Hormel Foods (HRL)

Q1 2012 Earnings Call

February 23, 2012 9:30 am ET

Executives

Kevin C. Jones - Director of Investor Relations

Jeffrey M. Ettinger - Chairman of the Board, Chief Executive Officer and President

Jody H. Feragen - Chief Financial Officer, Executive Vice President and Director

Analysts

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Lindsay Mann - Goldman Sachs Group Inc., Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Farha Aslam - Stephens Inc., Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Eric J. Larson - Piper Jaffray Companies, Research Division

Christine McCracken - Cleveland Research Company

Presentation

Operator

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods First Quarter Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, February 23 at 8:30 Central Standard Time. I will now turn the conference over to Mr. Kevin Jones, Director of Investor Relations. Please go ahead.

Kevin C. Jones

Good morning, everyone. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2012. 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. An audio replay of this call will be available beginning at 10:30 a.m. Central Time, today, February 23, 2012. The dial-in number is 1 (800) 406-7325, and the access code is 4509484. 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 statement. Some of the comments made today will be forward-looking and 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 27 through 30 in the company's annual reports for the fiscal year ended October 30, 2011 for more details. It can be accessed on our website. [Operator Instructions] And now I'll turn the call over to Jeff.

Jeffrey M. Ettinger

Good morning, everyone. We announced first quarter earnings this morning of $0.48 per share, down 13% from a year ago. During the quarter, we experienced weak pork operating margins and soft sales in the center of the store. Nonetheless, our current performance represents the second best quarter in our company's history. In terms of the top line, we generated a sales increase of 6% with gains in 4 of our 5 business segments. Although total volumes declined 2%, the majority of the decline was due to a planned reduction in harvest levels at our Jennie-O Turkey Store segment.

As you may recall from our November conference call, we had anticipated a challenging start to 2012. Though our overall results were not surprising, how we got there wasn't exactly as we had planned. Our Jennie-O Turkey Store segment performed better than we expected and International turned in a good quarter. While our Refrigerated Foods, Grocery Products and Specialty Foods segments did not perform as well as we had anticipated.

I will now take you through each segment.

For Grocery Products, segment profit decreased 9% on 3% lower sales. These results were prompted by significant input cost inflation and by decreased sales of our core products. We have encountered some sluggishness as consumers adjust to higher prices. Despite these conditions, we are seeing continued growth of our MegaMex product lines. Sales of Don Miguel products and the Wholly Guacamole refrigerated dips registered the biggest growth gain. Sales of our Hormel Compleats microwave meals declined slightly during the quarter as our new advertising campaign and the new product varieties and packaging have not yet been fully implemented at the store level.

Our Refrigerated Foods segment reported a 44% decline in operating profit, due primarily to unfavorable pork operating margins. You may recall that pork operating margins were particularly strong during our first quarter a year ago. Higher raw material costs also negatively impacted margins in our Meat Products group during the quarter.

Sales for our Refrigerated Foods grew 7% in the quarter led on the Retail side by Hormel's Sliced Pepperoni, Hormel Country Crock Side Dishes and Hormel Natural Choice deli meats. Foodservice sales were also higher with solid gains from Hormel Natural Choice deli meats, AUSTIN BLUES barbecue products and Café H ethnic products.

Operating profit at our Jennie-O Turkey Store segment increased 4% on a sales increase of 4% driven primarily by expanded sales of our retail value added products. Sales of our Jennie-O Turkey Store fresh tray pack items and turkey burgers were particularly strong as we continue to benefit from our Make the Switch advertising campaign late last year. We reduced our harvest volumes during the quarter in order to better balance our turkey meat supplies. Export demand also remains strong, supporting dark meat prices during the quarter.

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