Hormel Foods Corp (HRL) — Q2 2017 Earnings Call Transcript

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 an 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.

Thank you, Nathan. Good morning everyone. Earlier today we announced second quarter results of $0.39 per share, down 2.5% from last year. Sales for the quarter were down 5% on an 11% decrease in volume. Adjusted sales grew 2% while adjusted volume grew 1%. For the quarter, three of our five segments reported earnings growth. Refrigerated Foods, International, and Grocery Products grew earnings while Specialty Products earnings were down 16%. We frequently talk about the intentional balance we have built into our business and this quarter demonstrates the value of our balanced model. Even though we had double-digit declines in our very important business at Jennie-O Turkey Store and divested two profitable but non-strategic businesses, we delivered earnings within $0.01 of last year's results. We were able to achieve this through impressive results from our meat products, foodservice, grocery products and international teams. In addition, all of our teams proactively managed expenses. Now I would like to talk through each of our segments. Jennie-O Turkey Store had another difficult quarter compared to last year with earnings down 29%. Sales were down 8% and volumes were down 6%. Segment profit margins declined from over 21% in the second quarter last year to 16% this year, similar to the first quarter. Three main issues affected Jennie-O Turkey Store’s profitability this quarter versus the same time last year: Declining turkey prices, increased competition, and increased expenses. First, turkey prices such as breast meat have maintained their seven-year lows and in some cases declined further since the first quarter, as the industry continues to be in an oversupply situation. History suggests that the turkey industry will balance supply and demand and market conditions will improve in the coming months. Accordingly, we have made additional adjustments to our production levels and would expect volumes to be slightly under 2014 levels. The impact on our business continues, as commodity sales pricing and whole bird pricing is much lower than last year. Lower turkey prices are also pressuring prices in Jennie-O Turkey Store’s three sales divisions: 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 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, 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.

Thank you, Jim. Good morning everyone. Volume for the second quarter was 1.1 billion pounds, an 11% decrease compared to last year. Sales for the second quarter were $2.2 billion, a 5% decrease. Excluding the acquisition of Justin's and the sale of Diamond Crystal and Farmer John, adjusted volume increased 1% and adjusted sales increased 2%. Net earnings for the quarter were $211 million, down 2% compared to last year. General corporate expenses were lower in the second quarter primarily due to reduced employee related expenses and higher allocations to the business units. We expect general corporate expenses to be below last year for the remainder of the year. Depreciation and amortization for the quarter was $32 million, unchanged from last year. We expect depreciation and amortization to be approximately $125 million for 2017. Equity in earnings for the quarter was $10 million, up 6% compared to last year. Strong results for MegaMex including the Herdez and Wholly Guacamole brands drove the increase. Our effective tax rate in the second quarter was 33.2% compared to 33.6% last year. We expect our full year effective tax rate to be between 33% and 33.5%. As a reminder, we experienced an unusually low tax rate in the third quarter of last year, which was a result of international restructuring. Cash flow from operations was $84 million, down from $130 million last year. The decrease was primarily related to changes in working capital. Capital expenditures totaled $39 million compared to $66 million last year. We expect capital expenditures to be approximately $190 million this year. Projects include completion of our plant in China, the new plant in Melrose, capacity expansion for value-added product lines, and ongoing investments for food and employee safety. We paid our 355th consecutive quarterly dividend effective May 15, at the annual rate of $0.68 per share. We repurchased 547,000 shares of common stock, spending $19 million. We have 12 million shares remaining from the current authorization and will continue to repurchase stock to offset dilution from stock option exercises and based on the internal valuation of the stock. Operating margins were 14.5%, a 40 basis point increase compared to last year. Four of our five segments increased operating margins. Input costs for the second quarter were mixed. Beef costs were slightly higher compared to last year. Barring any unforeseen weather events, we expect beef costs to trend below last year in the second half. Breast meat and other turkey commodity prices remained at seven-year lows. Based on inventory and production levels, we do not expect material changes in prices until the industry starts to cut back production. Hog prices in the second quarter were similar to last year. We expect to see some short-term volatility in the hog markets in the second half. Overall, hog prices are expected to be higher than last year. Belly prices increased sharply in the first part of the quarter, but are now comparable to last year. On average, belly prices were approximately 10% higher than last year. We expect belly prices to be above last year as the industry continues to experience lower cold storage levels and high demand for bacon. 73% pork trim prices were 10% above last year. We expect trim markets to remain above last year for the second half. Prices for 50% beef trim were over 20% higher for the quarter. We expect beef prices to remain high for the second half, with a possible downward trend in our fourth quarter. The new hog harvest capacity is coming online. Two plants recently began production, and two additional plants are expected to start production by late summer. The additional capacity represents an increase of about 6%. We believe hog supplies are positioned to closely match this increase, as the USDA projects a 4% to 5% increase in the hog supply for 2017. As we assess the long-term future of the hog industry, we see three areas of focus: 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.

Thanks for taking my question. So I want to discuss the 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 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 that's how we're looking at it and thinking about it.

And then my related follow-up question, as you 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, 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.

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 your volume side? It is my understanding. So how much was that just because the environment is that bad that we're just going to cut? And then my second question which is actually probably more important, 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? Should we be looking at this as a structural issue?

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 could 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. 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 that's the short term view. From our perspective on the long-term side, there is nothing structurally wrong with this business. These changes are market-based, they are not fundamental issues to the business. And we said this on our first quarter call; 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. We've been very pleased with the growth in our lean ground turkey up double digit this quarter, and 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.

At the corporate level, I’d like to get a sense of your full year outlook for around 5% organic growth, as mentioned last quarter. Year to date, you're slightly below 3%, approximately 2% for the quarter, and considering the extra week in your fiscal fourth quarter along with the Jennie-O reductions planned for the second half, do you have any updates on the sales outlook, and could you provide some insights by business?

Sure Adam. Obviously, the driver has been the jobs performance. As we go around the horn and think about all 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.

Well, we constantly review our capacity. We've recently sold Farmer John, which obviously reduced our capacity at the harvest level. We make changes to our harvest capacity regularly. We look at it daily, 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 we obtain by harvesting the hogs themselves and, honestly, we do it on a very economic basis. We purchase hogs that are very focused on being used in value-added products, which sometimes are slightly different than what you might see in the open market. We do purchase bellies, 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.

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, a couple of factors influenced the change. We had about $30 million in additional tax payments, which is mainly a timing issue related to our estimated federal income tax payments. We anticipate that this will come back to us in both the third and fourth quarters, so it’s primarily a timing consideration. There were also some variations in our accruals for certain expenses, again tied to timing regarding when they are paid throughout the year, rather than the actual expense level. We experienced increases in dividends and share repurchases, amounting to around $25 million, but on the other hand, we noticed a decrease in capital expenditures. We expect CapEx to be about $190 million. As we progress further into the year, we will have more clarity on which projects will be completed and where investments will be made, impacting CapEx. However, we do not anticipate any significant changes to our cash flow, which we still consider to be very strong.

I have a follow-up question for you. It seems somewhat inconsistent to hear the company discuss reducing Jennie-O production in the second half while also mentioning renovations at Melrose and a $130 million capital expenditure for building a further processing facility. How do you reconcile these two aspects? Is this an indication that you foresee 2019 being a much better year for turkey once you're fully operational? Additionally, experts in the industry suggest that any recovery for turkey won't occur until 2019, given that production continues to increase this year despite poor results. What’s the reasoning behind this increase in production? I realize this is a lot to address, but I would appreciate your insights.

It is. But we will try to get to all of them. I think first, starting with the facility, what we’ve said here is we are replacing a very aged facility in Melrose. And it is more for whole birds and 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. This isn't a bet that we're making; this is an investment to update the facility, to modernize the facility, to make it more efficient. We do feel like it sets us up well for the future. 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. 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, while we never say never, it's obviously 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 improve, we 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 trend business to be in. There is nothing structurally wrong with the business; these are all market-based issues, not fundamental issues.

Good morning. I wanted to ask about the refrigerated foods. Thanks for the update on the capacity. You mentioned a 6% increase; can you clarify if that's for one shift across all four plants and when you expect that increase to take effect? You mentioned a couple of plants have opened now and a couple are set to open later. Do you have a rough timeline for when that 6% will be in effect?

Thank you, Akshay. The 6% refers to 2017, and I don't have specific information about the operation of those plants or how quickly they will reach full capacity. Additional capacity will be available in 2018, but the 6% pertains to the capacity scheduled to come online in 2016, so I can't provide more details on the ramp-up. The USDA has indicated that there will be sufficient hogs to meet that production level. This is partly why we have mentioned the potential for short-term volatility in hog prices; if the plants are delayed or if they start up more quickly than anticipated, it could lead to short-term fluctuations in the market. We have observed this with other plants coming online, but we view these as brief fluctuations rather than actual 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. 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 modeling 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. I know we 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, shouldn’t you be more insulated from commodity moves? Can you just address that sort of broader question? I understand that quarter to quarter over a 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. Over the long term 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 profitable business. But that doesn’t mean we're immune to market conditions and competitive activity. You've got a situation where we've got competing proteins. We know what the market was like for beef in the first half of the year. So there certainly is market pressure that comes into play, but through it all, 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. Again, these are short-term market-based issues, not structural or fundamental issues to the long-term viability of the business.

So again on Jennie-O, my first question is around there. We’ve seen turkey 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. 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?

Looking at the overall placement, it appears to be down by 3% to 5%, so we anticipate a decline of 3% to 5%. Recently released data shows that freezer inventories of breast meat are up by over 50% compared to last year. Therefore, the market still needs to work through this excess inventory.

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 in our own business. 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. 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.

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 basis 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, just to get a little bit of a sense of how much more savings potential you might have on the U.S. side?

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 management due to the market conditions. We've focused on practices that will not harm long-term growth; there are many examples of things we’ve done that have managed expenses in this market condition. We've had sales meetings 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 also 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 not lose market share in the different segments, or is that something you would try to maintain in terms of spending what we had in 2Q for the rest of the year?

The advertising cuts we have made are temporary. We have been clear and intentional about supporting our brands, which is very important to us. In the short term, the reductions mainly affect Jennie-O. Not all of these cuts have impacted our profits. Some of the JOTS funding has been redirected to trade to keep our products competitive on the shelves. However, even under these conditions, we still lead in pricing. Our current advertising levels are similar to those in 2015, and we have successfully adjusted our advertising budget before. We are focused on long-term growth and building our brands, and the short-term reductions do not jeopardize them.

I hate to beat a dead horse, but I have a question on Jennie-O. I 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 livability 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 the best producer in the industry among the best, and your margins are still strong. So it doesn't seem like anyone's in dire straits right now. So I was just wondering if you could give us a sense of how much things like your operating expenses are 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 believe you're correct; earnings remain strong. Jennie-O continues to be a profitable business for us. The main challenges we face are market conditions, pricing pressure, and our own increased expenses. We are working hard to maintain price competitiveness and shelf space, but those are fundamental issues we need to address. The changing market conditions will influence our operations going forward. We are committed to investing in our raised without antibiotics program, which aligns with consumer trends, and instead of cutting this initiative, we recognize its long-term benefits, so we will keep investing in it.

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

Good morning everyone and thank you for having me. Jim, I'd like to return to the pork markets. We all recognize the significance of export markets in maintaining a stable balance in the U.S. market, especially with the volume of pork entering the market in recent years. It appears we are about to start negotiations, with Mexico being a major partner for us in pork products, especially ham. I'm not sure this change will have a significant impact as Mexico has started sourcing corn from Argentina and Brazil, even if it's not substantial. However, I’m curious about your thoughts on the export markets in general and whether NAFTA could influence the dynamics of those markets.

Eric, NAFTA is certainly an interesting agreement. 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. Again, I'm not going to make a prediction as to what that's 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.

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 toward the end of the quarter, so we're seeing some improvement in the performance. It's a slow process. 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 we are getting close to turning the corner on that. In the second quarter, clearly we saw strong growth from SPAM, Wholly, Herdez, Guacamole, and SKIPPY, which are great margin businesses for us. Clearly, we've had the inclusion of our Justin's business, which has been a great acquisition, and of course we've talked about our recent innovations like SKIPPY Phoebe Bites and Herdez, as well as Wholly Guacamole and Salsa; those are all accretive innovations to the grocery products group. In terms of advertising, I would tell you it's a small portion of 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 didn't play out the way we thought. But remember, we're coming off a banner 2016 for our Chile business, so again we feel really good about where that is heading. For the back half of the year, we're thinking about GP as more of the same, with strong growth from SPAM, Wholly, AAM, Justin’s continuing to ramp up and these accretive innovations are strong growth from stamp holy air, so we're really good about the portfolio to deliver long-term stated goals for GP.

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. 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 and others, and you could be the preferred providers. I would assume that would translate to foodservice as well. What’s the opportunity here? What are you hearing from your customers with this business, and what does that mean for the sustainability of refrigerated foods margins?

Jeremy, that's a great question. There is definitely a retail focus on prepared food, which isn't new, but it seems retailers are finally starting to understand and sell it effectively. The business is now aligning more closely with traditional foodservice, which is very promising for us. We excel in partnering with operators, particularly in retail prepared foods, where we help reduce labor. We can create customized solutions that simplify preparation while still delivering high-quality products that consumers perceive as being made in-house. This area is a key focus for us, aligning with retailer priorities, and it enhances our foodservice operations.

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, Rob. Party trays are doing well. As we look across the entire meat products portfolio, the growth in the IRI data was very strong across many categories. We didn't go into specifics, but party trays continue to perform really well for us. We have limited space in the press release, but you are correct that party trays are very important to our meat products business and continue to do 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.