Nathan Annis - Director of IR Jim Snee - President and CEO James Sheehan - CFO and SVP.

Rupesh Parikh - Oppenheimer Ken Zaslow - BMO Capital Markets Adam Samuelson - Goldman Sachs Robert Moskow - Credit Suisse Akshay Jagdale - Jefferies Farha Aslam - Stephens, Inc. Benjamin Theurer - Barclays Heather Jones - Vertical Trading Group Eric Larson - The Buckingham Research Brett Andress - KeyBanc Capital Market Jeremy Scott - Mizuho.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods second quarter 2017 conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded Thursday, May 25, 2017. I would like to turn the conference over to Nathan Annis, Director of Investor Relations.

Please go ahead, Mr. Annis..

Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2017. We released our results this morning before the market opened around 6:30 am Eastern. 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 Jim Snee, President and Chief Executive Officer; and Jim Sheehan, Senior Vice President and Chief Financial Officer. Jim Snee will review each segment's performance for the quarter and also provide outlook for the remainder of fiscal 2017.

Jim Sheehan will provide detailed financial results for the quarter and further assumptions relating to our fiscal 2017 outlook. The line will be opened for questions following Jim Sheehan's remarks. As a courtesy to the other analysts, please limit yourself to one question with one follow-up.

If you have additional questions, you are welcome to get back in the queue. An audio replay of this call will be available beginning at 11:00 am today Central Standard Time. The dial-in number is 877-681-3367 and the access code is 2874950. 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 costs and availability of raw materials and market conditions for finished products. Please refer to pages 30 through 37 in the company's Form 10-Q for the quarter ended January 29, 2017 for more details. It can be accessed on our website.

Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance by excluding sales and volume impact of the divestiture of the Diamond Crystal Brands business, the divestiture of the Farmer John business, and the acquisition of Justin's specialty nut butters.

Discussion on non-GAAP information is detailed in our press release located on our corporate website. Please note that during our call today, we will refer to these non-GAAP results as adjusted sales and volume. I will now turn the call over to Jim Snee..

retail, deli, and foodservice. Second, increased competitive activity from other turkey suppliers and competing proteins such as beef continue to pressure Jennie-O’s results. Third, we incurred higher operating expenses primarily related to bird performance issues with both our conventional flocks and those raised without antibiotics.

We continue to make investments into consumer trends such as our raised-without-antibiotics products. Despite the market conditions and operating challenges, the Jennie-O Turkey Store team grew value added volumes 1% this quarter and also grew lean ground turkey tray pack volume by double digits.

Recent twelve week scan data shows positive sales trends as the Jennie-O brand continues to outperform the category. This week we announced plans to build a new production facility in Melrose, Minnesota primarily to process whole birds. This new facility will replace the current aged Melrose facility and is expected to cost over $130 million.

While our emphasis at Jennie-O Turkey Store is on value added products, whole birds are an important part of the turkey supply chain. The new plant will increase operational efficiency through an improved layout and will also automate some of the most difficult production jobs.

Construction begins this year and we expect the plant to be operational in early 2019. Grocery Products operating profit was up 15%. Volume was up 2% and sales were up to 8%. The inclusion of Justin's specialty nut butters and brands such as Wholly Guacamole, SPAM and Herdez, all contributed to growth.

International operating profit increased 38% on volume growth of 17% and sales growth of 19%. Fresh pork exports and branded exports such as SPAM had excellent results this quarter. Our SKIPPY peanut butter business in China also performed well. Refrigerated foods second quarter operating profit was flat with sales down 6% and volume down 14%.

The decreases reflect the divestiture of the Farmer John business in January of this year. Excluding the divestiture, adjusted sales were up 5% and adjusted volume was up 1%. Growth continues to come from retail and foodservice value added products.

In foodservice, items such as Hormel BACON 1 fully cooked bacon and Hormel pepperoni delivered excellent growth during the quarter. In our retail business, Hormel Black Label bacon, Hormel Natural Choice meats and Applegate bacon and dinner sausage delivered nice growth. Specialty foods operating profit declined 16%.

Sales declined 24% and volume declined 33%. Excluding the divestiture of Diamond Crystal Brands, adjusted volume was up 3% while adjusted sales were flat. Muscle Milk ready to drink protein beverages performed well, especially in the food, drug and mass channels.

Our Muscle Milk powder business was softer this quarter which is in line with the category dynamics. In addition, our new Muscle Milk bars have been well received in the marketplace. Given our current operating environment, we have made some short-term reductions to SG&A expenses. One such area is advertising.

Advertising expense this quarter was $30 million compared to $49 million in 2016. This level of advertising is comparable to our fiscal 2015 spend. The majority of the advertising reductions came from the Jennie-O Turkey Store segment.

To maintain our advertising and promotional spend efficiency, some of these advertising dollars have shifted to in-store promotions but we still remain the price leader. Looking to the balance of fiscal 2017, the only change to our outlook is for Jennie-O Turkey Store.

We now expect percentage declines in earnings for Jennie-O Turkey Store to be in the high-teens for the second half of the year with the pressure not abating until the entire industry starts to reduce production levels.

For Refrigerated Foods, we expect growth in many of our retail brands, particularly Hormel Black Label bacon and Hormel Natural Choice meats. We expect growth in the foodservice channel to remain strong with growth coming from many of our brands such as Hormel Bacon 1 and Hormel Fire Braised meats.

We see continued sales and earnings growth from grocery products. Justin's specialty nut butters, Wholly Guacamole dips, Herdez sauces and SKIPPY peanut butter are all expected to be strong contributors to this growth.

The full year outlook for the International segment is for growth in line with their long-term goals of 10% top line and 15% bottom line. We expect strong exports of both branded and fresh pork products.

Our new manufacturing facility in Joshing [ph], China will start producing products early in the third quarter and we also expect relief for China pork prices in the second half of the fiscal year which will improve the operating environment for our China retail meat business.

We look to specialty foods to deliver double-digit earnings growth in the second half of the year, driven by CytoSport and the Muscle Milk brand. As a reminder, we will annualize the divestiture of Diamond Crystal Brands early in the third quarter.

Based on our updated outlook for Jennie-O Turkey Store, we are maintaining our full year earnings per share guidance of $1.65 to $1.71, and expect earnings to be at the lower end of the range.

At this time I will turn the call over to Jim Sheehan to discuss the financial information relating to the quarter and additional key drivers for the remainder of 2017..

export demand, domestic consumption, and total U.S. harvest capacity. Year-to-date export demand has been strong. The USDA expects exports to be up 10% in 2017. Domestic consumption also remained strong. For example, pork feature activity has increased significantly and pricing has been stable.

Depending on the long term export and domestic consumption trends, we believe rationalization of less efficient harvest operations may need to occur. We remain confident we're well positioned to make the necessary adjustments in our business to address changes in pork capacity.

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

[Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer..

Thanks for taking my question. So I want to discuss with Jennie-O Turkey Store segment in a little more detail.

I was just curious when you look historically how long does it typically take for the industry to reduce production levels?.

Good morning Rupesh. What we've said is, I mean, we believe this cycle is a twelve to eighteen months cycle. We don't know, we can't predict exactly when others in the industry will make a production cut.

I do think one of the things that we have to remember is that there still are improvements that can happen along the way in that 12 to 18 months in terms of commodity pricing, competitive activity. So I mean that's how we're looking about -- looking at it and thinking about it..

And then my related follow-up question, as you look at – as we look at your guidance for the back half of the year, what do you assume for turkey prices, do you assume we've bottomed now or do you assume they continue to get worse?.

So from our perspective, I mean, we've built in the downside that we think can occur but from our perspective we believe that there could be some improvements in the back half of the year. But again as far as timing when that happens that's really hard to predict..

Our next question comes from Ken Zaslow of Bank of Montreal..

Just continuing on the turkey side, just – two questions I have. One is the short term, and one is the longer term. So on the short term what prompted you to change -- I mean, I get to profitability but you guys totally reversed course on your volume side, it is my understanding.

So how much was that just because, hey, look the environment is that bad that we're just going to cut so we’re going to change that? And then my second question which is actually probably more important, is okay, so with seven year low turkey prices, 2017 will probably be your fourth best year ever in turkey still.

So how does this change your longer term view of the turkey operation in terms of 2018 and 2019, does this change your margin structure, is this something that we should – there is a structural issue here, can you talk about that as well?.

Sure. Thanks, Ken. From our perspective the shorter term issue as we've looked at the business, starting with production, we have planned reductions for our fiscal year, some mid single digit reductions that really allow us to be a net buyer of breast meats. We did take further reductions in half one in response to the market conditions.

You can say those are probably low single digits and that would put us for the full year slightly lower than 2014. Beyond that for the short term, I don't know that I would say we've changed course.

And what we have seen is continued low commodity prices and others in the industry have not cut back yet but we haven't seen a change in competitive activity, still very strong and this is unique to us but clearly we’ve still seen some increased expenses in terms of bird performance, our investments that we're making which we believe are on trend with our WOA and of course the ongoing investment in biosecurity.

So I mean that's the short term view. From our perspective on the long term side, I mean there is nothing structurally wrong with this business, I mean, these changes are -- they are market based, they are not fundamental issues to the business.

And we said this on our first quarter call is whether good or bad we've been here before and we have emerged stronger as an organization. So we feel really good with our ability to deliver long term growth in this business and it's still about being able to drive value added sales.

So we've been very pleased with the growth in our lean ground turkey up double digit this quarter, scan data that shows we're outperforming the category. So lots of good positive trends that set us up really well for the long term..

We'll go next to Adam Samuelson with Goldman Sachs..

Maybe first at the corporate level, just trying to sense -- last quarter I think you talked to a full year outlook about 5% organic growth, for the year -- year to date you're running a little bit under 3, a bit around 2 for the quarter and you've got – you’re lapping an extra week in your fiscal fourth quarter with the Jennie-O reductions that you have outlined for the back half, do you have an updated thought on the sales view and any color by business would be helpful?.

Sure Adam. Obviously the driver has been the jobs performance. As we go around the horn and we think about all of our businesses for the back half of the year, we believe our grocery product sales will stay in line with their long term growth goal of plus 3% and then plus the addition of the acquired Justin’s business.

Refrigerated Foods, on an adjusted basis, would be in the low single digit range. For JOTS we are calling continued decreases in that mid single digit range. Specialty foods group will be positive mid single digits and international will be on track to deliver their long term stated growth goal of 10% sales growth.

So really aside from the JOTS business we feel really good about the other four segments..

And then I want to go back to some comments in the prepared remarks that you made about pork harvest capacity on the packing side, and maybe the industry actually needing to rationalize some capacity long term, and you even alluded to, you needed to re-evaluate -- you might need to reevaluate your own capacity there.

Maybe elaborate on that view little bit and do you view your pork packing capacity is higher cost relative to the industry or do you see less of a need for that vertical integration in your own business? Maybe a little more thought on how the pork harvest capacity fits in with the Hormel strategy relative to some of the increases in industry capacity that’s going on?.

Well we constantly review our capacity. We've recently sold Farmer John which obviously reduced our capacity in the harvest level. We make changes to our harvest capacity on a regular basis. We look at it on a daily basis, we increase and decrease our harvest levels. We harvest hogs to provide a supply of raw materials for our value added products.

We do that because of the consistency of the products that we attain by harvesting the hogs themselves and honestly we do it on a very economic basis. We have -- we purchase hogs that are very focused to be used in value added products which sometimes are slightly different than what you might see in the open market.

We do purchase bellys, trims and at times ribs in the open market, we've been successful with that in the past. So I guess the answer to your question is that we look at our harvest levels on a daily basis both short term and long term by looking at our harvest levels..

We'll go next to Rob Moskow with Credit Suisse..

Hi, this is a technical question on the cash flow in the quarter, if I'm not mistaken it was pretty far below last year.

Can you give us some color on the factors driving that and what do you expect cash flow to look like this year?.

Certainly. In the quarter there are a couple of things that drove the change. There were tax payments, about $30 million in additional tax payment and that's really just a timing issue. It has to do with how we make our estimated federal income tax payments, we expect that that will come back to us in both the third and the fourth quarter.

So that again is more of a timing issue. We also saw some variation in our workers -- in our accruals around some of our expenses, again more of a timing issue as to when they're paid during the year as opposed to the level of expense. We saw increases in dividends and share repurchase, that was about $25 million. But we also saw a lower CapEx expense.

CapEx is supposed to come at about -- we expect it to come at about $190 million. That is the primary driver of what would change the CapEx, as we get later in the year we start to understand what projects are going to get completed in the year, what projects you're going to have investments in. So we don't see any significant change to our cash flow.

We still see the company as having a very strong cash flow..

And I just have a follow up, Jim and Jim.

It just sounded a little inconsistent to hear the company talk about reducing Jennie-O production in the back half but then also talk about the renovation at Melrose, and $130 million of CapEx to build -- I know it's a further processing facility, so I guess it's different but do you view this as -- I don't know, how do I reconcile these two things? Is this a bet on 2019 being a much better year from a turkey perspective when you're fully operational? And then secondly the industry experts I talk to think that it's not going to be a 2018 recovery for turkey, it probably will be 2019 based on the fact that everyone seems to continue to increase production this year.

Why are they increasing production even though results are that bad? And now that's a lot of questions but maybe you can help me out..

It is. But we will try to get to all of them. I think first, starting with the facility, and so well what we've said here is we are replacing a very aged facility in Melrose.

And it is more for whole birds and that is a very -- I guess that we are focused on the value added business, I mean that's our long term growth driver but whole birds are still an integral part of the business.

And so this isn't a bet that we're making, I mean this is an investment to update the facility to modernize the facility, make it more efficient. So we do feel like it sets us up well for the future and I mean the other thing to consider is that there is a positive NPV and this is a replacement facility.

As you think about the production side of the business, there's increased production because you’ve had a lot of people who were uncertain about avian influenza. And so there was a chance throughout the year that you could have another outbreak, so you had people ramping up on production.

As we move further in the year and we never say never but obviously it's less likely -- I think that's when you could see some production cuts. The other thing that I would say, Rob, is that there will be improvements along the way.

If you want to think about when does it get back to more normalized or historical levels entirely, that will be hard to predict, we've said twelve to eighteen months.

But I do think the other piece to consider is that there will be improvements along the way as commodity prices improves you see some more rational competitive activity and we've seen what's happened in some beef markets already.

So I think all of those things will impact it and for us it’s the right long term on trend business to be in and there is nothing structurally wrong with the business. These are all market-based issues not fundamental issues..

And one last question, you filed a shelf placement recently, can you tell us the rationale for that?.

That was just a routine extension of the debt. It was expired and we've reviewed it..

Our next question comes from Akshay Jagdale with Jefferies..

Good morning. I wanted to ask about the refrigerated foods. Thanks for the update on the capacity.

So you mentioned 6% increase -- can you clarify if that's one shift for all four plants and when exactly you expect that sort of 6% increase to be effective, I guess because you mentioned a couple of plants have opened now, a couple are going to open later.

Do you have a sense roughly as to when that 6% will be sort of effective? And I have a follow-up to that..

Thank you, Akshay. 6% is for 2017 and I don't have any inside information about how those plants are operating or how fast they’ll come up to speed.

So there will be additional capacity that will come online in 2018 but the 6% addresses the capacity -- the stated capacity that will come online in 2016, so I can’t provide any further information on the ramp up. The USDA is stating that there will be enough hogs to provide that production -- at that production level.

It is part of the reason that we've told you -- we might see some short term volatility in the hog prices as – if the plants are delayed or if they start up faster than they thought that can create a very short term volatility in the market.

We've seen that as some other plants have come online but again we see those as very short term and not real trends..

So just so I understand your math, you’re just saying the daily capacity of these plants is x, if you look at that relative to what the daily capacity was before it's a 6% increase, it's not – you’re not doing any sort of weighted average calculation there because it’s coming –.

No, we are not; that is correct. And the information that we're using is the stated information from those groups building the plants..

And so as it relates to that expansion we understand the difficulty of modelling any of that.

But can you just help us understand your base case for 2017, is that hog prices set up for the rest of the year, remain flattish year over year, because they've moved up but they're somewhat still below year ago? So with the capacity coming online, what's your expectation for the next two quarters in terms of the hog prices at sort of flattish year over year or –.

Slightly higher; we don't believe that the plants coming online will have any long term impact on the prices of hogs. Again we believe that there could be some short term volatility but that's going to be very short term based on daily or weekly needs of hogs..

And just one last one on turkey and I know we had discussed this in private as well. But just overall the turkey business that you have is value added, right? And so there's a lot of conversation today and the last couple of quarters on commodity prices. I know there was – these three factors that are impacting the performance there.

But I mean over time, because you're so value added, aren’t you more -- shouldn't you be more and more insulated from commodity moves? Can you just address that sort of broader question? I mean I understand that quarter to quarter over six month period there can be some disconnects but one of the major issues you have is your cost of raising turkey is much higher and you have less pounds but the price itself long term you should be able to manage through that, right?.

Yes, I think, Akshay, in a nutshell what you're saying is correct. I mean over the long term -- I mean we are a value added business. Once again we demonstrate that in the face of a tough operating quarter by being able to deliver double digit growth for lean ground and positive scan data, and still a very very profitable business.

But I mean that doesn't mean we're immune to market conditions and competitive activity. So you've got a situation where we've got competing proteins, we know the first half of the year what the market was like for beef.

So there certainly is market pressure that comes into play but through it all I mean we remain the price leader in the categories where we compete.

It's a very profitable business that’s focused on long term value added growth and again these are short term market based issues, not structural or fundamental issues to the long term viability of the business..

Our next question comes from Farha Aslam with Stephens, Incorporated..

So again on Jennie-O, my first kind of question is around there. We’ve seen turnkey excess come down in the calendar first quarter of this year. Turkey excess were up 9% and here so far in the second calendar quarter we're down to flat. So the industry's cutting.

How much do you think turkey excess need to go down for this recovery to happen and your twelve to eighteen months kind of target, when is the start date that we should use for that 12 to 18 months in your mind?.

So as we look at that whole placement, it looks like it's down 3% to 5%, so we expect it to be down I guess I should say 3% to 5%. If you look at the inventory levels that just came out -- the freezer inventories that just came out this week, freezer inventories of breast meat are up over 50% above last year.

So there still needs to be some clearing through the market of this excess inventory..

And I think in terms of the twelve to eighteen months, Farha, the bigger issue there and what I've said several times already is this idea that we will see improvements along the way both in the market and of course in our own business.

And so we don't have today a starting line in terms of when the clock would set but for us it's more about the improvements that we know we'll see. And I think we've done the right things in terms of how we had planned reductions at the beginning of the year proactively managing our own business by taking further reductions in half one.

So we're doing the right things to set ourselves up for improvements and clearly that could be accelerated by others in the industry doing the same..

Yeah, clearly the industry is already responding.

But then it looked your earnings for this year, they're essentially coming in plus or minus last to last year, when you look out into 2018, with all the puts and takes, do you anticipate earnings growth, do you anticipate being able to get back to your historical targeted algorithm of 5% top line growth and 10% EPS growth..

In terms of specific guidance for 2018 it's obviously too early. As we think about our business just in real general terms, our business is solid. We've got market impacts -- market based impacts impacting Jennie-O but there's a solid foundation.

This intentional balance that we've built throughout our portfolio has allowed us to offset some of the devastating impact to jobs. This is the what if scenario but if JOTS is flat with year ago our business is up double digit on the bottom line.

So that doesn't do anything to the results but it just shows you how solid our business is and how strong that balance is. But I mean we do believe that we will get through this and we will be able to deliver our long term growth algorithm of 5% and 10%..

Our next question comes from Benjamin Theurer with Barclays..

Just I have a follow-up question on your SG&A expenses. So you mentioned that basically there was a huge reduction in advertising from roughly $50 million last year to $30 million, so that's about $20 million.

Taking a look at what you reported on SG&A, there is a decrease by about $30 million on a quarter over quarter but also on a year over year basis. So my question is I understand that you're likely to be a little more cautious on advertising especially on the Jennie-O side for the remainder of the year.

But can we assume that more from the long run that that roughly 10 million savings is something recurring. Do you think there is an opportunity to service a bond and what's your expectation in terms of SG&A for the back half of the year.

If you want to express it as a percentage of sales so more in absolute terms, it's just to get a little bit of a sense of how much more savings potential you might have on the U.S. side? Thank you..

Thanks for the question. You're right, our SG&A is down $30 million year over year, 19% million of that is advertising. We also experienced lower employee related expenses including the loss of the expenses related to the businesses that have been sold. But we've made other cuts around employee related expenses.

We're very tight, we're looking at any changes in inventory levels or in employee levels very closely. We've taken a very proactive approach to expense manage due to the market conditions.

We've focused on a great doctrines that will not harm long term growth, there are many examples of things that we've done that have managed expenses in this market condition. We've had sales meetings that that have been held on conference calls instead of the big meetings we've looked at how many people are going to conferences. We've reduced travel.

Now those things are going to be needle movers but I think it's just the sense of attention to every expense that's going through the system and it's not only going on now but it's so that it's something that we use to play in to continue in the future.

So we're very focused on expenses and I think this is a good time to refocus the staff about making sure that every dime is being spent wisely and efficiently..

And the $19 million that was related to the advertising as of now but is that something towards the end of the year, i.e.

4Q into what’s mostly a more strong quarter throughout the year, do you expect advertising to pick up by then again just to well map lose market share in the different segments or is that something you would try to maintain in terms of spending what we had 2Q the rest of the year..

Benjamin, just to reiterate I mean the advertising reductions that we've made are short term reduction things. I mean we've been again very public and intentional about how we do support our brands and how important that is to us but in the short term reduction is the majority again have come from job.

And not all of them have translated through to the bottom line some of the JOTS in particular shifted to trade to maintain on shelf competitiveness on shelf positions but remember even with that we're still the price leader. So we in these levels are comparable to 2015 and we have -- we have flax our advertising dollars before.

For this, this has happened and we are committed to a long term growth and long term brand building. And just want to reiterate that we are absolutely committed to our brands and that the short term reduction is not putting them at risk..

Our next question comes from Heather Jones with The Vertical Group..

I hate to beat a dead horse but I have a question on Jennie-O.

And was just wondering if you could give us a sense of how much of the profitability pressure you experience right now is due to things like your liveability issues with NAE, et cetera because from what I understand most of the industry is still making money and I understand you all are if not to the best producer in the industry among the best, and your margins are still strong.

So it doesn't seem like anyone's dire straits right now. So I was just wondering if you give us a sense of how much thanks like your operating expenses being higher and then once you regained some of the shelf space last turn AI, how much that could help your earnings as opposed to the industry cutting production..

I think you're correct, I mean earnings are still there, and are still strong. We are a very proud -- Jennie-O it was still a very profitable business for us, without getting too specific probably just more along the order of magnitude in terms of what’s having the greatest impact.

The first one would be market conditions; second, would be pricing pressure; and then third would be our own increased expenses.

So we are battling, it's a battle for us to maintain price competitiveness to maintain their shelf space but those are all the right fundamental things that were missed, these market conditions change that are going to set us up.

We continue to make investments and are raised without antibiotics program, that is on trend with consumers and rather than make the cut this year we know that it's something that's going to set us up for the long term, so we will continue to invest in..

And going back to an earlier question on the refrigerated food side, so you guys are not sure that belly, trim and to a lesser extent rips. From my understanding the industry, your plants that you have remaining I believe it's two.

They’re pretty efficient plants and so they don't seem to be two of the candidates to be shuttered when you were mentioned less efficient facilities.

However do you think -- would you ever entertain the idea of simply just stop moving to buying primals for your value added business as opposed to being in the hog slaughter part of the business?.

We harvest hogs as a source of raw materials for our value added business and so I mean we see great value and being able to harvest those hogs ourselves gives us a level of control as I said earlier. And so that that's a business that we plan to remain it..

Our next question comes from Eric Larson with The Buckingham Research..

Good morning everyone and thanks for squeezing me in here. Jim, I want to go back to really the pork markets. And we all know all important the export markets are for keeping a favorable balance in the U.S. In the U.S. market particularly given the amount of pork that we've been seeing coming into the market the last few years.

We're now -- looks like we are going to be negotiating now Mexico is a huge partner for us on pork products particularly ham so. I'm not really sure if it makes much difference. I mean Mexico’s already moved to get corn from Argentina, Brazil, not much but they're moving.

I am not sure makes much difference but I'm interested in your perspective in general and PCM – on the export markets in general and if NAFTA can have any kind of an impact on the dynamics of those export markets?.

Eric, NAFTA is certainly an interesting agreement. And the large driver of the whole agreement is agricultural products, I mean that's the benefit that the U.S. gets from those agreements with Mexico and Canada. So again I'm not going to make a prediction as to what that is going to look like in the future.

But I have a hard time believing that it's going to go away entirely. I think we'll see some renegotiation but we'll still be able to benefit from those neighboring markets..

Our next question comes from Brett Andress with KeyBanc Capital Market..

I wanted to go back to turkey real quick.

Could you comment a little bit more on the bird performance this quarter? I mean did it come in worse than you were expecting and maybe what's happening now here in May and I guess how long do you think it would take you to get these issues corrected?.

Thanks Brett. The turkey performance was about where we thought it would be and improved a little bit close to the end of the quarter so we're seeing some improvement in the performance. It's a slow process.

And it takes time to determine what you need to do to improve the turkey performance, there's a bit of a learning curve here and I think that we think that we are getting close to turning the corner on us..

And last one on the driver of the grocery margin, I think it was close to a record for the second quarter.

So I just want to understand some of the puts and takes, maybe how much was advertising, and maybe what were some of the largest input benefits or maybe some of the largest pressures because I think avocadoes are spiking reasonably and it seems like your expectations for beef and pork inputs are also up.

So maybe you can kind of clarify – maybe some of the expectations going forward..

In the second quarter I mean clearly we saw strong growth from SPAM, Wholly, Herdez, Guacamole and SKIPPY which are great margining businesses for us.

Clearly we've had the inclusion of our Justin's business which has been great acquisition and of course we've talked about our recent innovations like Skippy Phoebe Bites and Herdez, as Wholly Guacamole, Salsa and those are all accretive innovations to the grocery products group.

In terms of advertising, I would tell you it's a small small portion that improvement. And then we did have some offsets. Well for the quarter show we had had a difficult quarter and a large part of that was just some promotional activity that that didn't play out the way that we thought.

But remember I mean we're coming off a banner two thousand and sixteen for our Chile business so again we feel really good about where that is heading.

And so for the back half of the year I mean we're thinking about GP as more of the same, so strong growth from SPAM, Wholly, AAM, Justin’s continues to ramp up and then these are creative innovations are strong growth from stamp holy air to really good about portfolio to deliver long term stated goals for GP..

Our next question comes from Jeremy Scott with Mizuho..

I just want to get a sense of the retail and foodservice landscape, and how that's changing given the impact of labor costs? Clearly we've seen the growth in the retail perimeter and on-site preparation of the past 10 years in grocery and what that had done to the center of the story lines but given that it's a much more labor intensive process it seems like the natural progression would be to outsource more of those perimeter goods for now in others and you could be the preferred providers, I would assume that that would translate the foodservice as well.

What’s the opportunity here, what are you hearing from your customers with this business, what does that mean for the sustainability of refrigerated foods margins?.

Jeremy, that’s a great question. I mean there certainly is a retail focus on that area of prepared food. It's not new focus, but I would tell you it feels like retailers are really starting to finally figure it out and sell for it and you're exactly right. I mean the business is more closely aligning with the traditional foodservice business.

And that bodes really really well for us. I mean our ability to work with operators and so if you consider retail prepared foods and operator. Our ability to help them take out labor is second to none.

I mean we're able to develop customized solutions to meet their needs in a variety of different ways that with ease of preparation taking out labor but still very very high quality products that consumers believe are prepared in the back of the house.

So it is going to -- it's an area of focus for us because it's an area of focus for the retailers and sets up really well for how we run our foodservice business..

I guess in that same light, is a lot of regional specialty vendors that provide these goods to the retail perimeter. What’s your take on – the M&A pipeline is consolidating maybe some of that opportunity..

I don't -- I mean I don't want to speculate on that. I mean as we think about it certainly we've got our own criteria. We're looking for number one, number two brands, opportunity to become more global, accretive margins. So we've got our own criteria when we think about how we're going to approach the M&A market..

Next we have an additional question from Robert Moskow with Credit Suisse..

Just a follow up on party trays, normally that shows up in your prepared comments as demonstrating growth in the quarter. I certainly saw a lot of growth in the Nielsen data but you didn't mention it today.

Have you lost any distribution on party trays?.

No Ken, or Rob I'm sorry. We actually -- party trays are doing well. I mean as you go across the entire meat products portfolio, we didn't get too specific with it but the growth in the IRI data was very strong across many many categories.

So we just didn't list it there and party trays continued to do really well for us and we do all have only so much space in the press release but you're right, party trays are very important to our meat products business and continue to be doing really well. End of Q&A.

It appears there are no further questions at this time. Sir, I'd like to turn the conference back to you for any additional or closing remarks..

Well thank you all very much for your participation today. While we're proud of the results for many of our businesses we clearly understand that our mission is to deliver growth. Our team knows what needs to be done this year and is fighting to deliver our key results.

On behalf of the team here at Hormel Foods, thank you for joining us today and have an enjoyable long weekend..

This concludes today's conference. Thank you for your participation. You may now disconnect..