you think about pricing in your value-added products because it looks like hog costs will go up going into that spring-summer time frame.

Are you thinking that you're going to focus on passing along those prices in your packaged meats items? Or are you thinking of more taking a balanced approach and saying, "Okay, I'm making a lot in fresh pork.

Maybe I don't need to take as much on my packaged meats."?.

Sure, Farha. This is Jody. We always evaluate where we're at with our cost structure and the prices that we go to the retailers with. And in some instances, like the supply chain items, it's probably a more rapid change. Certainly in some of foodservice areas, we have contracts that have levers that move along with the cost of goods.

I would expect that we'll continue to evaluate and look at where we need to take pricing. And if it's appropriate at the time, we'll -- we won't be the only ones with those higher input costs in the industry..

Okay. And then so your -- sort of how much timing is required for you if we see -- because we see that summer hogs are going to be really expensive. You need to start talking about pricing with retailers now? Or can you -- or is it all automatically or formulaic? We're just trying to understand how you're planning on managing that summer hog hit..

Sure. From the retail perspective, I would say the team's probably looking at it right now. It'll be dependent on evaluating those gaps in our supply chain and what we think it's going to do to us internally. So I would believe the team is working on it now..

And on the grocery side, we actually have gone to our customers and notified them of pricing on such as the beef-based items, such as Hormel chili, Mary Kitchen hash and also on SPAM luncheon meat..

That's helpful.

And sort of the degree of pricing that you've taken on those, roughly?.

Low to mid-single digit. It varies by item..

Okay. And then this has been -- sort of you've had China with that Skippy business for about a quarter now.

Kind of now that you've had it, how do you feel about it? Have you been able to kind of marry SPAM and Skippy in China? And how is that working out?.

It's working out well. I mean, it's interesting. In terms of our quarter 1 results, our international team actually didn't get their hands on the business as quickly to be able to benefit fully from it in the quarter. They kind of by January kind of had the full control, and so they got 1 month worth of full benefit of integration of China.

But they're quite happy with what they've been able to do with some of the distributors, not only in China but in some of the other Asian-based markets where we have seen an ability to kind of lever at least the attention level or if somebody can carry both a SPAM and a Skippy as items into the marketplace.

So -- and then it's really -- it's way too early in terms of any sort of operating synergies. I mean, we literally have had our team helping the local group there for a very short period of time..

Your next question comes from Akshay Jagdale..

I wanted to ask about Skippy. I think last quarter, you said you wouldn't talk about that line item like financially separately. But are you -- it seems like it's going better.

So can you give us some more color on what's going better? Is it the peanut cost issue? Or is it just distribution and maybe a little bit more color on what's driving that? Obviously, the sales execution seems to be better, but anything to help us understand the performance of Skippy within the context of the category because the other big brand has had some issues in recent months?.

Okay. Well, I mean, the costs have remained benign, so that's been positive overall for the net margin for the business. But probably the bigger factor that has been the consumer reception to our positioning with the item.

We -- as we took the item over, we found there were some retailers that had either no Skippy items or pretty scant section even though we could identify there were long-standing consumers within that marketplace. And so they were quite receptive to the notion of us getting back in and becoming supportive behind it.

And we coupled that with promotional support. Clearly, it -- especially on a year-over-year basis, if you think about it, this was the quarter that last year the business was for sale. So I don't blame the seller that they probably weren't spending a lot of time promoting the product that quarter.

So on a year-over-year basis especially, we certainly drove some added feature activity but our feature spending on this item is now at a level that's kind of commensurate with being the #2 player in the category.

It allows us to generate some good solid growth in terms of the top line but also is living up to our performance expectations in terms of margins..

And now you're going to put some marketing behind it and then sort of the innovation piece will come after that. Is that how we....

Yes, exactly, Akshay. So the timing, I mean, we're looking at back-to-school time for the advertising. I mean, we're still settling on kind of the final new campaign themes and what the media elements will be. But I would -- you should look for it in the later part of our fiscal year as the kids go back to school in the fall.

And then the new product innovation -- and we have some closer-end things that will hit the market here soon. But in terms of kind of a more major, what we talked about, sort of the out of the jar type newer opportunities, those definitely are more 2015, probably not even right out of the gate 2015.

But we'll follow on soon after when the marketing kicks off..

And just one last one on grocery, just can you talk a little bit about the environment. Obviously, the center of the store is quite pressured, and we've heard that a lot in CAGNY. But I don't think it's clear to anybody, really, why the consumers are so strapped especially on their food purchase.

And so any -- what are your -- what's your read on that situation?.

Well, for us, the center of the store was somewhat choppy. I mean, we had items such as SPAM and Compleats that ended up having declines year-over-year. And so certainly, you can look at those and say, gee, we're experiencing some kind of at least short-term contraction of those franchises in this current environment.

On the other hand, we had several items that did well, like bacon bits and chili and HERDEZ and Wholly. And so we were, I guess, blessed, if you will, with a lot of niche relatively young items in some cases that are still finding more and more consumers.

And so we're maybe a little less than the mode of having a lot of high household penetrations, extremely mature franchises. And so we seem to be able to expand our consumer base even in this current economic environment..

And there are no further questions at this time. I'll now turn the call back to management for any closing..

Thank you all for joining us today. We appreciate your interest in Hormel Foods. Have a great day..

And thank you. Ladies and gentlemen, this will conclude the conference call for today. Again, we thank you for your participation, and you may now disconnect your lines..