Hormel Foods Corp (HRL) — Q3 2016 Earnings Call Transcript

Good morning. Welcome to the Hormel Foods conference call for the third quarter of fiscal 2016. 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 Investor section. On our call today is Jeff Ettinger, Chairman of the Board and Chief Executive Officer; Jim Snee, President and Chief Operating Officer; and Jody Feragen, Executive Vice President and Chief Financial Officer. Jeff will provide an overview of the quarter and then Jim will comment on the segment results, outlook, and guidance for fiscal 2016. Jody will provide detailed financial results for the quarter. The line will be opened for questions following Jody'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 10 am Central Time today, August 18, 2016. The dial-in number is 800-533-7619, and the access code is 6233484. It will also be posted to our website and archived for one year. Before we get started with the results for 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 32 through 39 in the company's Form 10-Q for the quarter ended April 24, 2016, for more details. It can be accessed on our website. Now I will turn the call over to Jeff.

Good morning everyone. Before we get into this quarter's results, I want to express my appreciation for all the contributions Jody Feragen has made to Hormel Foods. As previously announced, Jody will be retiring as CFO at the end of the fiscal year, so this will be her last earnings call. Jody has been an excellent CFO. During her tenure, our team has delivered exceptional returns to our shareholders. She was instrumental in helping to complete over $2.7 billion in strategic acquisitions that have transformed our portfolio, and she oversaw close to $1.6 billion in dividends delivered to our shareholders. Jody also led numerous initiatives across the accounting, treasury, information technology, corporate development, and Investor Relations areas that have made our company better. Jody will be missed around the office and we wish her well in her well-earned retirement with her husband, Dwayne. Hormel Foods is fortunate to have a very strong bench of talent throughout our organization and the accounting and finance area is no exception. Jim Sheehan will assume the CFO position upon Jody's retirement with a deep knowledge of all areas of finance and accounting, emanating from his experience at Hormel Foods as Controller, Treasurer, and in numerous other roles. We have the utmost confidence in Jim's leadership and capabilities in this new role. Now on to the results. Earlier today, we announced record third-quarter results of $0.36 per share, up 33% from last year. Sales for the quarter were $2.3 billion, up 5%, while volume was up 1%. Three of our five segments reported sales, volume, and earnings growth. Refrigerated foods, Jennie-O Turkey Store, and International all posted excellent results. Grocery products enjoyed modest top-line growth, though earnings were flat for the quarter. The specialty foods segment saw declines in sales and earnings due to the previously announced divestiture of Diamond Crystal Brands in May. I would like to take this opportunity to reconfirm that our long-term goals of 5% sales growth and 10% bottom line growth continue to be appropriate for our company. While we recognize any given year may deviate from these goals, we believe they are achievable over the long run due to our proven ability to build strong brands that resonate with consumers, innovate in categories where we compete, make strategic acquisitions, and achieve balanced growth in various market conditions. For the past two years, we have also provided segment margin ranges. These ranges were intended to offer enhanced clarity to our business. Unfortunately, we believe they have added elements of confusion as they have not always been aligned with our primary performance goals of 5% top-line and 10% bottom line growth, and they were not intended to be quarterly ranges. In light of this, we have decided to curtail the practice of providing segment level ranges going forward. However, we will provide an updated total company margin target during the fourth quarter call that we feel is achievable over the next three to five years. This long-term total company margin target will be consistent with and supported by our company growth goals. I will now turn the call over to Jim Snee, who will take you through each segment.

Thank you, Jeff. Good morning everyone. Refrigerated Foods third-quarter operating profit increased 24% with sales up 9% and volume up 3%. Refrigerated foods benefited from the addition of the Applegate business, favorable market conditions, and great results from our food service business. In addition, prior year results included $8.6 million in Applegate transaction costs. Our food service value-added products showed robust growth, led by brands such as Hormel Bacon 1 Fully Cooked Bacon, Old Smoke House Bacon, and Hormel Fire Braised meats. We also saw sales growth from many of our retail products, including Hormel Natural Choice lunch meat and Hormel gatherings party trays. Jennie-O Turkey Store's third-quarter segment profit increased 59% on a 20% increase in sales. Production volumes returned to normalized levels during the quarter, which enabled the food service and deli teams to deliver strong volume, sales, and margin gains. We also saw nice retail sales growth in Jennie-O Turkey bacon. Our retail division at Jennie-O Turkey Store continues to gain back distribution that was curtailed during the outbreak last year, even as competitive activity has heightened in the broader ground meats category. International sales and operating profits both increased 5%. Strong exports of fresh pork, SKIPPY peanut butter, and SPAM luncheon meats all contributed to the increase in sales and earnings. Our China business posted strong earnings growth as SKIPPY peanut butter products more than offset declines in processed meats. Higher pork costs continue to pressure the domestic retail China business. Grocery product segment profit was flat for the quarter as earnings from value-added products did not offset increased advertising expenses and acquisition transaction costs related to the Justin's deal. Sales were up 3%, aided by the inclusion of Justin's specialty nut butters and strong sales from SKIPPY peanut butter, SPAM luncheon meat, and Wholly Guacamole. Our grocery products team continues to deliver exciting and innovative new products such as SKIPPY pb bites and the Herdez Guacamole salsa. Both recently introduced products are exceeding our expectations in the marketplace. The specialty foods segment profit decreased 13% and sales decreased 25%, primarily due to the divestiture of Diamond Crystal Brands and reductions in contract manufacturing sales. Our CytoSport team posted strong growth for Muscle Milk protein beverages and powders once again this quarter. We continue to be pleased with the new Muscle Milk protein smoothies, which have been well received by consumers. Now, as we look forward into the fourth quarter, we expect refrigerated foods to continue growing sales and earnings through increases in value-added products in both the retail and food service channels. Our early view on fiscal 2017 shows a roughly 2% to 3% increase in hog supply. With the majority of new industry capacity coming online starting in the summer of 2017, we expect to see favorable market conditions through most of fiscal 2017. Jennie-O Turkey Store is positioned to show strong sales and earnings growth in the fourth quarter and continues to be focused on regaining distribution. Lower grain input costs should continue to be a tailwind in the fourth quarter. As we announced in the second quarter call, we are excited to be back on air in the second half of the year with our very successful make-the-switch campaign. We expect this advertising campaign to help improve distribution and growth of our Jennie-O ground Turkey product. We expect continued growth in our SPAM luncheon meat and SKIPPY peanut butter products to drive fourth quarter results for the international segment. Grocery products is expected to show strong sales growth driven by the inclusion of Justin's and positive momentum in SKIPPY peanut butter and Wholly Guacamole dips. The Muscle Milk brand has been performing well in both the protein beverage and powder categories and we expect that to continue. We're also very excited about the innovation the CytoSport team will be delivering in the fourth quarter. The specialty foods segment will not show year-over-year sales and earnings growth due to the sale of the Diamond Crystal Brands business. And finally, we continue to focus our marketing and advertising efforts on brands such as Hormel Pepperoni, Applegate, Hormel Black label bacon, Hormel Natural Choice, SPAM, and Jennie-O. These marketing and advertising efforts are supplemented by the great work being done by our direct sales forces in both retail and food service channels. And we are extremely proud to report that just this week Hormel Foods was ranked number one in the 50 best companies to sell for ranking by Selling Power magazine. This is a huge honor for the company and is further confirmation of the strength of our brands and sales teams. As a result of a strong third-quarter performance, one-time gains from various discrete tax events and continued confidence in our business, we are raising our full-year guidance from $1.56 to $1.60 per share to $1.60 to $1.64 per share. And our early look into fiscal 2017 shows us once again growing sales and earnings. We will have more precise guidance for you on our fourth-quarter call. At this time, I will turn the call over to Jody Feragen to discuss the financial information relating to the third quarter.

Thank you, Jim. Good morning, everyone. Net earnings for the third quarter of fiscal 2016 totaled $195.7 million, up 33% compared to $146.9 million last year. Diluted earnings per share were $0.36, also a 33% increase. Sales for the third quarter totaled $2.30 billion, compared to $2.19 billion for the same period last year, a 5% increase. Four of our five segments delivered revenue increases. Specialty foods sales declined due primarily to the sale of Diamond Crystal Brands. Volume for the third quarter was 1.22 billion pounds, up 1% from the same quarter last year. Tonnage was negatively impacted by the Diamond Crystal Brands divestiture. The Jennie-O Turkey Store results for the third quarter included a $9.6 million mark-to-market loss on hedges due to temporary ineffectiveness. Advertising expense for the quarter was $52.6 million, compared to $33.9 million last year, as we continued to invest in our brands across all five segments. Our effective tax rate in the third quarter was 28.6% versus 35.6% in fiscal 2015. The rate was favorably impacted by $14 million of one-time discrete tax items associated primarily with an international entity restructuring. For the full year, we expect our effective tax rate to be between 32% and 32.5%, including the one-time discrete items from the third quarter. Basic weighted average number of shares outstanding for the third quarter was 529.7 million, compared to 528.5 million shares last year. The diluted weighted average number of shares outstanding for the third quarter was 542.2 million shares compared to 541.2 million last year. We repurchased 1.1 million shares of common stock, spending $38.6 million in the third quarter. We have 14.3 million shares remaining to be purchased from the current authorization in place. Long-term debt at the end of the quarter was $250 million, the same as last year. Capital expenditures for the quarter totaled $66 million, compared to $41.8 million last year. For fiscal 2016, we expect capital expenditures to be approximately $250 million. Depreciation and amortization for the quarter was $32.6 million compared to $33.3 million last year. We paid our 352nd consecutive quarterly dividend effective August 15, 2016, at the annual rate of $0.58 per share. As a reminder, fiscal 2016 includes an extra week in the fourth quarter. At this time, I will turn the call over to the operator for the question-and-answer portion of the call.

Good morning. Thanks for taking the question. Jody, congratulations. You'll be definitely missed.

Thank you, Akshay.

Yes. So, I wanted to ask about refrigerated foods and just the pork operating environment in general. For next year, I know it's hard to pin down what other people's plans are, but regarding your plan for total company growth in EPS next year, what does that assume for capacity utilization rates for the industry? Because that's an important factor next year, right? So that's my first question.

So pork operating margins for this year were a bit higher than we initially expected on our Q2 call, really supported by a great supply of hogs, which provided favorable pricing in that environment, and then continued strong demand supporting the cut-out. As far as fiscal 2017, we just started our process. We would expect them to be somewhat similar to fiscal 2016 at this point in time.

Okay. Jeff, regarding your comments on the long-term guidance and the adjustments, I appreciate the responsible management of the company, so I trust this decision is appropriate. I'm just aiming to clarify that aside from how you communicate things, there won't be any changes to management incentives or daily operations, correct? It seems like your intention was to provide more clarity, but it might be causing increased volatility in the shares. I want to confirm that management compensation and the overall approach to running the business remain unchanged. You've consistently grown earnings over time by improving margins and making smart acquisitions, so things are essentially the same; you're just altering your communication strategy with the market, right?

Appreciate the question, Akshay. Really, our company's focus is on meeting the five and ten goals. We found that providing the individual segment operating margin ranges seem to sometimes distract from these goals. And honestly, we've not proven to be overly accurate in estimating the margins for each segment. Things come up, the Jennie-O AI issue, the DCB divestiture, et cetera, and you're dealing with variables of both sales and earnings for each business unit when you get into a margin like that. I'd point to our performance at Jennie-O Turkey Store this quarter as a good example of why we believe the segment margin percentages may be a less meaningful measure. On an operating percentage basis, you could look at Q3 and say, oh, that was a bad quarter for Jennie-O Turkey Store because its operating margins fell, but this would obscure the fact that Jennie-O Turkey Store delivered a $20 million improvement in segment profit for the quarter. Honestly, we're seeking to deliver sales and earnings dollars and not specific percentages.

And Akshay, this is Jim, if I could piggyback on Jeff's comments. I think we want to be clear that we are still providing segment specific guidance when it comes to their expected contribution to those overall five and ten goals. I think what we've learned is that some of the discussion around segment margins can be very short-term focused versus our goal of focusing on some of the long-term measures such as these corporate growth goals. And so it will be business as usual, be holding the business units accountable the same way we have in the past. There are no incentive changes, so we will be managing the business in the same way we have.

Okay. And just one last question about timing. This goal is intended to be long-term, and we recognize that. Could you clarify when you might expect to underperform those goals? You've been consistently outperforming them almost every year, especially in recent years due to favorable conditions. Are you concerned about the capacity coming online in pork processing that we've heard about? Thank you. I'll pass it on.

That's a great question, Akshay. In any given year, both top and bottom-line numbers can significantly outperform, which we've seen over the last decade. There have been years where we've exceeded expectations in one area and fell short in another. However, we remain focused on the long-term perspective. As for industry developments, we often discuss our balanced model. We believe that with every action, there's a reaction, and as new capacity becomes available, it leads to excess supply and affects input costs. We are confident that our balanced model will enable us to navigate challenges effectively. This is further supported by our track record of 27 out of 30 years of earnings growth, and this year will mark 28 out of 31. That's where we stand.

Thank you.

Hi. Good morning. Congratulations, Jody.

Thanks, Farha.

My questions focus more on the quarter. There was a lot of M&A acquisitions and divestitures in this current quarter. Would you be able to give us kind of volume or sales regarding the acquisition of Applegate and Justin's and the impact of the divestitures of Diamond Crystal Brands as well as kind of what the impact of the Justin's transaction costs were on the quarter?

DCB we have provided on an annualized basis that was in the $250 million range and the quarters were relatively consistent. Jody can provide you a little color on the Justin's transaction cost.

We didn't consider the transaction costs and the step-up in inventory accounting to be material enough to highlight specifically for the quarter, but they totaled around $3 million. In the grocery products segment, a major factor in the change to segment margin was a substantial increase in advertising for that category.

And then just on the Applegate and Justin's sales contributions or volume contributions in the quarter?

I don't have those figures available right now, but we indicated that Justin's in fiscal 2017 would be around $100 million. I would say we only had ownership of them for part of the time. Applegate is essentially what we're comparing now as we enter the fourth quarter, so I don't have those specific details with me.

Okay. And then my follow-up is on the $9.6 million mark-to-market in Turkey. Would you be able to elaborate on what caused that? Do we get take back in subsequent quarters? Just more color on that mark-to-market impact.

So we're probably one of the few companies that actually uses this special accounting treatment for hedge accounting, which allows you to put the mark-to-market gains or losses in any quarter on your balance sheet, and then it's recognized as it flows through cost of goods when the Turkeys come to the plant basically or as the feed is consumed. What happens when you technically become ineffective, which is a regression analysis comparing futures prices to cash markets, and because of some anomalies in the cash markets this quarter, you can have them go ineffective and you recognize all the gains and losses in your P&L. So we believe this is a one-time impact. It's recognizing some losses that would have been recognized through the future, but they're just hitting all in one period, which kind of skews Jennie-O's results. So Nathan's really well acquainted with hedge accounting, so if you want a follow-up primer on that he'd be a great one to talk to.

Just bottom line, we essentially get that back as you won't have that loss in future quarters.

Absolutely, it's a timing.

Great. Thanks. Good morning everyone and let me add to everyone's congratulations, Jody, on the retirement. Maybe my first question is on the top line and less so about the quarter specifically, but more about getting back on track with that 5% revenue growth target. Were it have been and relative to continue to be in a fairly deflationary protein price environment for at least the next 18 months, which to me would suggest that to get anywhere close to that 5% and maybe it's more like 3% to 4% organic, volumes are going to have to carry a bigger portion of that total mix. Can you talk about the volume trends that you're seeing in the business today because you look at in grocery and refrigerated specifically and there doesn't seem to be a tremendous amount of organic volume growth, and maybe I'm interested in kind of your thoughts if you maybe leaned a little bit too hard into the value-added premiumization of some of these categories that's come at the expense of volumes. Thanks.

I mean our ultimate goal is to sell a higher mix of branded value-added items which kind of absent the switches of market conditions should over time make our net sales be a stronger growth vehicle than volume inherently. There clearly are franchises within the company that are more responsive to markets or bacon pricing or pork pricing or something similar would be more along those lines. But, most of the grocery portfolio is less that way. Jennie-O Turkey Store has been able to hold their pricing on a stronger basis. We have a lot of franchises that we're really excited about that we think are at least 5% growing franchises, many of which did quite well this quarter and so we've kind of talked in past calls that we were a little disappointed with our top line but had felt it was trending in the right direction and indeed Q3 showed an acceleration of that trend, and we look at that favorably now heading into next year.

Okay. That's helpful. And then maybe just following up on the margin outlook commentary that you gave earlier. I appreciate withdrawing the segment, specific segment margin guidance, but if you're going to get corporate margin expansion either, your higher margin businesses are growing faster than the core or you're getting aggregate margin expansion across the entirety of the portfolio. Can you talk about which pieces of that kind of split you're most excited about, maybe by business or within the portfolio specifically?

Sure. Adam, this is Jim. I think on the sales side of the business, we see positive momentum in brands such as Muscle Milk. Certainly Jennie-O and the work that they've done with the ground Turkey business there and getting back on air that make the switch. The addition of the Justin's business, the SKIPPY brand, Wholly Guacamole, Herdez coming out of our MegaMex joint venture. From a food service perspective we're really positive about the work that team's been doing. Our Bacon 1 Fully Cooked Bacon, Natural Choice out of refrigerated foods. So there's a lot of excitement and momentum that we believe will continue in 2017.

All right. Great. That's very helpful. I'll pass it along. Thanks.

Good morning.

Good morning.

Hi, Mario.

I wanted to follow up on the comments regarding fiscal 2017 guidance. Could you clarify whether the assumption of growth is based on reported figures or a comparison with a 52nd week? Additionally, can you provide insight into which specific segments are expected to contribute more to growth? Thank you.

So Mario, this is Jim. And it would be on a reported basis as we look into 2017. And we recognize we've had many consecutive quarters of great results and obviously a key concern is whether we really can grow in 2017. So I talked in the last question about the sales side of the business and the positive momentum that we're seeing. Another thing that obviously we believe in and it served us well is our balanced business model. So we've got a favorable outlook on key inputs, such as pork, beef, and grains. That really is going to combine with the sales momentum that will allow us to submit a plan to our Board of Directors that will show growth in earnings in 2017. And clearly we'll give you a more precise look and range in November on the call.

Thanks. That's helpful. And then, just an additional question on Jennie-O. Can you elaborate a little bit more on the competitive environment there and then focusing on your market share? Are you feeling like you're getting placement on the shelves at an appropriate pace relative to your peers? Thanks.

As I commented, obviously the supply ramped up throughout the quarter and that's really the best position for the Jennie-O Turkey Store business to be in. And as we look across the business, there was strong food service performance and strong business in the deli area of the business. The retail distribution has continued to be a battle, but the team is having success. The trays continue to do very well, and we recognize that there is competition in the meat case but this is not unusual. There have been other times in the Jennie-O Turkey Store history where they faced this type of competition and we do believe that we're seeing the growth that we deserve. And we believe that the brand and product lines continue to be on trend with consumers and over time we'll continue to get expanded distribution and share.

Okay. Thank you very much.

Hi. Thanks and congratulations again, Jody. Just some clarity on the fiscal 2016 guidance. The EPS bump of $0.04, my math is that $0.03 comes from the tax rate and maybe a $0.01 comes from operating profit being better than you expected for the year. Is that a fair assessment as to how you're looking at it, or is all of the bump from the tax rate and the tax outlook?

I would estimate the increase from the Q3 tax impact at around $0.02, while the negative hedging effect in Jennie-O somewhat offsets that by about $0.01. Our effective tax rate for the fourth quarter will be comparable to our ongoing rate. Therefore, the overall effective tax rate for the full year, considering the lower rate in the third quarter, will not be primarily influenced by taxes.

Right. Okay. So your view is that it still contributes positively to the year.

Yes, it does.

But operating profit, it's a guide up on operating profit as well.

Absolutely.

Okay, good. And then the follow-up I had was on, I guess Jim's comments about it being a battle in the meat case. I think you said that you were trying to expand your East Coast distribution and capacity in Turkey. Is that what you're really referring to, Jim? And maybe a few more specifics as to how much you've expanded your abilities in the East Coast and what the outlook is?

Sure. I think our challenge has been clearly we're just ramping up supply. And so we have talked about the geographic expansion that we did have to put on hold last year and early this year. And so that's part of the solution, Rob. I think what we're talking about here is regaining even some of the existing distribution that perhaps we weren't able to supply last year. So it's really a combination of both those things. And there's no doubt that there is competition in the meat case, but I guess I would just reiterate that it's not unusual. We've been there before, and for us the bigger issue, the bigger message is that this product line, Jennie-O ground Turkey, is on trend with consumers over the long-term.

Is there any way to quantify what your distribution percentage is today compared to history and help us model out why the growth will continue?

Sure. Nathan, go ahead.

It also may depend, Rob, this is Jeff, on what products you're talking about. Clearly, we've talked about trade pack quite a bit. It has a certain share position. It has the unique element that it competes not only against other ground turkey brands, but significantly against ground beef. But there's a lot of other pieces of both the retail and deli component of Jennie-O. They would each have their own set of numbers in that regard.

Yes. That's what makes it difficult for us to determine the direction. So if there's something we can concentrate on to support the idea that distribution growth is a key factor, how much does tray pack contribute—30% of the story, 40% of the story? Can you assist us with that?

Why don't you take a follow-up with Nathan because I don't have that at our fingertips right here.

Got it. Okay. Thank you.

Good morning, everyone. Jody, congratulations and well deserved.

Thank you.

My first question is just housekeeping. When you talk about growth in 2017, you said sales and EPS. I just want to make sure, you're also talking about operating profit growth and it's not just a tax or corporate expense benefit in 2017. Is that a fair assessment?

Yes.

My second question is about the grocery products business. Can you discuss how it performed in the current quarter compared to our expectations? I'm trying to understand your perspective on operating profit for that business and the outlook, especially considering the lower input costs and the unexpected margin compression.

Sure, this is Jim. From a sales and brand perspective, I’m very pleased with the team's efforts to grow the SPAM franchise. The SKIPPY business, especially with the introduction of SKIPPY peanut butter bites, continues to show positive results. Our Mexican foods portfolio is also performing well. We did see an increase in advertising costs, which we view as a positive investment for ongoing and future brand growth. There are a couple of areas that require attention. The chunk meats category, while not a major part of our portfolio, has become competitive, and our team is working on a new approach with our product offerings in that area. We noted that Compleats sales were down, and we are strategically working to enhance the availability of our value tier offerings to boost sales and unit rates. It has been a mixed performance, but we remain optimistic about the future of our grocery products. For this quarter, it seems to be more of a product mix challenge, as some canned items do not typically sell well at this time of year. Overall, we are very hopeful about the transformation of our portfolio and the direction of our grocery products.

I would just add to Jim's comment that we saw quite a run-up in trim, which is an input on a lot of the grocery products items. So while they experienced favorable cost of goods in a lot of areas, that was one area that did negatively impact them.

I appreciate it.

Hi. Good morning and congrats, Jody, on the retirement.

Thanks.

A couple of questions on Applegate. Can you talk about the volume performance for this brand since you've taken over? Have some great penetration in some of the upper scale retail channels that are still growing. Just wondering what the outlook for Applegate here on the volume side and what it's been in the past year.

Jeremy, good morning. This is Jim. I think just as a reminder, when we took over the Applegate business, clearly we knew that there were some raw material or supply issues in terms of supporting that business. And then, those were compounded with the outbreak of Avian influenza. So in the short-term, the team has worked really hard to get raw material supply back in place and we feel good about where we are today. So that certainly made the volume growth a battle for the team, and so we had to regain some lost distribution. But the growth, we've seen some growth, we've seen some increased distribution. From our perspective, we love the brand, we love what the future holds for the brand and again, on a short-term basis it's clearly on target to deliver what we said it would deliver at the time of acquisition.

Okay. To follow up on a previous question, how do you see volumes trending as we begin to lap Applegate in the fourth quarter? We're looking at a more organic basis for refrigerated foods.

He is saying all of refrigerated foods.

I mean I think, again, as we think about the different parts of the refrigerated foods portfolios, our meat products team continues to be focused on the value-added items and they're doing a nice job. Our food service business continues to outperform the industry, and we expect that to continue. The Applegate business will continue to show growth that we've got returns of supply. So overall we feel good about that portfolio as well.

I would just add that as we transition particularly when you look at Applegate, that is a more sales-driven business than a volume-driven, and as we continue to value-add the portfolio, volumes become a little less meaningful as you compare to prior quarters or years that may have had more of a commodity element.

Got it. Can you touch on some of the competitive activity you're seeing at retail and do you plan to ramp up promotional activity as a response in the coming quarters?

Are you referring to a specific section of the grocery store or our business?

I would say in some of the higher traffic channels like sausage and frozen breakfast.

Yes. I think, Jeremy, our position on that is clearly we're focused on the effectiveness and our ability to not only deliver a return for us, but for the retail partner. And so we continue to look at categories individually, and where there's opportunity to be effective with additional spending, we certainly will take advantage of that. But can't tell you today that there's a significant specific plan in any one given category.

Got it. And then, last question. In the past, you've been able to repurchase shares as the M&A pipeline thinned out a bit. What is your opportunity to scale up buybacks over the coming years and can you walk us through your thought process there and some of the hurdles?

So really we kind of look at our share repurchase as being an opportunity to offset stock option exercises. We still believe that using that as a compensation element is appropriate to drive our business. So we're constrained because of the ownership of the Hormel foundation at about 48% to 49% these days. So we've agreed that they should be under 50%. So that would be the biggest constraint. Obviously, took advantage of some pressure on our stock this past quarter to be in the market and acquire some of those shares.

Okay. Thank you very much.

Thanks, Savannah. This is Jeff Ettinger. I'll go ahead and conclude the call for us. So, as some of you may have heard we actually celebrated our company's 125th anniversary recently here in July. This provided us a unique opportunity to bring many of our company's employees together to celebrate the occasion. After visiting with these employees from across the company, I've never been more optimistic about our company's future and our ability to deliver growth. I'm very proud of our team's performance this quarter and I look forward to continued excellent results going forward. I want to thank you all for joining us today.