Hormel Foods Earnings Call Nuggets: Hog Supply and Guidance on the Growth Rate
On Tuesday, Hormel Foods Corporation (NYSE:HRL) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Farha Aslam – Stephens: In Refrigerated Foods, I was surprised by your commentary in hogs. Could you just review kind of what percentage of hogs, I think it’s 11% you sourced internally? Just provide us some color on the gran contracts in terms of how you source your hogs. I didn’t understand that completely.
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Jody H. Feragen – EVP and CFO: So, let me take a stab at that one, Farha. This is Jody. We have less than 20% of our hogs that have some type of grain impact, most of those are sourced from the Sal operations that we have in the Colorado, Wyoming and Arizona. A large portion of them go to our Farmer John operation and the balance of them go to the Midwest to be finished and we take responsibility for the cost of finishing those hogs.
Farha Aslam – Stephens: Just a question on cash. I mean, you have net cash on the balance sheet. Could you share with us your priorities for that cash? How does the M&A environment look? Are you looking more domestically, internationally and how that relates to share repurchase?
Jody H. Feragen – EVP and CFO: Becoming a broken record, we certainly do look for opportunities to invest either organically and we’ve made some nice investments in capital projects within the companies this year and we also look for acquisitions that meet our strategic initiatives and we continue to look at those. Also returning to our shareholders we increased our dividend this year on top of an increase over the last few years that have been pretty robust and then we look for share repurchase.
Guidance on the Growth Rate
Kenneth Zaslow – Bank of Montreal: The guidance that you are laying is a little bit less than your growth rate over your long-term as well as last year. I was wondering if you can talk to the point of is there something that might be slowing down. Obviously the grain cost, I get that, but is there something that’s structural that may be slowing down your growth rate. Have you reached a certain size that maybe the growth rate historically may not be as applicable going forward and can you just talk about that as a longer term thought process?
Jeffrey M. Ettinger – Chairman, President and CEO: It is a fair question. No, we really don’t think we slowed down. We recognized that both the results we just completed in 2012 and the guidance range that we provided you for 2013 are below our long-term 10% bottom line growth algorithm. If you look at the three years prior to that we were well under the teens, so there is a little of an ebb and flow going on and to us really a lot of – really does relate back to the grain and the input costs. Our team has done a good job of mitigating a lot of those costs. They’ve taken pricing where they’ve had to but it’s been an environment where that’s kind of been a non-stop effort for the last couple of years and will continue into 2013. The underlying health of the franchises (to me) is very robust and so I am quite optimistic that our long-term goals remain very reachable even at the current size where – as the company having now reached $8 billion.
Kenneth Zaslow – Bank of Montreal: And then can you talk about certain brands that have actually gained more momentum than you expected into the quarter. Are there certain things that – certain brands on the top line you are looking forward to having a little bit more greater penetration going forward?
Jeffrey M. Ettinger – Chairman, President and CEO: I don’t know that there necessarily surprises to what we expected, but we have a lot of brands that are really doing quite well and enjoyed very solid quarters. In many cases, these were double-digit increases. So, on the Refrigerated Foods side, we have Hormel pepperoni and party trays; we have convenience bacon; we have a re-launch of our Cure 81 hams; we also enjoyed good sales growth of our entrees. On the Grocery side, SPAM had a great quarter of bacon bits. The Mexican portfolio is doing very well across the board and a 5% increase not counting Don Miguel, not counting the Wholly franchise and those are both growing as well. Our Food Service group is having good luck, while they’ve had their most successful new product launch in their history with one of their new premium bacon items and they continue to also grow within their ethnic items such as Cafe H and their Natural Choice based items. Jennie-O had solid double-digit growth in fresh tray pack and burgers and then bacon, the latter supported by their ad campaign. So, we’re really excited, and that’s not counting international either which has delivered two terrific years in a row for growing the SPAM franchise and we’re growing other pork-based items in various markets, particularly in Asia. So, from a top line standpoint, we’re very excited about what’s going on in the Company.
A Closer Look: Hormel Foods Earnings Cheat Sheet>>